[Music] well happy morning people so nice to see all of you after almost what two three months I didn't want to sing yeah that is mine only I know it works now it's okay it's started yeah thank you all right yeah Nik but start okay started all right so welcome to the first session of our Advanced accounting Marathon classes so before we dive in I'll just give you an overview as to what we'll be doing in this particular session of ours first of all the plan is to catch up for 5 days unal okay so from 7:30 to 2:00 okay maybe 2:30 also okay so I have proper breakfast fine that is the first thing so we have a daily particular topics to be covered that's our Target okay so 1:30 is official time it may become 2 25 23 also if need be so time G and all don't ask right now we are not in that particular Zone not regular class this is our exam mode class okay now that is one uh the second one is the duration is totally going to be about 5 days 5 days is what we have planned so we will try to cover as much as possible if one or two topics by by chance if you don't have time from the previous Marathon recordings I'll be giving it to you we'll try our level best to cover it in case we not able to because just for the sake of covering I don't want to rush okay so we want to cover in a meaningful manner so that that we'll be able to revise also okay so we will doing it so for those of you who already first of all if you seeing me for the first time I'm called sandesh by the way okay all right that said so if you already watched my previous Marathon first of all thank you for showing an amazing love and support for that previous Marathon crazy views I don't know what I did I don't know what clicked I don't know but still amazing views amazing support thank you thank you thank you so much for it so by chance if you watch that okay so it's not necessary that you'll have to watch this Marathon again because the intention and the way of covering this session marathon is also pretty much going to be the same okay so just for the newness and the freshness we are doing one more Marathon because students will ask no so 7 eight months over one more you do know we have paid full fees you come and do another 30 hours Marathon they will say for the sake of that we are doing one more Marathon so that means nothing is addition in this Marathon sir nothing like that some new questions I'll bring it in and one more addition is RTP May 2025 attemp RTP coverage we'll be doing in this particular marathon on the last day okay so that's going to be the add-on in this particular Marathon otherwise pretty much the concepts and the number of question coverage between last marathon and this marathon is mostly going to be same that is one point okay then uh normally when we start a class we get usually many queries or how to get this chartbook or how to get this notes get all people keep asking so if you want to buy this is first of all called chartbook okay all right so where we cover all the concepts with the help of this colored handwritten notes okay so it's about 75 to 80 Pages roughly you'll be able to cover all your Advanced accounting a syllabus in about 3 to 4 hours with the help of this chart book so some some practical question related poins also is brought in so majority of the concepts relevant for exams also is brought in into this particular chart book if at all you want to purchase no not mandatory if at all you want to buy you can log into our website Aro pro.com I'll just quickly show it to you because we get a lot of queries regarding this so log to website you'll be able to see this three signs next to sign in so click on uh Aro Pro online okay so yeah it will just pop in just give me a minute so it's just going in okay some problem it's not getting connected they don't want to do s to do marketing I think okay just one minute H still getting loaded I know why there's some issues in the Wi-Fi so we changed it hopefully the new one works still there okay so is the classes if you want to buy classes or for that matter if you want to buy uh the whatever books it's the same fun all various validity options various classes of all the faculties are available if you want to buy books similarly you'll be able to find it here only the classes and books you can buy through our website itself that is your particular choice if you want to Avail okay s right these are some main points which I wanted to put across before we dive into the syllabus now can we start with our syllabus today what okay without further delay now full Zoom okay first topic that we'll be taking up starting up today is internal reconstruction internal reconstruction name itself is saying internally we are trying to reconstruct meaning internally the company is trying to work out something generally internal reconstruction is an activity done by loss making company if companies are suffering loss such companies resort to something called internal reconstruction normal companies don't go for internal reconstruction not mandatory this is what we normally see okay people all right sir in case of loss making companies no sir as the name itself is saying internal reconstruction internally company is trying to work out something so that from loss making scenario they at least go to no profit no loss or at least some profit W scenario okay so how does this internal reconstruction work very simple company will go and beg in front of everybody hey Ma Ma machas sacrifice something okay it'll just go on asking the stakeholders to sacrifice not shareholders I'm using the word stakeholders meaning creditors debenture holders Bank people preference share holders debenture holders with to everybody company will approach and say for the time being make some sacrifice like to give an example company when we go to bank and say let's say current bank loan interest rate is 12% company will go to banker and say hey Macha make it as 8% from 12 make it as 8% for the time being give me just one year time so if you reduce interest after 1 year you can increase your interest rate from 12 you can make it 14 also for for the time being one year make it from 12 to 8% this is a sacrifice like you will go to preference shareholders and say sacrifice your dividend Equity shareholders you'll say sacrifice some portion of your Capital like this company will ask all the necessary stakeholders to sacrifice and all that sacrificed portion goes to a particular account called which account is this Capital reduction account or also known as reconstruction account whenever any stakeholder sacrifice that goes to a specific account called Capital reduction or reconstruction or also some books call this as reorganization but our study material uses only one of these two so I suggest you use one among these two don't use both in problem use either you use reconstruction or you use Capital reduction that is one all right now loss making companies do you think their assets will be shown properly or it may be overvalued let's say company is making huge losses they are showing Goodwill of one CR you tell me that Goodwill is is worth something or valueless valueless so what do you have to do in case of loss making companies assets and all usually will be over valued you need to bring it down to the current value so assets value you may have to reduce asset has what balance debit balance how do you reduce it credited all in this particular chapter every particular adjustment will be done through a specific account called Capital reduction account or reconstruction account so when asset is reduced the journal entry will be reconstruction account debit to assets account similar Sly if any liability is reduced or liability sacrificed liability how do you reduce liability has credit balance to reduce we will debit so the journal entry will be liabilities account debit to Capital reduction or reconstruction account is it okay people okay this is one all right next one is as I said sir after doing internal reconstruction also still if you show losses can we say we have done an internal reconstruction no so hence we whatever we have balance whatever balance is available in reconstruction account or Capital reduction account it'll be utilized to write off few things this Capital reduction or reconstruction balance will be utilized to cancel few things what are those few things one is PN Dela debit balance if you have any preliminary expense deferred revenue expenditure etc etc all that you need to cancel even if the question does not mention it question will not say right off pnl pnl has to be compulsorily written off if reconstruction account has a balance okay if there is no balance in reconstruction means we can't write it off if we have balance write it off this is irrespective of whether question says or it does not say okay all right next one is rare scenario sometimes no sir if there is any reserves available to you in the question a company already has some Reserve now use use your common sense it's a loss making company loss making company will have General reserve and all rare by chance if they give it to you in the question can we question the question no so if by chance any reserve like General Reserve Etc Etc if it is given to you in the question you can utilize this reserve for reconstruction purpose that means from General Reserve or capital reserve you can transfer the balance to Capital reduction account or reconstruction account capital reserve has what balance or for that matter any reserve has what balance credit balance to transfer what we have to do debit so the journal entry for this will be General Reserve or capital reserve account debit to reconstruction this is one more specific adjustment which can be given to you in the question rare but it can be given okay sir all right this is one next if I told you if you remember our notes if dividend is sacrificed if dividend is sacrificed by either Equity shareholders or preference shareholders should we have to pass any journal entry for it or no journal entry is required no journal entry is required for that scenario like why suppose company has a credit balance of 1 lakh Credit is so he told no need to pay me MAA he told the company no need to pay so that means should we still show this credit R in our books or not required not required that means you will cancel it h what entry you will pass for cancellation credit R has credit balance how do you cancel debit so the journal entry will be credit ours account debit to reconstruction yes sir now simple terms May if you have to cancel something means that account should be available in your books that account should be available in your books sir it's a loss making company loss making company can they pay dividend every year no that means is dividend accounted by the company or not accounted because it's a loss making company company has not declared dividend since many years that's the reason is dividend accounted or not accounted not accounted then how do you cancel that cancellation means it should be there in your books if it is there in your books you can cancel dividend is not even there in your books means can you cancel that not required that's the reason we say if any dividend is sacrificed either preference dividend or for that matter Equity Dividend if it is sacrificed by the preference shareholders or Equity shareholders cancellation entry required or not required not required suppose suppose suppose company tells in the question they say 80% dividend sacrificed 20% settled 80% sacrificed 20% settled tell me for this 80% will you pass any journal entry or no journal entry for this 80% sacrifice since we have not accounted it we cannot cancel it so for this 80% no journal entry is required what about this 20% dividend settled should we ignore it or pass pass okay how simple journal entry here everything will be recorded through reconstruction account only if you paid any money means the journal entry will passes reconstruction account debit to bank if you have settled by issuing Equity shares means you'll write reconstruction account debit to equity share Capital that they will tell you in the problem all these are problem specific adjustments okay sir I not have time to cover every problem so in here only we'll be revising most of the adjustments that comes that's the way we'll be covering it and we'll be revising it okay and the approach is going to be first we will revise all the concepts okay and then we will take up a few questions based on the time I have a certain Target for each topic so B based on the time availability I'll take up the number of questions if time is there one or two extra questions if time is not there one or two questions cut that's the approach okay because we can't take own sweet time also right first of all the marathon we did last time only was too much normally people don't do it Beyond 15 18 hours because last day you only have 15 to 18 hours to revise but many students said that we have never prepared sir we wanted a little more details sir and all I thought okay what the hell since it worked last time I thought okay this approach also we will do pretty much the same H okay now one minute now last step is Sir after doing all this internal reconstruction K drama if your reconstruction account still has balance if it still has balance what you'll do that balance should be finally transferred to capital reserve why sir in this internal reconstruction normal activity recurring activity or non- recurring it's a non- recurring I means this profit is a recurring profit or non- recurring profit it's a revenue profit or Capital profit Capital profit all capital profit goes where to capital reserve so after doing all this activity Rec construction account by chance has any balance transfer it off to capital reserve that is one okay sir and one more you need to keep in mind is any expenses sometimes they will say company had to pay a penalty of 5,000 penalty of 10,000 for that that is an expense or loss for the company no what is the journal entry for any expense in this particular chapter you'll pass normally what is a journal entry for salary paid 10,000 salary to bank 10,000 where will the salary be transferred to P sir if you add these two entries what are you getting salary debit salary credit so effectively the journal entry is PN to bank that's effective entry sir in this chapter May are we rooting all the entries through pnl or reconstruction reconstruction that means for any expense paid doesn't matter the entry will be reconstruction account debit to bank account this is for all the expenses for all the income Ulta entry that is bank account debit to reconstruction account all this will come as a 1111 separate adjustment the question that's all is internal reconstruction very very chinu Chin Chin topic okay people that's all is with respect to concept now can we take up some questions to revise this little better okay take up some questions I picked up from study material some maybe from RTP I've just checked whichever question covers maximum concept I've tried to pick that okay so don't worry if the same question is picked in the last marathon also absolutely okay the intention is to cover maximum number of adjustments in the limited time as possible okay so let's review this question uh so if you don't have R notes these sort of questions some of them are also available in ic study material so you can review that from there so balance sheet of a and Co limited as on 31st March 20 X2 they've given sir whenever they give you balance sheet ICA gives you big big big big balance sheet so that you should waste time so you should know how to read the question always first dive into the adjustments okay because the Crux will be for these adjustments only we may have to pass some journal entry after after passing journal entry at best they may ask us to prepare balance sheet that's all it is so main matter will be here whatever they given full blade Masala garam masala early morning gam Masala you should not take too much correct no so the only thing we should be aware of is one pay special attention to the reserves usually you will have Reserve or no Reserve no Reserve but pnl will have a debit balance okay just check over here they've given note number two reserves and surplus and this number is in positive or negative negative that means probably this is pnl debit balance you can go to the notes to accounts and confirm also debit balance in P other than this is there any other Reserve no if it is there can we utilize it for reconstruction purpose yes one adjustment hidden adjustment usually it'll be this is one observe for that okay rest everything is pretty much okay one more thing you need to keep in mind is the Bank overdraft C what about this I will tell you when I go to balance sheet for the time being okay rest Everything full garam masala not required directly di okay now let's go to the adjustments Court approved a scheme of reorganization as in reconstruction with effect from 1st April 20 X2 the following things theyve agreed preference Shares are to be written down to 75 watch out for this word written down by and written down to written down to means what written down to 75 means it is brought to 75 currently what is the face value of preference 100 from 100 you are bringing it down to 75 that means how much sacrifice is preferent shareholders expected to make 25 on one share yes or no correct that's the thing fine if they use a word written down by 75 if they say written down by 75 means 75 is the sacrifice okay from 100 may they are sacrificing by 75 in that case may the value of new preference shes will be 25 so watch out this word two and by that makes a world of difference in examination okay now sir old preference shairs has how much face value 100 now is it 100 or it's brought down to 75 75 what will the preference shareholder say boss my old certificate is face value is 100 so face value will be printed on the share certificate old face value was 100 but new face value is only 75 what will the preference share holder say take back your old certificate and give me a new certificate so what you have to do for old preference shares 100% you need to cancel preference share Capital has what balance credit balance how do you cancel it debit so the journal entry you will pass it preference share cap what percentage preference shes are these 6% cumulative preference share Capital account debit how much 4 lakh one second it just went off here didn't charge or something uh okay I think lose connection okay hopefully it'll stay okay so 4% uh 6% preference share Capital account debit 4 lakh all right so how much was the preference shares before how many shares we had 4,000 shares of 100 each so these are 4,000 shares of 100 each now what is the new did are you settling this 4 lakh Rupees to preference shareholders in cash no it is just that instead of old preference shares you are giving them new preference shares so you will credit what to preference share Capital new preference share Capital value they' have not given if you want you can write same number to 6% preferen share Capital got it but 6% preferen sh Capital you'll credit by what amount 4,000 is the number of preference sh still but is now the new preferen sh value 100 or 75 so you'll write 4,000 into 75 which is how much 3 lakh so instead of 4 lakh preference shareholders are ready to settle for 3 lakh so how much are they indirectly ready to sacrifice one L where will that sacrifice portion go to Capital reduction or reconstruction account this is the first general entry okay people and also don't forget the narration what is that narration I told you remember the keywords I told you as for the uput R scheme of reconstruction dated dot dot dot you can write other things in your own words like here claim sacrificed by preferent shareholders accounted as per approved scheme of reconstruction dated date dot dot dot sir every journal entry should have a narration unless the question says don't pass narration every journal entry should be backed by a narration otherwise one or two marks will be going there okay so watch out for that that's also one of the common mistakes students do okay let's go further then Equity shareholders are ready to hum reduced to how much now 2 rupees how much was the original face value of equity shares 10 from 10 it has become how much sir two that means Equity shareholders are also sacrificing so old equity share certificate had how much face value 10 but new Equity shares face value is two what will Equity shareholders tell take back your old shares and give me new shares what is the entry we will pass here equity share Capital account debit how many shares 75,000 shares of 10 correct equity share Capital you'll write 75,000 into 10 which is how much 7 and a half to what are you settling this money or just a barter system instead of old shares you are issuing new shares okay two equity share Capital how many new Shares are you issuing 75,000 but this new shares face value is how much new Equity shares face value is only 2 rupees that means you'll write 75,000 into 2 which is 1 lakh 50,000 so instead of s 7 and a half lakh of capital they are ready to equity shareholders are ready to settle for one and half lakh how much are they ready to sacrifice 6 lakh where will that sacrifice portion go to Capital reduction account or reconstruction account arrived as a balancing do not forget the narration okay sir like this they will give you 8 to 10 adjustments we'll have to go on passing the journal entries first one is it okay online also there all of you are able to recollect and remember I feel I know for majority of you all this will be easy but some of them they are dependent on this Marathon only so that's the reason I have to probably revise them a little more detailed fine okay next move on to the second one of the preference dividend check your favorite adjustment of the preference dividend which are in aers are means paid or not paid not paid for how many years company has not paid preference dividend for four years why so dividend will be paid only if company makes profit here pnl account is has a credit balance or debit balance that means this is what sir profit or loss it's a loss making company so will they declare the dividend no the when dividend come as an adjustment comes Now quickly go to the balance sheet check anywhere dividend payable are you able to see anywhere here check dividend payable account is it there no that means company has accounted dividend or not accounted not accounted why they have not even declared dividend that's the reason they have not accounted okay now in the adjustment they will say this is sacrificed this is sacrificed journal entry required or not required not requ check dividend was in a for four years 34 to be waved 34 to waved 34 are sacrificed and and Equity shares of 2 rupees each to be allotted for the remaining quarter that means 100% sacrificed here or only 34 34 means how much sir 75% 3x4 if you do in your calculator that is nothing but 0.75 75% so 75% of the preference dividend preference shareholders are ready to sacrifice balance 25% we need to sacrifice or settle settle for this 75% entry required or not required for 25% is entry required yes here will you pass the journal entry for dividend declared PN to bank or reconstruction reconstruction account debit to bank account if you have settled dividend in cash here did you settle dividend in cash or Equity shares Equity shares what entry you will pass reconstruction or Capital reduction account debit to equity share capital okay G the only thing is to find the amount now go back to the question how much is preference share Capital value 4 lakh what percentage preference Shares are these 6% take your calculator 4 lakh into 6% if you do how much are you going to get 24,000 that 24,000 is one year dividend is a dividend in Aras for one year or four years they said dividend is an Aras for four years multiply by four you do how much you going to get 96,000 96,000 is a total dividend yes in this total dividend how much is sacrificed 34 so calculate 3/4 of this is how much 70 whatever correct that we have to pass entry or no entry no entry what about this 1/4 which is settled should we pass entry yes so $6,000 1x4 you do how much are you getting 24,000 this is settled not by cash but by issuing Equity shares hence the entry is what capital reduction or reconstruction account debit to equity share Capital 24,000 24,000 you can show the calculation inside the bracket only whatever we have done here now you can show it inside the bracket only or make it a separate working note the choice is yours how you want to present take a call based on time I suggest if it's simple simple working note I mean simple calculations don't prepare separate working note show it here only in bracket that's that will save your time and that is good enough for exam in my view okay s now come back to the next adjustment what is the next adjustment interest payable on debenture to be paid in cash go back to the balance sheet have you accounted any interest check they've created other current liability they prepared note number four for it if you come to note number four you able to see interest payable on debenture how much 20 to 500 this is sacrificed or paid off this is sacrificed or paid off check here what did they say interest payable and debentures is to be paid in cash so what liability is settled in cash what's the journal entry for credit are paid in cash credit are to cash or buy interest if it is paid in cash this is not actually interest will Interest come in balance sheet or interest outstanding this is outstanding interest that is coming in balance sheet okay interest is an interest is an expense expense will come in balance sheet or pnl pnl so this interest represents your outstanding interest what is the journal entry for outstanding interest paid outstanding interest to cash or bank this is not sacrific this is paid off so entry for that is same interest account where is that interest payable account debit to bank 22500 22500 so can I write account for account in exam yeah that short form is acceptable yeah okay moving along next one debenture holders agreed to take over freeold property Book value of that freeold property is how much 1 lakh but they have taken out taken it over at what value 1 lakh 20,000 one second hang on what is the total value of freeold property that you are able to see in note number five 4 l25 entire property debenture holder to cor or only one part only one part is it necessary company should have only one property or can they have more than one they can have more than one in that many properties available one property whose market value is how much 1 lakh 120,000 is taken over by debenture holders in full settlement a part settlement a check in part payment in part payment that means are they ready to sacrifice something or are they ready to just take instead of settling in cash we are settling the debenture holders in through property that's all is there any sacrifice made here or no sacrifice suppose they are told in full settlement in full settlement go back what is the value of debentures are you see able to see in balance sheet debenture comes under long-term borrowings come to note number three how much is the value of debentures 3 lakh 75 if they had used the word full settlement that means what instead of settling for 375 they are ready to take property worth 120 so balance would have been sacrificed but did they use the word full settlement or part settlement if it is full settlement clearly it'll be meant mention to you in the question otherwise don't assume that sacrifice and all if it is sacrificed it will be mentioned here there is sacrifice or no sacrifice No sacrifice it is just a property worth 1ak 120,000 is taken over by debenture holder so what's the journal entry for cash paid to credit R again credit RS to cash if you pay property to creditor what is the journal entry creditors to property here who's the Creditor deur I means what is the journal entry 6% debentures account debit 1ak 120,000 to freeold property 512,000 No sacrifice just an asset taken over that's all okay G yes people but but but sir Book value of the property was only one lakh they took it over at 120 I'll do that adjustment in a bit yes we need to do something there because is asset value reduced or increased increased from one the debenture holders are ready to take it over at 1 lakh 20,000 for that 20,000 we have to do an adjustment hang on we'll do it little bit later on but so far everybody cool able to recollect everything okay awesome so move on and also they will provide additional cash of 130,000 secured by a floating charge on company's assets at an interest rate of 8% so nice people the debenture holders are telling give me your property okay not just that I will also give you extra cash of 1 lakh 30,000 that means company is issuing will debenture holders give cash at free of cost or new debentures are issued here new debentures are issued worth how much 130,000 and this new debenture will carry what interest rate 8% any sacrifice here or this is new debentures issued so if you want to do internal reconstruction if you want to go from loss making to no profit you need money also so the money we have raised by issuing new debentures worth 130 what's the journal entry for debentures issued bank account debit to 8% debentures 130,000 130,000 that's okay G okay moving on to the next now what is the next adjustment to patents and Goodwill are to be written so both are assets both have what balance debit balance how do you cancel them credited what is a patent and Goodwill value 13, 37500 so the entry will be what reconstruction account debit to payent to Goodwill all this right off now we can do a compound entry they will give many adjustment we will combine and we can pass one compound journal entry that's good enough so far okay all right moving on to the next this space is okay now I hope I can maintain this yes sir okay for online also by by default I have to maintain this okay I'm indirectly telling you get used to it okay all right okay next one is inventory to be written off by 65 that means written off means you're increasing or reducing inventory you have to reduce by 65 amount of 68500 to be provided for bad debts so because of bad debts what will happen to your datar balance datas will reduce correct no that means datar you have to reduce by 68 inventory you have to reduce by 65 both are assets both have debit balance how do you reduce them credit so the journal entry is again Capital reduction account debit to inventry two bad debts you can write or provision for doubtful Debs whatever that is the value done G okay next one what is the next one they've given uh this is over this over this is over next remaining Freehold property remaining Freehold property one second stop what was the Freehold property in our books 425,000 Let's split total value of freeold property is 425,000 in that one portion is taken over by debenture holder what was the book value of debenture taken over by the debenture holder one lakh did they take it over at 1 lakh or they took it over at 1 lak 120,000 120,000 I mean this particular 1 lakh worth of three old property its value has reduced or increased increased by how much 20,000 that is one part got it so out of 425 one lakh book value worth of property plan and Equipment debenture holders took over hence we cancel that because it is not there in our books anymore now remaining sir in 425 one is gone means what is the remaining in 4 lakh 25 May one is gone means the remaining is 325,000 that cut some drama they giving over here let's read what they're trying to say remaining three old property which is this 325,000 what happened to that uh after giving to deure Holders they are to be revalued at 387 P so whatever freeold property is remaining after giving it to debenture holders that remaining Freehold property value now is become how much sir 38700 Book value is 325 but the market value is 387 500 so this asset car reduction is happening or increase increase how much increase 60 that means totally freeold property value has increased yes no here it increased by 20 it increased by 60 to 500 what is the total increase 80 to 5 got it h if you want you can pass separate entry for this separate entry for this or you can combine and pass I believe the combination will save your time so this asset car value reduction or value increase increase freeold property has what balance credit balance how do you increase that debited so the journal entry here all the adjustment will be done through which account reconstruction so the entry will be freeold property account debit 80 to 500 to Capital reduction or reconstruction account 80 to 500 that's all it is they have shown the work calculations here only if you want you can present like this or prepare a separate working note again your choice done next wait or carry on okay now all right next Investments are to be sold for 140 go back to the balance sheet what is the value of the investment if you just check note number seven the value of the investment is 55 55,000 Book value of the investment is sold for 1 lakh 4,000 sad phaser happy phaser happy phase what is the journal entry bank account 1 lakh 140,000 right to investment account 55,000 so how much profit you made by selling this investment 85,000 this profit you'll transfer with pnl or here everything here all the profit all the losses are adjusted through Capital reduction or reconstruction account itself okay zaru hence this is the entry for investment sold next moving along next is what uh directors are ready to accept settlement of their Loan Stop there do we have any director's loan on the liability side of balance sheet check under other current liability in note number four we have a loan from directors how much 1 lakh so director has given a loan to the company worth 1 lakh now what is happening to that let's review directors to accept settlement of their loan as at 90% thereof by allotment of equity shares so director is telling the company to the extent of 90% of my loan you give me you settle not by cash but by Equity shares okay and the equity shares can now face value is two because from 10 we already brought it down to two in first first line only they told that one then 5% of that loan is settled by cash other 5% waved waved means they're ready to sacrifice that means is the loan there or fully settled fully settled some are settled in fact 95% is settled 5% is sacrificed 90% is settled by issuing Equity shares 5% is settled by giving cash another 5% is settled by or rather 5% is sacrificed that means should this directors loan be shown in our books or cancel can canceled it this loan is loan given by the directors that means for the company prospective this is a liability which has what balance credit balance how do you cancel it debited so the journal entry will passes director's Loan account debit so if you're giving cash back you would have written two cash or bank to the extent of 90% did we give cash or Equity shares so if a company issues Equity shares will they write Equity shares or equity share Capital equity share Capital to what extent 90% extent so 1 lak 90% is 90,000 Okay g then 5% is repaid by cash so you'll write here to bank 1 lakh of 5% which is 5,000 another 5,000 balancing figure a sacrifice portion goes off to reconstruction or Capital reduction account great moving on to the next one what is the next adjustment there were Capital commitments worth 250,000 these contracts are to be cancelled so one contract if somebody cancels will the other party keep quiet or ask penalty ask penalty these contracts are to be cancelled on a payment of 5% contract price as penalty for a company this 5% penalty is profit or loss loss for all expenses and loss the ENT in this chapter will be what will you pass pnl to bank no entry will be what reconstruction account debit to bank account how much is the penalty value 5% of contract price what is the contract price 250,000 so calculate 250,000 5% 12,500 entry is what capital reduction account debit to bank if you want to pass separate entry or Club in this compound only your choice done all right next one what is the next adjustment ignore Taxation and all that's fine you're required to pass journal entry which we already did okay and then you also need to prepare balance sheet one second stop this is what they told now few hidden adjustment always will be there in the question one is the reserve always check does a company have any reserves like General Reserve PN General Reserve capital reserve there or not there not there then whether question says or not pnl debit balance should be keep quite or write it off pnl debit balance preliminary expense deferred revenue expenditure if at all it is there we need to cancel here is pnl debit balance there yes in notes to accounts P andl has a debit balance of 535 can you keep this or cancel cancel pnl has debit balance how do you cancel pnl has debit balance how do you cancel credit so what is the cancellation journal entry reconstruction account debit to P account worth how much 5 lakh 35,000 that's what they've done in compound here check Capital reduction account debit to PN account 5 lak 35,000 if you just check all the entries are ticked off yes people that means all the adjustments we have captured okay now no no no after doing all this drama by chance Capital reduction account still has some balance it still has some balance what will you do that balance transfer it to capital reserve so you will pass the journal entry Capital reduction account to what capital reserve here reconstruction account has balance or no balance there is no balance that's the reason the last entry is not required if it is there you need to pass in this problem ironically not there so how will we get to know whether Capital reduction account has a balance you need to prepare working out okay how which format me your choice ideally I would suggest prepare Capital reduction account The Ledger account that ledger account if it has any balance that balancing figure you have to transfer it to capital reserve if you don't want to prepare it as Ledger prepare it in statement format your choice how you want to present okay sir if interest percentage on debentures is given and the question nothing is related to outstanding interest is mentioned in balance sheet should be calculated interest no need to calculate the interest any okay fair enough okay because we don't know all right we assuming that the interest is already paid okay if it the if company has to make some interest payment means uh sha question is Sir here we have debentures no 6% debentures should we pay current year debenture interest is what he's asking if the question says consider that adjustment otherwise ignore it not required because in case of internal reconstruction and all company has money or no money no money so that's a reason in the we may not pay interest for the current year unless the question saves okay this is one kind of problem yes people uh one more thing is we have passed or one more requirement is there sir can we write cap Reserve as balancing figure no much write full don't write that short form people may not understand as I keep telling in my class the person who's going to correct your paper is a CA but he's not an accounts faculty so don't confuse him make his job as easy as possible few short forms sir okay now you think if you are in your 11th standard which short forms works for you in your 11th grade and all which form short forms you used to use account to debit to credit all the you're comfortable only that you use others don't use because after all that CA also he's practicing ca he would have cleared his examination here or she 10 years 15 years 20 years back first of all evaluating is horrible job because people write nonsense we know are Indians we can't leave empty page even if you don't know the answer page is there means we will fill it up family history only we will write no problem we will write it okay now imagine you have written some nonsense evaluator has to evaluate your nonsense and in that nonsense find out how much is good nonsense and award marks for that it's really a painful job nobody likes evaluation truth everybody likes teaching loves teaching but nobody loves evaluation or in fact everybody hates evaluation okay so make their job as much as possible because one or two marks no will always be there in evaluator's hands you have done you have it's like this you have written something it is not fully correct neither it is fully wrong somewhere you're stuck in between somewhere you are stuck in that case if you maintain good impression with evaluator instead of giving zero you might get one month because it's a judgment call if you have irritated that person I'll make you C if for you is not ched accountant come again or CH okay whatever so he may make you that so don't irritate the evaluator as much as possible write everything it's not that you have to write beautiful beautiful hand not required just that present it in a way that it is legitimate and he can understand and evaluate properly as long this you are able to take care it is sufficient typical Indian character yeah understood why you don't evaluate I never go for evaluation though I'm eligible I've never never applied also once I will not apply also B okay come back to the question so is this question over or one more adjustment one more adjustment is what balance sheet so in balance sheet one more thing you need to keep in mind is whenever you prepare balance sheet you have to use the word and reduced and reduced do not forget that because company has done some internal reconstruction so when you use the word and reduced this is an indicator company is giving to the stakeholders that we have done something called internal reconstruction okay now balance sheet is very very easy how simple take your calculator all of you sir how much is the share Capital as given in the question 11 lak 50,000 they prepared note number one come to note number one what is the first equity share cap First Capital 7 and a half lakh so as per the question 7 and a half lakh share Capital was there go back to your journal entry what did you do entire 7 and a half lakh you debited means Capital became how much zero okay now check where in all have you credited equity share Capital 1 and a half lakh here take your calculator one and a half lakh here and then you credited here share Capital by 24,000 so add where and all you have credited you add then where we credited anywhere else we credited H here we credited by 90 add 90 anything else is there no add it how much is it totally totally equity share Capital you got how much 2 2 lakh 64 similarly let's do preference share Capital what is preference share Capital given in the question 4 LH come to your journal entry take the question balance sheet value immediately come to journal entry that way you'll not go wrong so come to the journal entry 4 lakh was preference share Capital Credit balance here what did you do you debit it 4 lakh credit 4 lakh debit balance became how much now go on checking where and all you have credited preference share Capital go on adding here you credited by 3 lakh add anywhere else you credit that's it that means preference share capital is worth how much 3 LH so total share Capital should be how much 5 64,000 check your balance sheet 5 64,000 is a sh Capital that's the easy way to do it okay that's all you'll have to just take one more maybe we'll do it over here next question data you just check uh this 535,000 is PN debit balance is it there or written off written but do not do not do not forget to show capital reserve one mistake students do is they forget to show capital reserve but in this problem capital reserve is that there or not there not there be aware of that if it is there that should come under reserves and surplus that means in this problem reserves and surplus is there or zero so if you just check the balance sh reserves and surplus they have not prepared because balance is zero Okay g okay now come to the next next is what is there sir uh we have long-term borrowing 375,000 this long-term borrowing is debenture what did you do for debenture what did you do for debentures it is repaid or or partly settled partly settled by property worth how much 120 so in 375 120 Venture is settled means how much is remaining 2 lakh 55,000 correct yes that's all or you issued new dentures also check your journal entry if you want if you're confused okay you can go to the journal entry where is that P take a calculator or this maybe we'll use that approach only long-term borrowings as per the question has how much balance 375 punch in this number now come to the calculator where and all you have debited debentures debenture is a liability if you debit its balance will reduce if you credit its balance will increase check the journal entry where did we yeah here we debited debentures by 120 so minus 1 lak 120,000 you okay then sir here we credited 130,000 deur and 130,000 what is the value of debenture you're getting 385,000 that's the value of debentures that's the easiest way to prepare balance sheet okay next is what sir uh you have trade payable anything did we do for trade payable or no change no change that means in the new balance sheet also trade payable will be shown at three lakh okay all right what about this uh shortterm one minute I'll tell you this what about this current liability other current liability is note number four in note number four may you had loan from directors it is there or fully settled settled interest outstanding interest there or settled so will it be there or not it will not come it will not come in your balance she that is gone next what is the remaining next what is the remaining is Bank overdrift Bank overdraft I'll tell you a bit first let's cover all this so far okay all right next property plan and equipment or in in this fashion may you have to prepare it did you get the approach simply what you'll do maybe instead of wasting time I'll tell you first what you'll take you'll take question car balance sheet value and then you'll directly come to what journaling if it is if you're working from asset angle means wherever the asset is getting debited you will add wherever that asset is getting credited you will minus then automatically you will get the new value that you have to show in your revised Valance sheet okay same goes for liability with this approach is it okay I can move forward no need to waste too much time correct no all right one thing I want to bring it to your attention is this Bank overdraft is this Bank over Bank overdraft sir as per schedule three it should be shown under cash and cash equal it should be shown under cash and cash equalent cash and cash equivalent will come on current liability side or current asset side current asset side okay but here there is a small catch I mean ideally we should not have been done but I is following a specific approach I suggest follow the same approach in exam also what does that take so as per the question what is Bank overdraft 1ak 195,000 is this okay I think I've written this somewhere or okay wait waste time so Bank overdraft value is how much 1 lakh 95,000 all right now tell me do we have any cash and cash equivalent balance given in the balance sheet on the asset side under current assets are you able to see any cash and cash equivalent no but but but but just like that don't ignore the cash is not there check your journal entry have you debited or credited cash anywhere take your calculator many entries may we have debited and credited here we have credited outstanding interest put that on hold how much money we raise through by reing debentures 130,000 take that number add in your calculator 130,000 in this 130 how much did you pay to the debenture interest outstanding interest settled is how much 22500 minus 22500 where and all you have debited Bank add where and all you have credited Bank minus here you debited by 140 so add here you credited by 5,000 rupees director's loan settled so minus you do here you paid a penalty of 12,500 so minus you do how much is that 2 lak so cash and cash equivalent is 2 lakh 30,000 easy now what you have to do is cash and cash equivalent is 230 Bank overdraft is how much 195 sir this has debit balance Bank overdraft has what balance credit balance net of these two when you net off these two how much is the balance 35,000 35,000 credit balance or debit balance this will be shown where under current assets at cash and cash equal this is what you have to do understood so check in the balance sheet have they done this check cash and cash equivalent they must have showed 35,000 done this is one okay okay okay by by by by by chance this is not relevant for this problem by chance look at this scenario suppose you got this scenario what to do know tell me once again what do you have to do for Bank overdraft Bank overdraft should be shown under cash and cash equival cash and cash equivalent is an asset which has debit balance Bank overdraft is a liability which has credit balance it's not settled just that you net off to be shown under balance sheet okay but by chance let's assume Bank overdraft balance is 195 Bank OD balance is 195 but cash balance is only 50 the scenario can also come we have worked out in this problem also when this scenario plays out do not net off cash and cash equivalent the bank overd show both of them separately ideally you should net off as per schedule three but in this case what IC is doing is cash and cash equivalent separately they will show it on the current side as an asset and Bank overdraft separately they will show as a current liability is this okay so understood adjustment this is what ICA is following for Bank overdraft so keep this one more adjustment as me so if you have enough balance in cash and cash equivalent Bank overdraft you set off or you net off if you don't have enough balance means show cash and cash equivalent separately on the asset side Bank overdraft separately you show on the liability side this is the one more adjustment you need to be aware of that's it with respect to this question can I move forward all right so in the balance sheet outstanding interest is not mentioned but in the adjustment it is given that interest is not paid for 2 years is sacrificed should we consider it or no entry I saw this is an adjustment okay one question has come is sir we have not accounted an outstanding interest that that is pretty rare because interest is an appropriation or it's a charge interest and all is a charged item that means whether you make profit or whether you make loss interest accounting Can You Escape or you have to account it have to account but I still I'll take your question I will not question your question so the question that has come out is Sir company has not paid interest to the debenture holders for two years and that interest is not accounted by the company okay now now now now now now this particular interest is sacrificed there now this particular interest is sacrificed should we account it or should we ignore it is a question what do you think should be done not entry sir s see accounting is required in internal reconstruction accounting means you are ultimately canceling sir if it is not even accounted how can you cancel or if you want to do first accounted first accounted and then cancel so to account it the journal entry you will passes reconstruction account debit to outstanding interest first accounted then to cancel again you'll write what outstanding interest to reconstruction so if you want to pass the entry you have to pass the entry like this ideally in my view both accounting and cancellation both are not required in that case hope it is sorted fine people okay next one is one more typical question is there maybe let's review that okay all right so in some cases May what will happen is you'll ask the equity shareholders to sacrifice you'll ask the equity shareholders to sacrifice okay then using that sacrificed shares company will do something using that sacrificed shares company will do something in that case may what you have to do this is a slightly a different question we will review this so balance sheet of revised limited is as follows again nothing fancy in balance sheet reserves and surplus has a negative balance that means pnl will have a debit balance if you want you can just check here pnl has a debit balance of 6 lakh other than that pretty much straightforward balance sheet nothing much great all this are okay now check the adjustment directly it was decided to reconstruct the company for which necessary resolution was passed okay awesome now what first check the first adjustment each share is subdivided into 10 fully paid up Equity shares of 10 each one share has got subdivided into 10 means one share is now one is is one now or it has become 10 one due to subdivision has become 10 go back to the balance sheet how many shares does this company currently have one has become 10 so 10 10,000 will become how much if one has become 10 means 10,000 will become one or uh 10,000 will become one lakh correct now one lakh shares it will become okay so earlier 10,000 shares face value was how much before the subdivision each share face value was 100 now what has happened each share has got subdivided into 10 but now their face value is only 10 so what is happening here sir what is happening here number of Shar is going up and down and and face value from 100 it has become 10 correct that means did the value change or no change no change so means instead of old shares you need to issue new shares what is the entry old share Capital you need to cancel and issue new shares with the same amount just that instead of 10,000 shares of 100 each now we have one lakh shares of 10 each but the value is still the change or same same as for the first adjustment but read the second adjustment after subdivision each shareholder shall surrender to the company 50% of the holding that means how much sacrifice Equity shareholders are ready to make value is 10 lakh in this 10 lakh they're ready to sacrifice 50% means sacrific portion is f correct so normally sacrific portion where do we put in reconstruction account or Capital reduction but one second hang on check here read the question I'll come back to the adjustment one second check here out of the share surrendered out of the share surrendered how much is share surrendered 5 lakh out of the share surrendered 10,000 shares of 10 each will be converted into preference shares that means are you cancelling surrendering the shares and just canceling it or out of the share surrendered something extra compan is doing out of the share surrendered company is doing something so in this case may you'll have to you can't account it like a normal problem you'll have to treat the slightly different so what you will do is very simple first is old share Capital there or cancell canceled old share Capital has how much balance as for the question 10 LH how do you cancel that debit so you'll write equity share Capital account debit 10 lakh we had 10,000 shares of 100 each which is 10 lakh so far okay sir okay all right how much how much sacrifice the shareholders made 50% 50% is how much 5 just they sacrifice that's all or we are using the sacrifice shares and doing something else company is using the sacrifice shares and doing something else so in this case may this particular five lakh sacrifice portion we put it one specific account we show it in one specific account called shares surrendered account okay sir why are we not showing in reconstruction account because is this sacrificed straight away or this is utilized for something whenever this share surrendered is utilized for something you have to park it in an account called shares surrendered got it all right now that means the new value of share capital is how much 5 lakh rupees this is the entry adjustment number A and B both have combined and passed a journal entry are we comfortable when to use share surrendered all of us are completely okay now you tell me when will you park the sacrifice portion reconstruction account if the question says Equity shareholders have sacrificed that's all Equity shareholders have surrendered that's all in that case may straight away entire balance you will transfer to reconstruction account but if the question says Equity shareholders have sacrificed using the sacrifice shares company is doing some extra activity extra jug in that case me you park it in one dummy account called CH surrendered account that's how to identify when it is a normal problem and when it is this share surrendered W yes G okay this is one now let's go further third adjustment I'll do it later out of the share surrender 10,000 shares will be convert or maybe take your calculator out of the share surrender 10,000 shares of 10 each that means what is the value 1 lakh out of this one lakh company has issued new preference shares because they said new preference shares of 12 each is this new preference shares or it is converted out of share surrender out of sharees surrendered one lakh you are converting it into preferential keep that in mind next check the next one the claims of the Denture holder stop the claims means whatever belongs to debenture holder yes no what in all belongs to debenture holder debenture and outstanding interest if any check the question do we have any debenture yeah we have 12% debentures worth how much 2 LH we have interest payable on debenture meaning your outstanding interest on debenture how much 24,000 both this belongs to debenture holder how much is it totally 2 lakh plus 24,000 is how much 2 lak 24,000 what happened to them check the claims of the debenture holder which is 224 shall be reduced by 75% so calculate full they ready to sacrifice or 75% 75% 224,000 75% is how much lak 68,000 so debentures are debentures holders are ready to sacrifice one lakh 68 68,000 correct that sacrifice it's a normal sacrifice where it will go to reconstruction sir if debenture holders are ready to sacrifice means liability value of the company will be same or it will reduce with respect to debenture we have accounted one liability or two liabilities two liabilities one is 12% debenture and another one is interest outstanding both should be shown or reduced reduced by how much 75% so both has credit balance how do you reduce them debited so the journal entry will passes 12% debentures account debit interest payable on debentures account debit the value of debentures is 2 lakh 2 lakh 75% is sacrificed which is 1 lakh 50,000 24,000 is the interest given in the question of that 75% if you do you'll get 18,000 got it this SA portion goes off to reconstruction or Capital reduction account 1 168 right I've not written the narration you write the narration revising so I'll not put off everything there okay done people okay next what did they say the claims of the debenture holder shall be reduced by 75% in consideration of the reduction debenture holder shall receive prefering shares of one lakh which are converted out of the share surrended out of equity shares surrendered one lakh you converted into preference shares what is the company doing with that preference shares keeping with them or giving to the debenture holder giving to the debure holders I will do that adjustment little later now check trade payable claim trade payable claim shall be reduced by 50% it has to be settled by the issue of equity shares of 10 each out of the shares s that means what is credit are there or fully settled fully settled 50% they're ready to sacrifice 50% they're ready to sacrifice other for other 50% what do they want they want Equity shares new Equity Shares are coming out of the share surrendered Equity shareholders surrendered some of their shares in that some portion is given off to credit ours correct so is credit ours there or fully gone fully gone what is the value of credit ours as per the balance sheet the value of credit trade payable is 72,000 should we show the 72,000 or cancel so 72,000 account trade payable liit to what to reconstruction account how much full or full or 50% did the credit sacrifice 100% or only 50% but how much check have I transferred to reconstruction 72,000 that means I've transferred 50% or 100% 100% time being let this be on hold okay is this entirely right or wrong wrong but that wrong will get right in sometime so far okay fine because are we issuing new shares to them or it is coming out of share surrender it is coming out of the share surrender that's the reason we have to account it like this only compulsorily over here okay there a separate routin but I will show you at the end the final accounting will work out so far there everybody okay next what happened next what is adjustment uh balance in P account should be return off this your normal account no okay now hang on before this sir how much balance is there in share surrendered 5 how much balance is there in Shar surrender out of this five lakh some you converted into preference shares how many preference shares did you convert 10,000 shares of 10 each is got converted into preference Shar so what is the value of preference Shar 10,000 into 10 if you do one lakh correct sir if company issues preference shares if company issues preference shares and collects money what do the journal entry will pass if company issues preference shares worth 1 lakh what entry will pass bank account debit to preference share Capital here company is issuing new PR preference Shar and collecting money or it is coming out of equity shares Equity shares have got converted into preferen shes correct and that Equity shares currently are parked in which account share surrender account that means will you pass the journal entry Bank to preferen share capital or share surrender to preferen share Capital share surrendered to preference share Capital got it so what is what is balance in sh share surrendered 5 L sir is this an actual account or dummy account just a rooting one so that will get cancell so s surrendered account you will debit 5 lakh got it entire 5 lakh got converted into preference share capital or only one lakh only one LH what percentage preference shes are these 12% so you'll write here to 12% preference share Capital One any problem in that entry so far no cool all right sir one more out of share surrender did we give anything to creditors did we give anything to creditors did we yes to total credits they were ready to sacrifice how much 50% and for the balance they want what Equity shares what is the total trade payable as for the question 72,000 means 50% of this is how much 36,000 for that 36,000 they sacrificed another 36,000 they want cash or they want Equity shares new Equity Shares are coming out of share surrendered coming out of share surrendered if company issued new Equity shares worth 36,000 means the entry would have been Bank to equity share capital Did is the company issuing new shares or it's coming out of the share surrendered so what will be the entry for this 36,000 share surrendered account debit to equity share Capital 36,000 got it our people this is the entry and this 36,000 is given to whom creditors this 1 lakh is given to whom debenture holders that I've written in bracket so far good so in this five lakh all this drama you did after this any drama you're doing or nothing else so out of 5 lakh 1 lakh and 36,000 you did drama how much balancing figure is still there 3 L6 or any more drama or over over this particular is the actual sacrifice that will be transferred where to reconstruction account because you're not doing anything more okay so you will transfer the balancing figure to reconstruction this is the way we wrote it yes people now how this ties out everybody just check and pay attention this is not required in exam this is just for your reference H now what is this simple sir go back to the question how much sacrifice did Equity shareholders really make how much SA sacrifice did Equity shareholders really make out of 10 lakh they surrendered 50% no I mean sacrifice they made by how much 5 LH that means ideally how much you should have transferred to reconstruction 5 lakh they have sacrificed means you should have transferred 5 lakh to reconstruction but out of share surrendered 5 lakh you transferred or only 364 364 that means you have transferred more or you have transferred less transferred less ideally how much should have gone 5 LH relating to equity shareholders 5 lakh should have ideally gone to reconstruction account but how much went only 364 how much did not go how much shortage 136,000 you did not transfer to reconstruction account though it was sacrificed by Equity shareholders first point is okay that means you have transferred less to reconstruction account easy okay now come back to the problem sir excuse me check the debenture holder sir how much have you transferred from debentures to reconstruction account relating to debenture how much have you transferred to reconstruction account 1ak 168,000 okay now t your heart and tell is debenture holder really sacrificing 168 or only 68 sir though they sacrificed 168 they got one lakh preference shares out of the share surrender no on one hand the they are saying I will sacrifice 168 on one hand May they're saying I will sacrifice 168 on other hand they're saying give me one lakh preference shares that means really really really have they sacrifice 168 or only 68 68 that means ideally how much should have gone to reconstruction account 6 honestly only 68,000 should have gone to reconstruction but how much did we actually transfer 168 we have transferred 168 but to be transferred is only 68 that means here we have transferred more or we have transferred less what have we done here here we have transferred less or more instead of transferring 68 we have transferred 168 how much extra have you transferred to reconstruction account one lakh so far okay here we transferred 136 less here looks like we have transferred 1 lakh more so far okay next the same drama with respect to to creditor sir how much did the Creditor really sacrifice creditor sacrificed only 50% creditor sacrificed only 50% what is the total value of credit are 72,000 that means 72,000 50% is how much so how much should have been transferred to reconstruction 36,000 because they have sacrificed only 50% but how much did we transferred relating to credit to reconstruction 72,000 we have transferred 72 but ideally we should have only transferred 36 comfortable so means relating to credit we have transferred less or we have transferred more we have transferred more how much more 36,000 now add these two these two we have transferred to reconstruction more how much 136 how much have we transferred less to reconstruction 136 that means end end end May is there anything extra transferred or fully got nullified fully got nullified this the way we need to root this entries because you're not giving new shares to the debenture holders and creditors you are giving out of the share surrendered you are giving that's the reason we have to root it this way in this particular problem this particular working note what I've showed absolutely not required an exam this is what you need to pass but to understand this I've just given this Clarity we have done two or three questions in our regular class relating to this adjustment hope you remember okay now normal reconstruction whether question says or question does not say two three adjustment we compulsorily do what are those DL debit balance compulsorily we'll write off any other uh preliminary expenditure if it is there we will write off here do we have any pnl debit balance yes we have P debit balance of 6 lakh okay that means will we keep it or write it off write it off only if reconstruction account has enough balance your reconstruction account has 6 lakh 4,000 balance as for the question you'll get this how by preparing reconstruction account ledger so Ledger has a balancing figure of 6 lakh 4,000 how much debit balance is there in pnl only 6 lakh so out of 604 we we can write off 6 lakh entirely after writing P pnl also does Capital reduction account has any balance yes how much balance it has 4,000 that Surplus balance will be keep quite or transfer it to capital reserve that will be transferred off to capital reserve as a balance figure this is a common adjustment that's all with respect to this particular problem easy people that's it with respect to this particular question thank you so much for your patience with respect to internal reconstru yes well hello people so let's revise the next Topic in our marathon revision session which is cash flow statement so cash flow statement chindy topic waste topic what is this cash flow statement so everything you say this only yeah every topic in syllabus is like that only what is difficult for you sir you are where where you are can't a to see also that how you are so all this topic you know Chiller Chiller topic for you okay but one good thing one reality of this particular topic is 90% of the answer is there in the question question just that you have to read the information gather all the proper information put it properly it'll be lengthy no doubt but is it easy easy in my view very much okay so what is this cash flow statement cash flow statement is as the name itself is saying it's a statement which captures cash and cash equivalents coming in cash and cash equivalents going out not just cash cash here refers to both cash in hand as well as cash at bank so what does cash equivalent mean cash equivalent means highly liquid Investments sometimes company will have short-term Investments no that shortterm Investments we call it as cash equivalent so every short-term investment is cash equivalent sir no if you want to call any investment as a cash equivalent it should satisfy some criteria one the total majority period of that investment should not exceed 3 months meaning today if you buy means within next 3 months you should sell off that investment not the remaining period the total holding period of that investment should not exceed 3 months second one it should be subject to insignificant value change risk it's basically it value should not fluctuate too much now you invested in cryptocurrency today you invested 10,000 tomorrow it may become 2530 also it may become one rupee also possible so that means its value is same or fluctuating too much so Equity shares or cryptocurrency and all are not cash equivalent because their value changes significantly for you to account it as cash equivalent significant value change should not be there is it okay with you and it should be readily convertiable into known amounts of cash meaning by selling this investment how much money approximately you'll get you should be able to estimate if these three criterias are satisfied we call such such an investment as a cash equivalent meaning it is not cash but it is equal to cash so this cash flow statement captures cash and cash equivalent coming in cash and cash equivalent going out that is what is this statement all about okay this coming in and going out we put it in three buckets those buckets are operating activity investing activity financing activity that's all it is if it is inlow we show this in cash flow statement as a all cash coming in we show it as a positive number all outflows show it as a negative number that's all is this drma all about okay see now one more thing is to find out this first bucket what is the first bucket operating cash flow we have two methods only for operating cash flow we have two methods one is direct method and another one is indirect method so how to find out I'll tell you okay first off some of the examples of operating cash flow is what name itself is saying operating cash flow operating cash flow means those cash flow related to our day-to-day operation examples could be cash purch chases cash paid to credit ours cash sales cash received from debars employee expense paid rento electricity administrative expenses all these are examples of operating cash flow if those information if it is given to you in the question directly we will go for direct method if those informations are missing if you cannot find it out then we will use something called indirect method indirect method maybe we'll take it in a bit first can we go for direct method any problem yeah I don't know the remote where it went if you want uh maybe you have it you can adjust fine don't switch it off ma yeah so this is how we find out whether it is a direct method or indirect method let's do a thing first we will apply direct method one question we will take and then we will learn it will be helpful okay let's uh review this okay prepare all the are again uh your uh study material questions only all right again for cast flow statement also you don't have to go through all the questions there are some one two three in fact three four questions are there which are marked as ldr few if you revise that entire concepts of cash flow statement will get summarized one such questions I'll pick it here also okay so because anyway more or less the same thing will come in almost every problem okay so first let's maybe understand direct method with the help of this question prepare cash flow statement of gamma limited for the year ended 31st March 20 X1 from the following info now how to find out whether it is direct method check sales for the year is how much 135 out of which 60% was cash that mean cash sale information missing or given given okay that means it's looking like an indicator of indirect method or direct method direct method if these operating cash flow information if it is given directly or if you can find it out then we will use direct method okay instead of this instead of all this information if suppose they give you p in the problem if they give you p in the problem then question is indirectly hinting that we should use indirect method because under indirect method we take pnl as a base and get the operating cash flow here pnl information given or missing missing but directly operating cash flows are given okay so take your calculator sir 135 how much is Cash sale 60% so calculate 135 60% is how much which cash where it should be shown operating cash flow investing or financing cash flow cash sales is an will come under operating cash flow 135 60% which is 81 easy all right next one uh sir if 60% is Cash sale means 40% will be credit sale so calculate 135 40% how much is that 50 CR sir have they given you cash received from datar or missing cash received from datar data given or missing missing but if you just check this table they have given datar opening and closing B visualize your Ledger datar opening balance given closing balance given credit sales also given that means when you prepare datar Ledger you'll get cash received from datar as a balance so is that cash received from data is really missing or we can find out we can find out by how by preparing dataa working note yes no so how much is credit sale just now we got we'll go line by line 135 40% you do how much is the credit sale 54 CR what is the journal entry for credit sale dears to sales 54 CR so this is done other information when we find it we'll take for the time being whatever we find we'll go on taking okay come back to the question next is what sir purchases of the whole year is how much 55 out of which credit purchase was how much 80% so 55 80% you do how much is that huh 44 sir have they given you cash paid to credit or missing missing but they have given you credits opening and closing balance that means cash paid to credit R we will get it as a balancing figure from which Ledger credits ledger so we will prepare next working not as credit ARS Ledger what is the journal entry for credit purchase purchases to credits so post it as by purchases 44 credit purchase easy okay move on to the next one what ises the next person sir sir if 80% is credit person credit purchase means balance 20% will be cash purchase so 55 20% you do how much is that 11 cash purchases comes under what activity operating activity under operating activity cash purchases directly you can write 11 since it's an outflow you denote it as a negative number okay next administrative and selling expenses amounted to 18 CR and salary is 22 CR so both these are EXP are related to our operations so both this expense data they've given one is 18 and another one is 22 so both are payments both will come where under operating cash flow itself 18 and 22 for admin and salary expense respectively both are payments hence negative next company redeemed debentures worth 20 CR at a premium of 10% that means are we paying the debenture holder 20 CR or 10% extra 10% extra how much are we totally paying 22 stop how are we paying this debenture holders where issued Equity shares worth 15 CR towards Redemption and the balance was settled in cash so totally how much we need to pay the debenture holder 22 entire 22 CR did we settle in cash or 15 CR was settled through shares out of 22 15 was settled through shares balance 7 only settled through cash what are we are we doing accounting here or are we doing cash flow statement in cash flow statement which among these three number is relevant for me only cash coming in cash going out how much cash went out so debenture Redemption of debentures is what activity Redemption of debentures is not activity it's a financing activity yes or if you want to go one step back some of the examples of operating cash flow is what cash purchases cash paid to creditor cash sale cash received from dears salary rent etc etc that is your example of operating cash flow can you tell me some of the examples of investing cash flow where in all can you invest don't outside where and all within the organization can you invest PP instead of fixed asset now we call it as property plan and equipment so PP purchased is an investing activity PP sold is also investing activity intangible asset purchased intangible asset sold still if you have Surplus money what you'll do you'll invest outside so any long-term investment purchased long-term investment sold is an example of investing activity so if you purchase some other company debentures what will you get now I purch central government bonds what will I get as an investor I will get interest so if investment if this uh debenture purchased if it is investing activity means interest received on this bond is also investing activity okay suppose I purchased Reliance Equity shares I purchase Reliance car Equity shares what will I get dividend so for me as an investor dividend received comes under investing activity because it is part of my investment so these are the examples of investing cash flow similarly financing activity cash flow think where in all can you raise Finance or how and all can a company raise money one by issuing Equity shares if a company can issue Equity shares can they buy them back or cancel yes so issue of equity shares buy back of equity shares both are financing activity or company can issue preference shares and redeem preferes issue of debentures Redemption of debentures or conventionally company can take a loan and repay the loan okay on loan taken or debenture issued what will the company pay interest so if loan Lo taken is a financing activity means interest paid on that loan is also financing activity if Equity shares preference shares issued is a financing activity means the dividend paid on that Equity shares and preference shares is also financing activ so these are some of the common examples of operating investing and financing activities yes people now come back now debentures here you have redeemed debentures you have redeemed Redemption of debentures is what activity Redemption of debentures is a financing activity how much you have to totally pay for rtion 22 CR entire 22 CR did you settle by cash or only 7 CR only 7 CR was settled through cash balance was settled through Equity shares so for my cash flow statement is this Equity shares value and 22 CR relevant or irrelevant I own only 7 crores because cash went out only to the extent of 7 CR where should I show the 7 CR under financing activity as a positive or negative under financing activity Redemption of debenture 7 negative that's all right next next what have they told uh interest paid during the year one and half CR sir interest paid is what activity interest will be paid if company takes the loan or company has issued debentures if loan taken debenture issued is financing activity means interest paid is also what activity financing activity so under financing activity interest paid one and a half CR should come as a negative okay next what is that uh uh investment costing 12 CR was sold at a profit of 2.4 sir sale of investment is activity purchase of investment sale of investment both are what activity investing activity now you tell me cost of investment is 12 we want the cost price or we want how much money finally came in we are preparing cash flow statement we want to know finally how much did we sell for 12 12 CR is a cost but we sold it at a profit of 2.4 means what is the selling price 14.4 CR is my selling price these two cardition so where should this 14.4 CR come under investing activities right sale of investment 14. 4 cror okay next 8 CR was paid towards income tax so income tax could be operating investing financing anything depending on the information given in the question okay like long-term capital gain tax your tax and all you have done right now when you sell any building and if you're paying tax on that ltcg and all may get attracted sale of building is what activity sale of building is what activity investing activity so any tax paid on that sale also will come under investing activity yes dividend paid is what activity financing activity on dividend paid if dividend distribution tax is paid dividend distribution tax I think now it's abolished but still if they say dividend distribution tax is paid then since dividend paid is a financing activity dividend distribution tax also will come under financing activity but but but by chance in this problem have they given the nature have they given breakup for this tax or no breakup so if they give you don't give any breakup as to what is this tax for we always show tax under operating activity because majority of the tax which the companies pay will be related to their operations so if the breakup is not given you'll show whatever tax paid under operating cash flow itself so how much tax did you pay 8 CR tax paid is usually the last component under operating cash flow the last component you'll show is tax paid which is 8 rupees it's an outflow so shown as a negative number easy okay next a new plant costing 21 CR is purchased sir purchase of pp what activity investing activity but hang on how much is the new value of property planed equipment for new plant value is 21 but did you pay 21 cash check in part exchange of an old plant so it's a barter system old plant you are giving away and purchasing a new plant old plant Book value is how much 12 but we want Book value or taken over value taken over value but the vendor took over this old plant at a value of 10 vendor is telling me I want to buy a new plant the new plant value is 21 I gave away the old plant to the vendor I told the vendor Book value of that plant is 12 he told no no no its value is only 10 that means how much balance I have to pay to the vendor new value of the plant is 21 in that old one is adjusted to the extent of 10 how much Still Remains 11 CR that's what you have to write here total value is 21 Old plant value take take over value is 10 so balance we have to settle by cash so which number is relevant here for my cash flow statement these three numbers are relevant or only 11 K is 11 so you have purchased PP and paid 11 CR cash so where it will come under investing activity you'll write planed purchase 11 rupes okay next what sir the balance dat opening and closing balance they have not given how much money is received from datar so take the datar they have given 1st April 20x Z balance which is opening balance 31st March 20x one balance which is closing balance opening datar balance 45 closing is 50 so in datar opening balance will come on which side in datar Ledger opening balance will come on the debit side two balance brought down 45 to buy balance carry down 50 this side if you total it is 99 that side also should be 99 you're getting a balancing figure of 49 what is that 49 don't say bad debts okay for 50 CR 54 CR sale 49 cannot be bad debts otherwise soon you'll be gone out of business only so this 49 CR is not badage it's a money received from dear given or arrived as a balancing figure arrived as a balancing Feld okay now where will this 49 come in cash flow statement necessarily under which category under operating cash flow under operating cash flow amount received from datar arrived as a working note number 149 like this okay people similarly credit arsa opening balance is how much opening is 21 closing is 23 credit ARS opening balance when you prepare Ledger value posted buy balance brought down 21 two balance Carri down 23 okay purchases was already given this side total is 65 you're getting 42 as a balancing figure on that side which is nothing but amount paid to credit are arrived as a balancing figure so cash paid to credit R is what activity under operating activity amount paid to credit R 42 that's okay sir now simple addition all this you add okay finally you're getting 29 if you after adding if you get 29 this is what all activity or only operating activity operating activity this we call it as if you're getting a positive number we call it as net cash flow from operating activity meaning we have generated 29 lakhs or 29 cres or whatever from our operating activity by chance if this is negative then we will say net cash flow from or used used if it is negative we say we have not got the money from the activity rather we have used more money towards that activity hence we say net cash flow used in operating activity that's all or you can write the same presentation you can do it okay so this is positive 29 similarly the net cash flow from financing activity investing activi is how much 3.4 CR this I'll call it as B and similarly net cash flow from financing activities 20 point to negative that means this is net cash flow from or used used now all the three activity cash flow you add if you add it how much you're going to get 29 + 3.4 minus 20.2 if you do it your calculator should show 12.2 correct that no no problem if you don't want to do absolutely no issues you can trust the numbers I put up so that what is this 12.2 the 12.2 is the total cash flow you have generated from all operations yes no okay to this what you have to do simple what is the opening cash balance opening cash balance was how much 6 CR to this cash flow whatever we have got 12.2 you should add opening balance and compulsorily get the closing balance if you don't get it somewhere you have done something wrong this is like your cashbook and passbook reconciliation and you used to do in your golden days that's all it is hence majority of the answer is there in the question only thing is you need to be little careful whether have you considered everything sir this and all will come in exam or sir you never know it may come in your attempt now only it has come sir don't be of that mindset that that c examination means everything will be tough no there will be some easy questions there will be some tricky questions okay so as I always say around 70 marks in your paper will be straightforward from study material RTP mtps last two three itemps ctps and usually and study material question mostly study material if you just check 70% of the question will be from that 70 marks balance 3540 they will make it tricky it'll be either entirely new or some adjustment will be new or they will make it really ly where you'll be sweating crazy that thing so paper that that's what you'll make but don't worry about that 30 35 marks focus on the 70 write it properly and try to score 60 65 also you can score there okay your own seniors you can see on the YouTube so many people have commented your own seniors have commented I've got 70 80 and they are not different from you they also prepared heavily in the last two months only so if they can do it if I can do it so can you right now someone can do it we also can do it no what is wrong with us we are more we are better than everybody yes no at least that's what we would like to think yes sir right so it is possible so don't freak out just keep yourself this one very very very very calm that's all is a intention especially in the examination Hall here will be full chillers ah okay sir we listen but then when you go to examination full G okay me moment we go that okay so that's the reason right write some mock papers this is a season ideally to write some mock papers anyways so this is done so with this I hope your direct methoda drama is all over everybody cool yes now we will dive into the next one so the next one is indirect method online people are also there AA suddenly you have gone silent I know that probably you're making some notes and all just kidding but still there no yes sir we are there sir physically present sir mentally absent sir s cholesterol for you I tell you no I understand especially during last one month of physically mentally everywhere will be present only correct no yeah we don't have to tell by default it'll be okay all right the next one is indirect meth so name is saying indirect method means and this indirect method is relevant for all the activities or only operating cash flow only operating cash flow can be found either using direct or indirect method under indirect method what do we do is we use profit as a base we use profit as a base and get ocf ocf means operating cash flow from profit we try to get operating cash flow hence the name indirect method so in this particular method now the first thing you need to be aware is which type of profit is given to you in the question confirm yourself this which profit is given sometimes may they will give you profit before interest tax you know the P order no from pbit if you deduct interest what are you going to get profit before tax pbit means profit before interest and tax from that if you reduce interest you'll get profit before tax from this if you reduce tax you'll get profit after tax after paying your tax all your Appropriations will start transfer to General Reserve transfer to crr Equity Dividend preference dividend and all that after doing all the appropriation item whatever profit remains only we call it as profit after all the adjustments this particular profit only will be shown in our balance sheet as a final profit yes people now in every indirect method question first check which profit among this is given to you in the question because based on that the adjustment will change so cash flow statement you cannot mug up if you mug up it's a nightm topic because things will keep changing one problem may we will add one problem may we will ignore and all that so it's not a mug up topic it's a total just conceptual application I mean if you are clear conceptually cash flow statement literally will be the easiest L for you so in some question may they will give you this number in some question may they may give you Pat some question may they will give you PBT usually one among these three is examiner's favorite either Pat or PBT or profit after all adjustments one among these three profit they will give it to you in the question now how does it make a difference let's review this again sir next 10 15 minutes quickly I'll be reviewing all the concepts of indirect method then we will apply it in one of the questions okay that's how we'll proceed now how to to find out operating cash flow using indirect method we already know how do what do we keep it as a base to get operating cash flow profit so first we start with profit first we start with profit this profit could be PBT or it could be P or it could be profit after all adjustments I have taken profit after all adjustments in my chartbook because I had to take a base right so if by chance if they give you in the problem profit after all adjustments meaning if they give you the final profit that you're showing in balance sheet after all the adjust inv Ms in this case how to do it very simple first thing is if you have any non-cash expenditures if you have any non-cash expenditures you add back you add back what are the examples of non-cash expenditure depreciation amortization let's take the example of depreciation okay so depreciation is an expense do you agree with me so if I account depreciation of one lakh did Cash go out or it's a non-cash expenditure and because of time because you using the asset value of the will go on reducing every year that reduction only we accounted as what sir depreciation does Cash go out like salary expense 1 lakh is it a non-cash or cash cash expense if I account salary of one lakh can I account it and keep qu or I also have to settle I also have to settle salary so salary interest and all is a cash expense right but depreciation is cash or non-cash non-cash that means did Cash go out because of this depreciation or no cash outflow neither no cash inflow nor there is any cash outflow let's understand the impact when you book an expense what will happen it's a simple plus minus method when you book an expense what will happen to profit when you account and when you account an expense P andl balance will reduce P balance will reduce sir under indirect method from profit only we are getting under indirect method from profit only we are trying to get operating cash flow due to depreciation your P profit balance has reduced so if your pnl balance is reduced means indirectly your operating cash flow is also red because from profit only we are trying to get operating cash flow because again due to depreciation your profit pnl balance has reduced because pnl balance is reduced your operating cash flow is also reduced but did Cash go out due to depreciation or no cash cash has not gone out but cash operating cash flow has got unnecessarily reduced how to do it what to do add add back hence non-cash expenditures we add back is this clear with you that's a logic okay everybody cool same goes with amortization also same thing with transfer to reserve let's say we have transferred from pnl to General Reserve we transferred some one lakh rupees from pnl to generalism tell me what happened to pnl balance if you transferred from 1 lakh from pnl to generalism means pnl will reduced by one LH from P andl only we are trying to get operating cash flow if due to this particular adjustment if pnl has reduced by 1 lakh means your operating cash flow is also unnecessarily reduced by 1 lakh did Cash go out of one lakh or it's a non-cash non-ash but your operating cash flow has unnecessarily got reduced what to do add hence all this non-cash expenditure whatever is there we add I've given you some of the examples which we see in our problems any doubt in this first category can we get to the second category all right similarly if you have online also cool sir okay super next is non operating expenditures pnl will have non-cash expenditure also it'll have some nonoperating expenditure and income also if you have any non-operating expenditures we need to add like example is interest paid interest paid sir interest paid is what activity interest the company will pay on loan or debentures loan taken debentures issued and all is what activity financing activity so interest paid is what activity financing activity but interest is an expense where will this expense be transferred to pnl so due to this interest due to this interest expense pnl balance has reduced if your payl balance is reduced means your operating cash flow has also got unnecessarily reduced but is interest paid operating activity or it's a financing activity it's a financing activity but your operating cash flow has got unnecessarily reduced so what to do hence add that that's all it is none people okay same goes with this also suppose loss on sale of investment or PP sir if you have sold any investment or PP at a loss sale of investment sale of PP and all is what activity sale of investment and sale of pp is a investing activity but you sold this asset at a loss means where will the loss get transferred loss will be transferred to Pendle due to this loss what happened to your pel balance due to this loss pel balance has reduced from under indirect method from profit only we are getting ocf because of this loss pendl balance is reduced means your operating cash flow has also got unnecessarily reduced but sale of asset operating activity or investing activity investing activity hence to restore what do we do add back that's your adjustment can I move on to the next next if you have any nonoperating income non-operating income if you have means you need to minus examples of non-operating income is interest received sir interest received dividend received is what activity first of all when will you receive interest not paying interest interest when will you receive if you purchase investment on your in investment you will get interest investment purchase what activity investing activity so interest received dividend received on that investment is also what activity investing activity but interest received divident received is an income where will the income go to pnl due to this income what will happen to your pnl balance due to this income pnl balance will increase if pnl balance is increased means unnecessarily your operating cash flow is also increased but is this operating activity or investing activity investing activity but your ocf has increased hence what to do minus that's a logic yes people so one or two concepts if I discuss that's good enough so these are all the things that you'll get in the question which I've just brought in over here we'll see what and all I mean in this particular question that we picked up what what and all will come so by taking profit if you do all this adjustment no by doing all this adjustment we get a particular number that number we call it as operating cash flow before working capital changes from profit if you do these three adjustment the number what you get is only we call it as operating cash flow before working capital changes now the last but one adjustment you need to give is working capital changes effect you need to give in cash flow statement that is very simple I told you the logic now I'll not go into logic simple we'll go by the formula what is that formula working capital how do you get current assets and current liability so current assets and current liability changes we need to account it in cash flow statement how very simple increase in current assets means what we have to do if you have an increase in current assets means we need to minus if it is decrease in current assets means you will add increase in current liability means plus decrease in current liability means minus okay if you forget the equation in fact I've told you the logic also but one quick way to if by chance ideally you need to remember this you should because we have done almost 20 25 questions Plus in case you forget this in exam may we don't know what in all can happen to us suddenly sometimes you'll forget our name only this topic you leave yeah things can happen yes so if by chance you got into that scenario means don't freak out easy way to decode is check first of all how do you get this increase or decrease how will you say a current asset is increased or decreased by comparing opening balance with closing in these sort of problem they will give you balance sheet they will give you balance sheet current year balance sheet they will give you also they will give you last year balance sheet current year balance sheet will be prepared at the year end so that will represent what closing balance last year balance sheet represents last year closing balance which becomes current car opening balance so opening balance and closing balance you need to compare and tell whether the current asset has increased or for that matter it is reduced so let's take a small example datar so datar opening balance was 1 lakh dat opening balance I've assumed it to be 1 lakh at the end of the year its balance has become 70 1 lakh has become 70,000 means how don't say back dats we are preparing cash flow statement so think from that perspective and tell one lakh has become 70,000 means what 30,000 it has reduced how because we have receive money from datar sir when you receive money from datar if you receive money it's an inflow in cash flow statement inflow you will show it as negative or positive positive that means this 30,000 you should show it as what positive now related back to the equation opening balance of 1 lakh and closing balance is become 30 so that means what has happened here data balance is increased or reduced datara balance opening was one closing has become 70 so datar balance has reduced that means current asset has reduced that's what it say if you have any decrease in current asss what you have to do you have to do plus like that one if you remember automatically you can construct the other three equations in case yes people but is this the logic of adding no I've explained you what is the actual logic of doing this we will not go into logic now because we are interested in marks now we want to swaha the marks not the logic correct no so let's not worry too much about that some problem instead of current assets current liability directly they will give you working capital directly they'll give you working capital if by chance they give you means how do you get working capital current assets minus current liability so if current asset is 100 current liability is 80 means how much is this 20 okay so they will give you working capital for one first year okay compare it with the second or directly can I tell you is it okay so if you have any increase in working capital means if there is any increase in working capital you minus decrease in working capital you need to add because if working capital has increased means the only way working capital is can increase is current asset has reded rather current asset has increased if current asset increases means working capital also will increase so increase in current assets what do you do increase in current assets what do you do minus hence increase in working capital also you will M like that way rare but sometimes directly this particular adjustment also can be done okay check this and accordingly do okay people after doing all this one last adjustment you need to consider that is tax tax paid by doing this finally you will get the net cash flow from operating activity that's all you have to do under indirect method okay okay all these are what it may look small in the format but in the question if they give you five current assets four current liability I mean this adjustment only will Lear into n nine line items correct no so if they give you five six adjustment here that means overall the question may become two pages but is there any dumb in the question or no them no them just that it is lengthy that's all they'll make it look like big okay but in reality question nothing okay move on to the next one H all right there's some extra Concepts that will come relating to indirect method we will quickly review that and then apply what is that is first one with respect to depreciation with respect to depreciation sir as per as depreciation goes or one second hang on if you okay there's any small question I'll quickly review that or is it okay another 105 minutes I spend on Concepts then I'll take up a question would you be fine so far there no not no problem okay so come back to this provision for depreciation or rather what is this with respect to depreciation sir there are two methods through which you can account depreciation I'm not talking about methods of calculating depreciation I'm not talking about straight line wdv here I'm saying two methods of accounting depreciation one is we can follow charge method another one we can follow provision for depreciation method company is free to choose what they want to go for so what is the journal entry for depreciation depreciation account debit to fixed asset we don't call it as fixed ass we call it as now PP and this depreciation will be transferred off to P and L this is the entry if you are following this method like your golden days then we say company is following charge method okay sir there is another method which the company can follow which is your provision for depreciation method or also sometimes it is referred to as accumulated depreciation method you can call that way also provision for depreciation method or accumulated depreciation method in if this method is followed then the journal entry for depreciation will be same depreciation is an expense nominal account rule say expense to be debited so we will debit depreciation but we will not credit PP account we will credit provision for depreciation account okay so if depreciation is 1 lakh means entire one lakh will be shown in which account provision for depreciation account and this depreciation is an expense it will be transferred off to P okay s now tell me if provision for depreciation method is followed suppose you purchase the asset for let's say 5050 lakh rupes you purchase asset for 50 will the asset ledger balance ever come down or it will never come down if you follow provision for depreciation method we fix it as it called Ledger ledger balance reduce or it will never reduce never reduce why because all depreciation are you crediting fixed asset account or provision for depreciation since all depreciation is going to provision for depreciation account PP Ledger will always be shown at original cost in my example original cost is how much 50 lakh okay Z that is the first statement I hope this is okay so for how long should we maintain this provision how many years should we maintain this one year 3 years 5 years how many years so as long as the asset is there as long as the asset is there provision for depreciation also should be maintained I think check this is this statement okay when provision for depreciation account is maintained PP ledger balance will always be shown at original cost you able to satisfy yourself with that okay now sir when you will show this provision cger or you'll Main this provision cleure till you have PP till the time if you have PP for 20 years means provision for depreciation also will be maintained for 20 years so the moment that PP is derecognized the moment that fixed asset is cancelled that today that today even this provision for depreciation also will get canceled the moment that asset fixed asset or PP gets cancelled that day even this PP Ledger also will get cancel sir when will you cancel PP when will you cancel a fixed asset when that fixed asset is sold off usually or written off whatever so when you cancel or fixed asset that particular day this provision also will get cancel stop there what is a journal entry for depreciation in this method under this method what is a journal entry for depreciation entry is depreciation to PP account no entry is depreciation account debit to provision for depreciation that means tell me provision for depreciation account has what balance if your crediting this account means it'll have a credit balance something which has credit balance how do you cancel so the moment you sell an asset the moment you sell an asset can you show the asset or you need to cancel the asset canc asset has what balance debit balance how do you cancel it credited this provision for depreciation if the asset is not there means is this provision required or not required provision has credit balance how do you cancel it debited that means the entry you will passes provision for depreciation account debit to PP once the pp is derecognized due to whatever reason you will cancel a also you'll cancel provision also by passing this particular in so far good yes so how is this relevant for my cash flow statement I'll tell you whenever they give you accumulated depreciation okay or provision for depreciation balance do not forget prepare one Ledger what Ledger provision for depreciation Ledger you prepare we'll also apply it okay they will give you provision for depreciation opening balance and closing balance so you tell me credit AR opening balance where it will come credit opening balance where you will show debit Side Of The Ledger or credit side credit side you'll write it as buy balance brought down why credits has credit balance similarly provision for depreciation also has what balance credit balance so this provision for depreciation opening balance you will post it on the credit side as byy balance brought down closing balance you'll write it as two balance carry down so far okay sir if PP is cancelled if PP is cancelled what entry will pass if PP is cancelled mean should we maintain provision for de iation on that PP or not required not required so provision also you'll cancel PP also you'll cancel provision as credit balance to cancel we will debit PP has debit balance to cancel we will credit so the entry will passes what provision for depreciation account debit to PPM so that if it is there it will come here got it everybody all right no no no no no let's assume this is one lakh this is 2 lakh so what is the total balance 3 LH that means Ledger means this side also should be three lakh okay let us say opening balance is only 2 and a half lakh opening is only 2 and a half is the journal Ledger matching or there is a balancing figure how much balancing figure 50,000 yes that is what sir that is what current year depreciation arrived as a balancing figure because under this method what is the journal entry for depreciation what is the journal entry for depreciation depreciation account debit to provision for depreciation when you post this entry in provision Ledger what will be the posting you'll have to post it as by depreciation and depreciation goes to p p only know either you can write by depreciation or you can write by P one and the same why do we prepare this provision Ledger is in in these sort of problems usually depreciation for the current year will not be given to you in the question depreciation for the current year will be missing by preparing provision for depreciation Ledger we get current year depreciation as a balancing to get that you need to prepare this as a working mod because depreciation is a non-cash expenditure and under indirect method all non-cash expenditure what do you do add back if you don't know the data prepare provision for depreciation for Ledger and get it as balancing figure so that means if depreciation is given means this Ledger can be cut as yeah most probably yes it depends on the question but most probably yes you don't have to prepare it done people this is the intention of preparing provision for depreciation account once more got it everybody call a new person has walked in he's saying I'm no new sir no problem first we'll continue with this easy okay next one more thing is with respect to two adjustments the treatment is same for both one is dividend another one is provision for tax okay now usually in this dividend adjustment and tax adjustment one examiner's favorite way of structuring this adjustment is they will give you anyway balance sheet here two years balance sheet they will give you okay now sir let us say current year previous year in current year balance sheet under current liability side you see something called dividend payable you see something called dividend payable so current year it is 2 lakh last year it is 150,000 that's all they'll not talk anything in adjustment in balance sheet you see dividend payable current year 2 lakh last year one and a half lakh nothing else will be given now you are law students you know dividend payable 150 is relating to current year or previous year PR sir once a company declares dividend they have to settle I think in my law knowledge goes within 30 days once you declare it company has to settle it within 30 days this relates to current year or last year that means company will keep this outstanding or they will settle they would have settled because otherwise you'll be violating companies act 2013 Provisions correct no so if what is the adjustment I'm trying to say is if the question gives only okay opening and closing balance if the question only gives the opening and closing balance and nothing else is given then the assumption that we make is assume that the last year dividend last year dividend means opening balance right that is assumed to be paid in the current because last year dividend outstanding we cannot keep current year is also passed can we keep this outstanding or we would have settled we would have settled so assume that this 150,000 is paid off in the current this is the Assumption you need to make when you'll make this assumption when you'll make this assumption only if opening and closing balance relating to Dividend is and no other information is available fine people you make the same assumption for provision for taxation also because like a dividend when you make provision for tax provision for tax is estimated tax so can you make the estimate or you also have to pay it will you just make estimation of tax or you also have to settle also have to settle same goes if provision for taxation opening balance let's say is 5 lakh closing balance let's say is 7 lakh only if these two data is given now this provision for taxation of five lakh relating to current year or last year last year so last year over current year is also over not even one rupe tax you'll pay to the government that much chuna you'll put to government I know that you probably may not like the government but still we need to pay tax yes or no so this what is the assumption that you'll make in that case since this F L pertains to the last year we assume that it is paid off in the current year okay you will do this assumption only when sir When what when only opening and closing balance is given and no other information is given to you in the question okay if other information is given in the question don't apply this approach then you prepare a proper Ledger and get that great so current year dividend proposed do we need to reduce from net profit that depends on the question okay depends on what sort of profit is given to you in the question if it is profit after all adjustment then we will add back we will not reduce because due to Dividend pnl balance is reduced so hence in that case maybe we need to add back maybe maybe in the question maybe we'll take that up if it comes so this is the format of proposed dividend and this is the format of provision for taxation any problem in this case anybody or maybe 1 minute once again we will spend this dividend payable so dividend payable is a liability last year closing balance becomes current year car opening balance I means this is opening balance and this is your closing balance tell me this 150,000 where it will come when you prepare dividend payable Ledger you can call it as dividend payable you can call it as proposed dividend you can call it whatever name doesn't matter this 150,000 where it will come when you prepare Ledger opening balance will come on the credit side as buy balance brought down yes closing balance of 2 lakh where it will come on the debit side two balance broad down yes a people no no no no no dividend if only they give you this what you'll do if only these two information is given to you in the question what assumption you'll make what assumption you'll make this 150,000 pertains to last year current year or last year last year will you keep this outstanding or it'll be assumed to be paid it'll be assumed to be paid what is the journal entry for credit our paid 150 credit paid 150,000 entri is credits to bank dividend payable paid 150,000 what is the journal ENT dividend payable is also liability so that means what is a journal entry dividend payable account debit to bank so when you post this entry the journal entry will be dividend payable account debit to bank got it people okay then you would have made current year divident also right so this is the journal entry for current year divident because what is the journal entry for dividend sir when you declare the dividend what what is the journal entry when you declare the dividend pnl balance will be same or it'll reduce reduce that means the journal entry will passes pnl account debit to proposed dividend or you can call it as dividend payable or whatever fine so how much dividend have you declared in the current year 2 lakh so this entry when you post it in proposed dividend or dividend payable Ledger the posting will come on the credit side as by pnl that's all it is okay this way you'll have to prepare The Ledger same format me you have to use for preparing provision for taxation also all this we will apply in the question just say done G okay one more pointer you need to specifically remember for indirect method is Sir sometimes they will confuse you by saying bad debts is 10,000 discount given to credit RS or discounted from credit is 7,000 like this if they give you any adjustment relating to current assets and current liability will you consider an indirect method or ignore ignore sir in indirect method indirect method we only want current assets opening balance and current assets closing balance compare if there is increase in current assets means minus decrease in current assets means plus increase in current liability means plus decrease in current liability means minus all other adjustments like bad debts or discount whatever they have given absolutely ignored for indirect method logic I've explained to you in regular class why we do like this okay but for the time being I think this is good enough yes people if they give you all that adjustment ignore absolutely no need to worry about that done one more thing you need to keep in mind for cash flow statement is a hidden adjustment called interest called interest sir they will tell you in the balance sheet 10% debentures and they will give you closing balance 1 lakh opening balance is 50,000 okay in the they'll give you two years balance sheet in that balance sheet there will be one component called debentures it will not be just debentures they'll specifically use 10% what does this 10% signify interest okay and for interest nothing they will specify in adjustment they will not give anything in adjustment should we ignore the interest or should we there should we account it we should account it okay that means interest adjustment will be hidden you have to always consider if they give you percentage if they say 10% debentures means interest adjustment is always there if they give you 8% loan means the interest adjustment is always there suppose they only give you a loan they don't tell you interest rate in this case may can I calculate interest or not possible only in that case may you can ignore the interest all these are some quick pointers you need to keep in mind for cash flow statement can we go ahead and apply one or two questions relating to indirect method to get our understanding little better yes everybody okay they're on the same page just to be on the safer side can you tell me the format for me under indirect method let's see what is it first of all under indirect method what do we do from profit we try to get operating cash flow we'll call it as ocf going forward from profit we trying to get operating ocf right now this profit will it be one or it could be anything it can be profit before before tax or it could be profit after tax it could be profit after all adjustments they can give whatever profit in the product that depends okay now if suppose profit after all adjustment is given to you in the problem what will you do first if you have any non-ash expenditures like depreciation on tangible assets amortization on intangible assets transfer to Dividend and or transfer to reserves and all you will add back then if you have any nonoperating expenditures like interest paid loss on sale of pp loss on sale of investment etc etc you will add back if there is any non-operating incomes like interest receive dividend receive profit on sale of pp investment etc etc you minus okay by doing this plus minus you get a number that only we call it as operating cash flow before working capital changes then give working capital changes effect how do you get working capital changes effect simply compare current assets opening balance with current assets closing balance if there is increase in current assets means minus decrease in current assets means plus yes increase in current liability means Plus decreas in current liability means minus one equation you remember asset ult equation is liability so first equation if you remember other three you can automatically construct on your own but instead of current assets current liability sometimes they may directly give you working capital if there is increase in working capital means indirectly it is increas in current assets what do we do for that minus if it is decrease in working capital means we plus okay after doing this last adjustment you'll consider is your tax okay and then finally you'll get your ocf for investing activity and financing activity there are no methods the same format only for operating cash flow either we can go for direct or we can go for indirect method okay let's understand and apply indirect method a little better with the help of a couple of question if time permits okay I think we do have some time maybe two questions let's at least try to cover up okay one basic chinto question we will take up first off this is an RTP May 24 question huh retained earnings they have given theyve given called retained so name itself is saying retained earnings earnings means profit retained earnings means the profit retained in the business after all the adjustments The Profit after all the adjustments only we retain that only we call it as retain so what profit is given to you in this problem PBT P or profit after all adjustment profit after all adjustments in this case is 17,000 so we start with this okay so where is that solution start with this profit after all that you can write that use that word only it's okay profit after all adjustments or you can call it as retain earnings as given in the question it's fine okay now we'll go for adjustments one by one sir should we have to give a heading non-cash expenditure nonoperating expenditure non-operating income not required that was just for you to remember the adjustments I put them under respective category when you are solving you don't have to call it as this is non-cash this is non-operating like that not necessary all adjustments one by one you can go on doing without giving any particular name okay now check depreciation but here we will give the name to it depreciation is what because when we give a name we'll have Clarity over it or the adjustments in exam not required depreciation is what it's a non-cash expenditure maybe one more we'll do that plus minus due to depreciation what has happened to your profit due to depreciation your profit has reduced if your profit is reduced means indirectly your ocf is also reduced but did Cash go out no it's a non-cash expenditure so what to do add back so 4,000 you need to add back go take your calculator simultaneously we will work out why to look at the solution every day it'll take time system little slow it'll keep loading okay 177,000 plus 4,000 you do okay now next one loss on sale of machinary Sir sale of missionary what activity investing activity sir if you have sold a missionary at a loss right that means this is a income or it's like a expense any way you can treat it as expense so this is what nonoperating expenditure yes okay so this loss loss on sale of Machinery where it will go to P due to this loss pnl balance has reduced if pnl balance is reduced means your indirectly your ocf is also reduced sale of missionary operating activity or investing activity but your ocf is reduced so what to do add so add 3,000 again great next provision for tax sir for tax tax should be considered but we want provision for tax or we want tax paid we want tax paid want tax paid but they have made provision for tax so what is the journal entry for any provision provision is a charge against profit provision is a charge against profit meaning when you make a provision pnl balance will reduce so what's the journal entry for any provision the journal entry for any provision is pnl account debit to provision whatever provision okay now you made a provision how much provision you made 7,000 due to this provision pnl balance has reduced if your pnl balance is reduced means ocf is also reduce for cash flow statement we want provision for tax or we want tax paid we want tax paid hence add back the provision whatever provision we have reduced first you add back we will deduct what we will deduct what tax PID current current year tax paid we want hence provision for tax we add back because due to this provision pel balance is reduced so your ocf is also reduced hence we add back yes people clear clear balcony clear next interim dividend paid during the year sir when you pay the dividend what journal entry you will pass first you'll declare the dividend then only you will pay what is the journal entry for though they have said dividend paid here you will declare it and then only pay right so when you declare the dividend what entry you will pass when you declare the dividend profit pnl balance will be same or it'll reduce that means the journal entry will passes pendl account debit to interim dividend correct no how much is that interim dividend 10,000 correct then when you pay this interim dividend the journal entry will be interim dividend account debit to bank account 10,000 10,000 these are the two journal entry you will pass let's analyze them one by one sir have you paid this interim dividend yeah dividend paid is what activity doesn't matter whether it is final dividend proposed dividend interim dividend you give whatever name dividend paid is what activity financing activity ignore or consider consider under financing activity first of all are we preparing full cash flow statement here no people you're actually preparing the the requirement is we need to find only ocf we need to prepare only OA so if they asked full cash flow statement means dividend paid will be shown under financing activity as a minus since they have not asked that we are ignoring that okay sir next when you declare the dividend what entry you passed pnl to Dividend so because of this dividend declaration pnl balance has reduced because when you declare the div pnl balance will reduce your pnl balance is reduced means operating cash flow is also indirectly reduced but dividend paid is an operating activity or financing activity it's a financing activity but your ocf has reduced hence what to do add back the interim dividend how much 10,000 rup okay people one moment hang on why do we add back because in this problem what profit is given to you in the question profit after all adjustments go back to the order can you reiterate the order for me what is the order of Pendle first you will take profit before interest and tax from that you will deduct interest what are you going to get profit before tax from that you'll reduce tax you will get profit after tax then if you deduct the interim dividend whatever or I'll just call it as dividend because there is no other adjustment after declaring after reducing dividend you will get what sir profitter after all adjustment which only is being told to us in the problem as retained earnings correct that means is dividend already deducted when we got retained earnings yes after deducting divident only we got retain earnings hence we are adding back yes because they have reduced the dividend then they've given the profit so because of this adjustment pnl balance is reduced so ocf balance is also reduce hence we add okay people suppose in the problem if they had given you profit after tax if they had given you profit after tax should we consider this dividend adjustment or ignore if they had given profit after tax in the problem should we consider dividend or we'll ignore ignore why sir is dividend already reduced from profit after tax or yet to be to be that means is dividend already reduced their profit or not yet not yet so if they had given you profit after tax means this dividend adjustment we would have ignored because the dividend is not yet deducted that's a reason manageable yes no once more okay suppose they give you same profit before tax suppose they give you profit before tax in the problem should we consider this dividend adjustment or still ignore sir is dividend already reduce from profit before tax or not yet not yet so if by chance if they give you profit before tax in the problem again this dividend adjustment will be ignored because dividend is not yet reduced but did they give you these two in the problem or they give you profit after all adjustment in this problem since they've given profit after all adjustment has dividend already been reduced yes that means due to this dividend car reduction pnl balance is reduced so your ocf is also reduced but dividend is not an operating activity rather it is a financing activity but your 4cf has unnecessarily reduced hence what do we do add that so in this problem that's the reason you have to first identify what sort of profit is given to you in the question based on that you'll plus you'll minus or you may also ignore that's all it is so if you know the logic easily you'll Aramis solve but if you try to mug up it'll become a little bit of a nightmare you can mug up it is just that you're giving too much load to your brain I feel that much load not required But ultimately I leave it to you yes ma'am PBT is given if PBT is given huh don't need to uh if PBT she's saying sir if PBT is given should be not add back provision for tax also absolutely yes PBT is what profit before tax is provision for tax deducted or not yet deducted not yet deducted I mean should we have to add it back or not required not back in that case even tax will be ignored correct if this is given to you in the question means all this adjustment will be considered or we will ignore we will ignore that's the reason identification of profit is very important okay so if you are having any problem with that solve three four questions to identify what profit is given then you'll accordingly get it what adjustments to be done in that case may no need to mug up also otherwise Chum you have to mug it up waste you you have some mug up topics in accounts also that you mug up no this and all why do you want to mug up pointless still if you want to do it your choice your memory who's disturbing okay this is done this is done this is done this also done next is dividend paid during the year that means there is one kind of dividend here or two types two sir interim dividend is like our normal like shareholders are going on asking the company give dividend dividend dividend he told the shareholder take that take a 10,000 rupees for the time being keep quiet don't ask okay for the time being to shut their mouth we company gave one dividend that we call it as what interim div final dividend company will declare later on so what doesn't matter the treatment is still the same dividend paid what we have to do you will just pay the dividend or first you'll declare and then pay declare and then pay so when you declare the dividend what is the journal entry pay account debit to Dividend then when it is paid inter dividend account debit to bank now what profit they give you in this particular question did they give you PBT P or retain earnings retain earnings means they gave profit after all the adjustment that means is this dividend is this dividend of 8,000 already reduced yes is this dividend already reduced yes because of this dividend pnl balance has reduced if your pnl has reduced pnl balance is reduced means indirectly your ocf is also reduced but dividend paid operating activity or financing activity financing so what we should do add back dividend of 8,000 manageable move on to the next okay premium payable on Redemption of preference shares sir instead of repay redeeming preference shares at 100 let's say we paid 102 instead of repaying preference shares also company will redeem redeem means cancel yes no so the face value of preference shares is let's say 100 but the company on Redemption let's say they paid 102 how much extra the company paid 2 Rupees at extra only we call it as What premium for the company that extra paid is profit or loss that extra instead of paying 100 if they pay 102 means that premium paid extra paid for the company prospective it is profit or loss loss where will the loss be transferred to P end correct loss will be transferred to that loss in my example that loss is 2 rupees in this particular case may the loss is how much 2,000 rup okay so how much extra have you paid to the preference shareholders 2,000 Rupees right that 2,000 is a loss where has that loss gone to that loss has gone to PN so due to this loss pnl balance has reduced if your pnl balance is reduced means indirectly your operating cash flow is also reduced but Redemption of preference shairs is operating activity or financing activity preferen CH issued is a financing activity so preferen CH redeemed is also financing activity but because this loss has been transferred to pnl have to keep okay I keep it idle I think it goes off one second the screen I think it's getting timed out hope it comes back ah okay all right sir this premium has been transferred to pnl means due to this premium pnl balance has reduced so your ocf has also got unnecessarily reduced but is this operating activity or financing activity financing activity hence what we need to do add in fact are you adding all this in a calculator yes sir okay see you already done the problem no problem profit on sale of investment sir sale of investment what activity investing activity so profit on sale of investment should ideally be considered under investing activity but sale of profit in your P all profit loss will be transferred where P has this profit on sale gone to pnl yes because of this profit what has happened to your pnl balance pnl balance has increased if pnl balance has increased means your ocf also has increased but sale of investment operating activity or investing activity and what we have to do minus so minus $10,000 all right refund of tax refund of tax so when there is a refund of tax the entry you will passes bank account debit to P you can write bank account debit to refund of tax and refund to P whatever or directly you can pass the entry bank account debit to pnl 1 okay sir sir pnl has what balance usually pnl has what balance profit means pnl will have a credit balance due to this refund again pnl balance you are crediting I mean due to this refund pnl balance will be same or pnl balance will increase pnl balance will increase if pnl has increased means your operating cash flow is also increase for tax can we show it anywhere or there is a separate category there is a separate category so due to the adjustment pnl balance has increased your ocf also has increased since for tax there is a separate category for the time being you minus this and show it under that category not anywhere else because of this adjustment again pnl balance has increased so your ocf also has increased but since there is a separate category for tax show it there so reduce it from here so for this what you have to do minus once again this will be considered which I'll tell you in a bit have you done that minus all this adjustment we did next we have to capture working capital changes here check they have given additional information they've given the data as on 31st March 2022 that is for the previous year previous year closing balance becomes current year opening balance then they've given 31st March 2023 current year data which is your closing balance so check trade receivable dats opening balance was 10 closing has become 12 from 10 it has become 12 means datar balance has increased so increase in current assets means what you have to do minus so- 2,000 you need to do take a calculator minus 2 you do doing trade payable liability opening balance 7 closing balance 15 that means it has 7 has become 15 means it has increased by 8,000 increase in current liability means what we have to do plus so add 8,000 rupes how 8,000 50 - 7 if you you'll get 8,000 that's the changes compare opening balance with closing balance accordingly you'll get increase or decrease provision there is a separate category for tax we will put it up there don't show provision for tax in working capital changes okay working capital changes may only show those components which are related to your operations okay tax since there is a separate category comes there do not consider this we'll prepare a separate Ledger for this one minute first we'll finish off this this is not prep prepare it is prepaid expenses opening balance two closing is one opening was two closing as one means prepaid expense balance prepaid expense is a current asset yes no so current asset balance is increased or it is reduced reduced by how much 1,000 two has become one means there is a reduction of 1,000 so decrease in current assets means what do you decrease in current assets means you add add 1,000 outstanding expens is part of current liability opening is 1,400 closing is 1,000 from 1,400 it has become 1,000 rupees I mean increase or decrease there is a decrease of 400 so decrease in current liability means plus or minus minus okay whatever number you have got so far good okay keep that in mind now the only thing we need to consider is provision for tax now tax what did I say just help me Rec recollect that concept just now we discussed and came what is the thing we discussed two things called concept what is that for provision for tax and proposed tax what you need to prepare a ledger normally how they will give this question opening balance and closing balance that's all they will give other than this extra data will be given or not given not given first let's do it for uh provision for tax sir opening balance do you know for provision for tax 4,000 closing is how much 7,000 sir if only these two data is given to you in the problem what you'll assume opening balance of provision is relating to current year or last year last year last year C tax will you still keep it outstanding or it is assumed to be settled assumed to be settled when the current but hang on can you make that assumption in this problem or they have given data they have given data check here what is that provision for tax they' have given provision for tax how much 7,000 means just opening balance and closing balance is given or current year provision is also given current year provision so can you make that assumption in this problem or not you can't make you can't make so first what you do provision for taxation Ledger you prepare what is the opening balance of provision 4,000 so when you prepare provision for tax Ledger opening balance comes on which side provision for taxation is also liability liability opening balance comes on which side credit balance byy balance broad okay similarly provision for taxation closing balance where it will come on the debit side as two balance carried easy okay if only these two data was given means what assumption we would have made this 4,000 is a tax related to last year it would have been assumed to be paid in the current year right but here hang one they also give an extra data called provision for tax what is the journal entry to make any provision I do p account debit to provision how much provision have you made in the current year 7,000 so when you post this journal entry in provision for taxation Ledger what will you post it as you'll post it as by pnl 7,000 this is given to us in the question correct now nothing other than this is given this I total is 11 the side total should be 11 is it matching or you're getting balancing figure how much balance B ing figure ironically here balancing figure is also 4,000 what is that balancing figure sir will you just make provision and keep quiet or provision you also settle settle settle sir what is a journal entry for a liability paid when you pay a liability credit are paid what is a journal entry credit ours to bank provision for taxation paid what is a journal entry provision for taxation to bank so this 4,000 is a tax paid arrived as a balancing figure ironically here the assumption is still holding good but but when they give you the data prepare and actual Ledger and get it yes people now this is relevant for my cash flow statement one minute sir how much is the tax paid by the by the company during the current year in the current year company has actually paid a tax of 4,000 but but but but hang on did the company just pay tax or they also receive refund how much refund also they receive, rupees okay that refund may be related to last year whatever it doesn't matter cash flow statement doesn't give a damn whether it is related to current year or last year or next year doesn't matter cash flow statement simply captures cash and cash equivalent coming in cash and cash equivalent going out it maybe for current year maybe for last year maybe for future year it doesn't really matter now coming back to this adjustment how much tax the company paid 4,000 how much refund did they receive 1,000 that means net net how much tax the company really pay to the government for they paid one they received means net tax paid is how much 3,000 tax paid will it come under operating activity yes and the as a last category tax paid you add or you minus minus so minus 3,000 and tell me what is the number you're getting 40 600 that is a net cash flow from operating activity P got it now manageable clear clear online also kg uh someone asked doubt I didn't get it P what is that one minute those skes it is mentioned as dividend declared in the current year can we assume that it was declared in the last year it is not no no no no P when they say in the data okay some sh's question is Sir can I assume this dividend as relating to the last year sir when they give you current year profit after all the adjustment and when they give you dividend right it is always this dividend is related to current year not for the previous year if it is previous year they will mention okay so if they just say dividend paid dividend interim dividend and all it's always for the current year okay other than that any other doubts no okay if you have another 15 minutes I can take one more question if you feel enough I wind up I'll give you a break 15 to 20 minutes it will take if you are through manageable online also good online they're saying it's okay you do it I'll have food simultaneously that is Advantage for them okay this is a good question uh last day revision question Ryan limited okay this is a study material question only a good question in my view so uh the Ryan limited provides you following information as on 31st March 20 X1 great now if you just check this data check the problem they've given you sales sales minus cogs gives you GP sales minus from sales if you reduce cogs you're going to get gross profit from gross profit if you reduce all this you'll get profit before tax then finally you'll reduce tax you'll get profit after tax now sir you are spoiled for choices why sir they have given whatever you you can take whatever you want you can take profit after tax you can take profit before tax whatever and work out yes or no usually usually as3 cash flow statement is backed by accounting standard three as3 recommends that you start with profit before tax okay if they don't give you profit before tax then you start with whatever data available if by chance PBT is given ideally you start with PBT that's the ideal scenario as per as3 exam I also recommend you to take up the same yes people so in this problem I'll start with profit before tax so let's start with that the moment you see PN data and balance sheet data which should click direct method or indirect method indect direct or indirect method indirect method because under indirect method from profit we get ocf the moment P data balance sheet is given it's 100% your indirect method only okay because all other direct information will not be given to you in the question okay so let's start keep your calculator simultaneously profit before tax or maybe I think we can tick also that is okay I think full problem we have solved so profit before tax is 23,000 manageable now one minute go through the question sir how did they get this 23,000 by considering few things one they've reduced loss on sale of plant 3,000 loss on sale of plant they've reduced 3,000 sir sale of plant what activity tell me quickly quickly quickly tell sale of plant investing activity but because you sold this plant at a loss loss you transferred to pel because of the loss pel balance is reduced so your ocf was also reduced sale of land operating or investing so what we have to do for this add back check 3,000 have they added back yes loss on sale of plan 3,000 they've added back okay next what is the next one gain on sale of investment so sale of investment what activity investing activity but you sold investment at a gain or profit so due to this profit pnl balance has increased so your ocf also has increased but sale of investment ocf operating activity or investing activity so what we have to do 12,000 we need to minus have they minused yes given here I hope I can maintain the space next so interest income received interest income received okay sir interest income when will you receive when you have purchased some investment correct so interest income received is what activity investing activity yes people okay but interest is also an income where will the income go to P so due to this income what happened to your pnl balance pnl balance has increased if your pnl balance is increased means indirectly your ocf was also increased but interest received operating activity or investing activity so ocf has unnecessarily increased what to do 6,000 you need to minus done over here okay next interest or one minute simultaneously can I do one more sir this 6,000 Rupees is what 6,000 is interest income received sir interest income received where it should come investing activity that means can you ignore under investing activity or show sure under investing here we are not preparing just ocf it's a full-fledged cash flow statement that means under inves activity you should show interest received 6,000 okay in ocf you will minus under investing activity you will add so some students will ignore this adjustment cash flow statement will match but two marks go there because at one place may you are reducing another place may you are adding final cash flow statement will match but it should be considered do not forget that yes people this interest has gone to pnl this interest has gone to interest income has gone to pnl because of this interest income pnl balance has increased so your ocf also has increased hence compulsorily we have to minus from here under operating cash flow you have to compulsorily minus but have you received this interest yes interest received is what activity investing activity and investing activity compulsorily you need to show 6,000 both the adjustment effect should be given hope you are able to comprehend or understand what I'm trying to say here yes okay next uh where is this question huh interest expense paid interest expense paid okay stop interest expense have you paid interest paid is what activity interest when will you pay when you have taken a loan or the company has issued some debentures in in loan or debentures and all or what activity financing activity so the interest paid on this also is a financing activity so should we ignore this interest paid or we should show under financing activity under financing activity since you have paid the interest you will minus or Plus or what you'll do interest you paid that means cash is going out cash is going out means under financing activity what you'll do minus 23,000 easy this is one adjustment okay next adjustment sir interest is an expense interest paid is an expense yes yes yes sir where will this interest expense go to interest expense will go to pnl interest expense will also go to P due to this interest expense pnl balance will reduce if pnl balance reduces means your ocf also will redu but interest paid operating activity or financing activity financing activity but due to this adjustment ocf has got unnecessarily reduced hence what to do add back because this is a nonoperating expenditure so have they added back 23,000 under operating activity yes that's another two F we have given yes people okay moving on to the next people okay now total operating expenditure is 147 that's okay anyway we preparing operating cash flow only no so for operating expenditure should we do any adjustment or ignore or simple I have paid salary we have paid salary let's say we have paid salary just hypothetical adjustment we are discussing salary paid 50,000 due to salary paid what will happen to your profit salary is an expense so when you pay this due to salary expense pnl balance will reduce if your pnl balance is reduced means your ocf also will reduceed salary paid what activity operating activity what has happened to your operating activity it has reduced what should happen it should reduce and it is reduced should we do anything or ignore ignore for operating expenses and all you don't have to do any pluses or any minus adjustment only should be given for non-ash expenditure nonoperating expenditure nonoperating income for operating expenditure which are in the form of cash nothing has to be done okay people but but but but but one adjustment relating to operating expenditure you may have to give that is depreciation depreciation is also part of your operation but depreciation is a cash or non-cash non-cash so what we should do for non-cash expenditure depreciation non-cash expenditure ignore or add back add back should I have to explain the logic once again or okay okay so add back depreciation 37,000 so far we took the profit and whatever they had done to get this profit all that adjustment we already done okay people now next the balance sheet sir before you read the balance sheet no what you'll do is in usually in indirect method May three four working notes you may have to prepare but which working note to prepare which is not required that you will not go get immediately hence what you do is quickly just quickly read the adjustment nothing detail me just quickly here something is talking about investment here again investment here something about plant that means one Ledger I may have to put for investment one Ledger for plant again here it's for plant there's something about Bond they are saying so one more Ledger we'll put for Bond then they're saying something again Bond again then they're saying something about shares something about dividend that means probably four ledgers what is that investment plan to bond to shares for all others is there any adjustments or no adjustments that means other related components I can close simultaneously okay with this in mind let's go on reviewing the balance sheet first plant okay the moment you see the plant big smile on your face why accumulated depreciation or also known as what another name for this is Pro ision for depreciation what is a point Theory we just now learned whenever accumulated depreciation is given or whenever provision for depreciation is given fixed asset Ledger fixed asset Ledger will always be maintained at original cost because all depreciation will go to PP or it will go to provision cger because what is the journal entry for depreciation tell me once again under provision for depreciation the journal entry for depreciation is depreciation account debit to provision for depreciation since you're not crediting PP PP Ledger will always be shown at original cost and the original cost of that plant is 750,000 and this is current year and this is previous year previous year data is your opening balance because last year closing becomes current year car opening then they've given you closing balance of the current year so this is the original cost of the plant this is the depreciation we have charged so far okay was there an adjustment relating to plant we just now read yes that means can we close this directly or prepare Ledger prepare a ledger okay so now what is the opening balance of plant 505 opening balance of plant where it will come opening balance of planted Machinery where it will come credit side or debit side on the debit side you'll write two balance brought down 5 lakh five as in when we see we'll take off then we will finally push all this impact in cash flow statement similarly what is the closing balance of plants 7 lakh 15,000 where will the closing balance come on the credit side as buy balance carried down manageable okay that's all or we have even provision for depreciation they also given provision for depreciation opening balance and closing balance but in this problem you know you should be saying is provision for depreciation account really required or not required in this problem is provision for Ledger provision for depreciation Ledger really required or not required go one step back why do we prepare provision for depreciation I told to get current year depreciation as balancing figure so should we have to find current year depreciation or already given given so even if you prepare provision for depreciation you'll get this only as balancing figure if you want I'll prove it to you okay how much is provision opening balance 68 closing is 103 opening balance where it will come in provision for depreciation ler opening balance comes on the credit side closing balance comes on the debit side manageable okay move on we will see that later this is just after reducing it we got it this is not relevant for us leave that out okay you want to finish off the plant account or is it okay we'll go adjustment by adjustment in examination ideally you should go adjustment by adjustment otherwise you'll be reading the same problem again and again what you have to do is leave around two pages for working note then have a format for cash flow statement and go on reading the data as and when you read the data if you have to fill the working note means fill it in working note or in your main solution like that you'll have to go on doing same approach can I follow here also that means I will leave the plan Ledger as it is and move on to the next one next is what investment did we see any adjustment in additional information for investment yes that means is ledger required yes that means we'll prepare The Ledger opening balance of investment and closing balance of investment where it will come tell me sir opening balance in the it's an asset opening balance on the debit side closing balance will come on the credit side captured next what inventory sir inventory trade receivables both are what both are part of current assets where it will come all current assets will come under which working capital changes okay check opening balance of inventory is 1 10 closing balance is 144 from 110 it has become 144 that means inventory balance has increased how much it has increased by 34,000 inventory is a current asset increase in current asset what we have to do increase in current asset means minus check under working capital changes 34,000 is reduced H this is a decrease in inventory 34,000 okay people next trade receivables opening balance 55 closing balance 47 from 55 it has become 47 so incre increas a decrease 55 has become 47 means there is a decrease decrease in current asset means what we have to do decrease in current assets means you need to add how much decreases happened 8,000 check have we added 8,000 under working capital changes yes not going fast now able to relate okay next cash for cash what it comes under operating investing Finance or there is a separate category at the end way we have opening balance of cash as well as closing balance of cash so opening cash balance is how much 50 closing is 46 so this is the answer we looking at opening should be 15 and closing finally should be 46 we will review that okay next prepaid expense prepaid expense is also part of current assets current assets opening balance was five closing has become one from five it has become one that means there is a decrease decrease of how much 4,000 so decrease in current asset what do we do add back so check have we added back 4,000 under working capital changes prepaid expense decrease 4,000 added back great great next share Capital was there any just one minute what is the opening balance of share Capital 315 closing balance is how much from 3155 it has become 465 means it has increased by how much 1 lh50 correct no opening balance was 315 closing balance has become 465 share Capital has increased by how much 150,000 so share Capital increase you will show under working capital changes H share capital is operating activity or financing activity your shares has increased by or share capital is increased by 150,000 means company has issued shares issue of shares is what activity financing activity so ignore or consider when you company issues shares they will pay the money or they will get the money so outflow or inflow under financing activity issues of share Capital 150,000 that is what they're saying in the adjustment also check here we have issued uh 15,000 shares of 10 each 15,000 shares of 10 each if you do Total Money received is 1 L 50,000 that's what is said in the adjustment also okay next reserves in Surplus sir do we need reserves Surplus or we already got our profit we already got our profit so is this relevant for us for this problem or not relevant not relevant Bond Bond can we directly do it or adjustment was given adjustment so let's prepare a ledger bond is a liability liability opening 245 closing 295 liability opening where it will come liability opening balance comes in the credit side this is your bond account 245 closing is 295 n g other adjustments we'll see it later as in when we come across trade payable outstanding liability both are part of current liability which should be captured under working capital changes opening 43 closing 50 43 has become 50 means current liabil trade payable has increased by how much 7,000 so increase in current liability means what we have to do add check we added 7,000 under working capital changes yes next outstanding liab 9 has become 12 again it has increased increased by how much 3,000 increase in current liability means again 3,000 add done so with this income tax payable income tax payable this is opening balance this is closing balance can we do our assumption approach or data given sir go back in the last table may they give pnl in pnl May you are able to see tax what is this tax this is nothing but your provision provision for tax so provision for tax of the current year missing or given given so let's prepare a ledger so where is that provision first of all what is income tax payable opening balance opening is five closing is three so when you prepare provision for taxation Ledger opening balance comes on the credit side and closing balance comes on the debit side as to balance carry on easy go back to your pnl in pnl how much income tax are you able to see 7,000 so what is this pnl it is tax paid or provision for tax because what is the journal entry for provision for tax P account debit to provision so when you make a provision for 7,000 what will happen to pendel balance when you make any provision pendl balance will reduce that's the reason 7,000 is reduced from your pendl here so this is not tax paid this is actually provision for tax yes people so you are preparing provision for tax Ledger now when you post this entry where will the post income in provision for taxation Ledger you'll post it as what you'll post it as by pnl 7,000 any other information or nothing nothing so these two if you add you're getting 12 this side also should be 12 is it matching or balancing figure you're getting 9,000 as a balancing figure what is that 9,000 so will you only make the provision or also settle settle so this 9,000 is a tax paid arrived as a figure okay people so for cash flow statement we need all this or we need tax paid tax paid how much is the final tax paid 9,000 so will it come yes where they've not given the nature of tax so we'll show it where under operating cash flow 9,000 we will show it at the end as cash tax page yes that's what they done done people work next to this so pnl and balance sheet fully we have captured just now just one more thing we need to capture that is adjustments able to keep a track of this lengthy but difficult or pretty okay manageable yes or no but since it is lengthy one or two adjustments there is always a probability of missing out that is always there okay just be a little careful in that okay next purchased investment for 78,000 for investment are we preparing any ledger so what is the journal entry for investment purchased investment account debit to bank account 78,000 post first I'll close the Ledger once Ledger is closed all ledger related components we'll push it into cash flow statement till then we'll put it on hold next sold investment for 1 lakh 2,000 and these investment costed only how much 90,000 so 90,000 of investment worth your sold it for 1 lakh 2,000 so how much profit you made profit or you made loss what did you make 90 worth of investment you sold for 1 lakh 2,000 means the profit on sale of investment is 12,000 in fact we don't have to find that they only gave gain on sale of investment 12,000 it's already transferred to P but anyways come back now so what is a journal entry for investment sold you sold the investment for 1 lak 2,000 what is a journal entry bank account debit to investment account 1 2,000 okay Z but stop at what value sir investment is always shown at cost price right what is the cost price of the investment cost price of this investment cost price is 90,000 is this investment there or gone gone sir if investment is shown at cost price means in fact one minute what is the journal entry you passed here tell me once again tell me the journal entry the journal entry you passed on here is bank account debit 1 lakh 2,000 to investment account 1 L 2,000 correct that's what you posted in investment lger fine but is the cost of the investment 1 lakh 2,000 or only 90,000 ,000 so if investment is shown at cost price means and when you sell that investment can you show that investment or cancel it if it is shown at 90 means you should also cancel it at 90 yes no correct but normally what IC passes is when they sell the investment entire money they park it in investment account ideally investment should be credited for what value here 102 or 90 90,000 how much extra credit we give to investment account 12,000 correct no that we will pass the journal entry as next entry is investment account debit 12,000 what is a 12,000 that is a profit on sale so to profit on sale which will be transferred to pnl to the extent of 12,000 ICA Roots the sale entry purchase entry in this fashion I suggest you do the things actually if you don't want you can also pass the entry one more way what is that bank account debit how much 1 lakh ,000 to investment investment cost price is how much 90 that means you can credit investment at 90 balance 12,000 profit directly you can transfer it to profit on sale this is also you can pass but IC prefers this approach if possible try to do this approach only in exam is what I would suggest either ways you follow final answer is same but since all ICI will have suggested answers will have this better to follow this is what I'm trying to say manageable everybody okay sir that means what is the posting for this entry now what is a posting for this entry in investment Ledger in your investment Ledger you'll post it as to profit on sale or to pay and 12,000 that's the reason we say that saying is very popular if you have sold any PP at a loss means that loss will come on the credit side if you have sold any investment or PP at a profit profit will come on the debit side because of the entry that's all if you want you can remember that for examination in case you get confused loss means the posting will be on the credit side profit means the posting will come on the debit side this is fun okay G all right anything else for investment or that's all that's all so let's push now if you just check is The Ledger matching or yeah I think Ledger is matching everything we have tck no so there is no balancing figure if there is no balancing figure means any more drama or no drama no drama but but but one one second hang on relating to this particular components which component affects cash flow statement tell me quickly tell among this which affects my cash flow statement okay we'll go One By One debit side May check this is what the 78,000 is invest inment purchased investment purchased will it come in cash flow statement investment purchased and cash paid 78 ignored or it will come it'll come investment purchased what activity investment purchased will come under investing acity check under investing activity have we shown 78,000 as a negative this is your investing activity purchase of investment 78,000 negative got it okay next one sir did you sell this investment what is this 12,000 profit on sale of investment okay profit on sale of investment where it is one to pnl account due to this pnl balance has increased because of this your ocf balance is also increased but sale of investment is operating activity or investing activity so what we should do for this 12,000 minus have you already done that yes we have already reduced to 12,000 rupees already here this is our solution that and all is already done okay again just seeing okay this sums up your debit side now come to the credit side what is this 1 lak 2,000 is what sale of investment by selling the investment how much money toal till you recovered doesn't matter whether you recovered profit or not cash flow statement simply considers what total money coming in totally you sold the investment and how much money you got 1 lak 2,000 in this 1 lak 2,000 90,000 recovery is towards cost price 12,000 recoveries towards profit cash flow statement doesn't worry what you recovered it only worries about total totally what is your selling price 1 lak 2,000 sale of investment is what activity investing activity should should this 1 lak 2,000 come yes under investing activity sale of investment 1 lak 2,000 that's all so this Ledger full information we have pushed in cash flow state so that ledger is closed manageable okay now come back to the question so this is over next purchased plant asset for 1 lakh 20,000 for plant are we making a ledger yes so what is the journal entry for plant purchased plant account debit to bank account 1 120,000 same first we will finish off all the Ledger this Ledger and then push the impact to cash flow statement any other adjustment is there yeah we sold some planed asset costing how much 10,000 with accumulated depreciation how much 2,000 but how much did we sell it for 5,000 here you need to be little careful sorry depreciation we are accounting under charge method or provision method here we following provision method once again repeating whenever provision for depreciation is maintained or accumulated depreciation is maintained fixed ass Ledger is always shown at original cost one second on what is the cost of this plant sold the cost of this plant sold is 10,000 the cost here refers to OC OC as in original cost so originally you had purchased this plant for how much 10,000 accumulated depreciation means so far on this asset how much depreciation have you charged how much is that 2,000 so like this originally you bought the asset for 10,000 so far you have depreciated asset by 2,000 means what is the value of that asset you bought it for 10 you already Dee IED two means the ideally the book value of that asset is eight correct from original cost if you reduce depreciation you will get carrying amount of wdv yes now that asset is there or it is sold off sold for what value did you sell the asset 8,000 worth of asset you sold it for five means happy pH sad pH sad pH 8,000 worth of asset you sold for five means you ended up making a loss how much is a loss on sale 3,000 okay people fine one by one tell me what is the journal entry here for this don't look at the solution or anywhere any have covered it you tell me for this what is a journal entry you will pass now if you're confused go back is accumulated depreciation account maintained yes whenever provision for depreciation or accumulated depreciation is maintained fixed as Ledger is always shown at original cost yes is this PP there or gone is this PP there or sold off sold off that PP ledger balance is how much now 10,000 is that PP there or gone gone if it is gone means you have to cancel that PP if that PP shown at original cost of 10,000 means cancellation also will be done at 10,000 PP will have what balance PP will have what balance debit balance how do you cancel it credit so you will credit PP to the extent of 10,000 that's a first adjustment got it everyone cool with this okay next one sir what did I tell you will maintain Pro is for depreciation or accumulated depreciation till when forever you will maintain till the time asset is there that asset provision for depreciation also will be maintained once that particular asset is sold is this provision for depreciation required for that asset sold or not required not required provision for depreciation or for that matter any provision account has what balance cred credit balance how do you cancel something which has credit balance debited sir you have to cancel asset also you have to cancel provision also what joural entry will pass what you will pass the journal entry provision for depreciation account debit to PP account yes or no so entire provision sir provision balance as for the question is this where is at sir provision for depreciation closing balance is 13,000 entire 13,000 you'll cancel sir entire asset you sold off or only one asset one asset whatever asset is sold that asset related provision only you need to cancel so this asset is sold and this asset provision for depreciation is how much 2,000 only that asset provision will be cancelled by debiting for 2,000 where it went done with this entry done with this entry H everybody cool cool Co H this is done now sir you did you sell this asset yes how much did you sell it for 5,000 sir when you sell what is the entry what will you debit when you sell money comes then no so bank account will be debited fine people so that's the second entry okay now did you sell this asset at a loss yes how much loss 3,000 I already told you when you due to nominal account rule check as per nominal account rule expense and loss should be debited so you'll write loss on sale debit 3,000 okay so with this is the journal you will pass in fact if you remember I told you in regular class whenever you sell an asset three things you should add and compulsorily you should get original cost if you don't get you have done something wrong these are the three things okay people now we have to post this journal entry into PP Ledger means what will you post it as this particular journal entry when you post it into PP Ledger what will you post it as you'll write buy Bank buy accumulated depreciation byy loss on sale that's all it is manageable AA everybody cool just tell me this's one entry once again just to be on the safer side now no go one step back normal method or accumulated depreciation method accumulated depreciation method you have sold a particular asset you have sold a particular asset so when you sell an asset money will come in so bank account debit okay when you sold an asset is provision for depreciation for that asset required or not required not required so provision has credit balance how do you cancel it debited so first entry is bank account debit second entry is I mean when the same entry second debit will be given to provision for depreciation okay s then did you sell this asset at a loss yes nominal account rules say loss to be debited so loss on sale you will debit manageable have to credit something what went out PP went out in provision for depreciation method PP ledger balance will always be shown at original cost I means you'll cancel PP by also crediting it at original cost this entry gets posted into the lger as byy Bank by accumulated depreciation by loss on sale that's what we have done the posst okay people once more or clear clear okay next one what is the next adjustment to where it went to yeah this is done issued one lakh Bond issued check this adjustment issued rupees one lakh Bond at face value in exchange for plant assets on 31st March 20 X1 that means so you purchased the plant how much is the value of the plant purchased 1 lakh but did you repay that one lakh in cash or by issuing debentures you purchased the plant and you did not give money you gave your company car deers or bought so when you purchase the plant ideally what is a journal entry plant account debit to bank account here did you give money or you give bonds means what is the entry here here the entry will be plant account debit to what bank account or Bond account Bond account how much value 1 lakh one L so when you post this entry in plant Ledger you'll write it as two Bond account one lakh that's all it is manageable people huh in your are we preparing Bond Ledger also yes in your bond Ledger the posting will be done as by planted missionary one corresponding posting okay now all the information I think relating to plant we have fully covered yes okay so let's close off plant CER is there any balancing figure or completely matching if it is balancing figure if you get any debit balancing figure on the debit side means assume it as to bank account arrived as a balancing meaning some planted missionary additionally purchased if you're getting balancing figure on the credit side means assume as buy bank account arrived as a balancing figure assume it as planted sold here balancing figure is there or matched out matched out okay now this information we'll have to put in cash flow statement 1 by one we'll go debit side tell me debit side components which affects cash flow statement what is this this is plant purchased plant purchased will it come in cash flow statement yes which activity under investing activity 1ak 120,000 should be shown as minus okay that is one sir you purchased the plant for one lakh but you purchased by issuing bonds that means what came in here here missinary came in for 1 lakh rupees what went out Bond went out did Cash go out or cash come in that means does this have any impact in cash flow statement or no impact no impact come to the other side this is what planted missionary sold sale of plant where it will come under investing activity sale of plant 5,000 manageable okay accumulated depreciation that means this entry also has to come in accumulated depreciation I think we did not post this what is the entry for that again we told bank account debit accumulated depreciation account debit loss on sale to PP so when you post this entry in accumulated depreciation what is the entry accumulated depreciation account debit to PP how much amount 2,000 Rupees so in accumulated depreciation you'll write to plant account 2,000 that's for the manageable okay so accumulated depreciation is irrelevant leave that loss on sale what should we do for loss on sale loss on sale where it has gone to loss on sale has gone to PN due to loss and sale pnl balance has reduced if pnl balance is reduced means your ocf also has reduced sale of plant operating activity or investing activity so what should we do for this 3,000 add have you already added back yeah we already added back here only loss and sale of plan 3,000 that is already done okay next is what anything else so that's all that's all now sir take a calculator if you want provision for depreciation that's all the data they give 13,000 here 2,000 here total is how much 1ak 5,000 they give you opening balance of 68 that's all other date is not given so add 105 - 68 you we have tck we have ticked three things this one I have not ticked leave that okay these two if you add you'll get 105 from 105 if you reduce 68 what are you going to get 37,000 what is that that is a balancing figure in accumulated depreciation account which is nothing but current year depreciation what is the journal entry for current depreciation here depreciation account debit to provision for depreciation or depreciation account debit to accumulated depreciation that depreciation will be transferred to PN you either you can write by depreciation or by P one in the same but in this problem should we have to get this as balancing figure or given given in the question only they told that depreciation is 37,000 this was actually given that means is this Ledger really required no even if you prepare this Ledger you'll get this as a balancing figure if they don't give you current year depreciation then you need to prepare this Ledger and get current year depreciation as balancing figure that is the importance so this Ledger is also closed plant over accumulated appreciation over investment also over now only thing is Bond any information more about bond is given check are repaid 50,000 of bond at face value maturity sir when you issue the bond what is the journal entry when Bond debentures one and the same when the company issues debentures what entry Bank to bonds or debentures when this Bond or debentures if it is repaid debenture SL Bond account debit to bank account so here you have issued or you repaid repaid so the entry will be What bond account debit to bank account 50,000 manageable okay any other information or that's all that's all so if you add these two it is 345,000 in fact here the bond account is perfectly matching there is no balancing figure if there is balancing figure you'll assume it as what additional bonds issued or additional bonds redeemed usually they will not be if there is balancing figure make that assumption now from this ler what affects cash flow statement tell me credit side anything impacting cash flow statement no debit side May yeah this is bonds to bank that means you have received the money or paid the money you have received the money here or paid the money paid the money so bonds redeemed or bonds repaid bonds issued bonds repaid both are what activity financing activity under financing activity bonds repayment is 50,000 it will come as negative then this ler is also closed off okay provision for tax we already closed off any other adjustment is there issue of shares also we already did then last one is cash divid dividend paid cash dividend paid so dividend paid what activity financing activity under financing activity you will show 8,000 as dividend paid yes people okay H one second hang on sir when you pay the dividend what will happen to your pnl when you pay the dividend pnl balance will reduce if pnl balance reduce means your operating cash flow also will reduce but dividend paid is what activity financing activity what we should do add here we will add back or ignore ignore here the dividend adjustment in operating cash flow dividend we will add or ignore ignore why did we take in this problem profit after all adjustment or profit before tax we have taken profit before tax that means is dividend already deducted from profit before tax or not yet deducted not yet deducted that means has a dividend caused profit before tax to reduce or no impact no since this particular dividend has no impact on profit before tax dividend is ignored so in the last problem we added back dividend in this problem we have added or we have ignored we've ignored hope you are able to establish why it is so yes people that's it with respect to and remaining I think everything is total if we just do I think remaining yeah I think everything if you just check this is a total total total total more total and total that's what it is remaining everything will match we'll trust I solution in this okay people so this is your cash flow statement quick revision okay people yeah thank you well hello people so welcome back after that short break so let's resume our discussion on this Marathon revision series the next topic that we'll be taking up is a big ticket topic called amalgamation amalgamation is backed by accounting standard 14 so all the treatment that we're going to be studying over here is given by accounting standard 14 okay now what is amalgamation so as far as as14 is concerned amalgamation could be one company purchasing another another company if a limited takes over B limited if one company buys off another company that is also amalgamation okay that purchase that takeover is also known as amalgamation something is happening there online is everything looking good G can you just quickly confirm is the audio and the video part okay all good oh I'm just getting some quick messages okay they're saying all good I'll move on okay so if one company takes over over another company oh recording started now that's okay no problem so one company takes over another company that is also amalgamation or if two companies come together a limited and B limited came together and they formed another company called C limited that is also called amalgamation this is actually a merger right this is a merger if a and b merge together and form a new company that is also considered as amalgamation for as14 is concerned okay both scenarios are considered that is one next is as far as as14 is concerned as4 accounting is concerned amalgamations are of two types one amalgamation in the nature of purchase another one amalgamation in the nature of merger that we studied as purchase Method and merger method that's all it is right so let's understand so how do we know whether it is a purchase Method or a merger method for it to be purchase Method as14 has given five conditions okay all the five conditions are satisfied it is a merger method even if one of the condition fails it automatically becomes Chase method so for our problem all the five conditions are not necessary first two is good enough that's what we'll be spending time on for it to be a merger method merger method is also known as pooling of Interest method for you to say you have to do merger method accounting as per as14 one purchasing company should take over all the assets and liabilities of the selling company selling company every damn asset every liability also should be taken over by the purchasing company that is condition number one and all the assets and liability should be compulsorily taken over at Book value you should not revalue it it should be taken over at book well suppose selling company has a land worth 10 lakh Rupees land is shown by selling company in their books at 10 lakh means purchase company should take over this land at 10 lakh only they should not take it over at market value not if they have taken it over not at Book value means then merger condition will be fail automatically it will become what method purchase Method like that so practically we'll be able to test these two other three only for the Nam sake okay so keep these two parameters in mind accordingly test whether it's a purchase Method or a merger method so if question only says purchase Method you don't have to test any condition directly give purchase Method accounting okay if question men mentions merger method do automatically merger accounting no need to test any of this condition only if question does not say what kind of amalgamation then you test the condition conclude and accordingly do the treatment okay because for the purchase Method and merger method accounting treatments are different that is the reason so let's understand the purchase Method a little better so if it is purchase Method what you have to do first step in purchase method is to find out the net assets we calculate something called net assets so net asset means what first of all we calculate net assets of which company purchasing company or selling company we calculate net assets of the selling company selling Company Net assets you need to find out that is the first step what is net assets how do you calculate this name itself is saying net assets net asset means asset asset minus liability not just that net assets how do you get this assets taken over at agreed value minus outside liabilities taken over at agreed value selling company what and all assets purchasing company have taken over at whatever value minus selling company what in all liabilities purchasing company have taken over at agreed value those two you minus if you net off that number only we call it as net assets okay people so far all of you are okay the key word there is net asset means asset taken over asset should be not all assets asset should be taken over and specifically at what value agreed value that is one similarly liabilities also all the outside liabilities taken over at agreed value that's a key key criteria to find out the net assets second one is to find out something called purchase consideration can you buy someone's business at free of cost or you have to pay some money pay some money so what you pay what the purchasing company has to pay to the owners of selling company only we call it as PC purchasing company whatever they have to pay to the owners of selling company only is referred to as PC or purchase consideration so who are who who are the owners of the company shareholders what are the types of shareholders Equity shareholders and preference shareholders so whatever the purchasing company pays to the equity shareholders and preference shareholders of selling company that only we refer to as purchase consideration okay people okay this is one next next is in some problems Miss sir PC will be given what is given as PC will be mentioned but in some problem PC will be missing PC will be missing meaning what is given as PC they will not give that will be missing so if PC is missing what do we do net assets only we calculate and assume net asset itself as PC because so simple I have assets worth let's say 10 lakh I have liabilities worth say 2 lakh rupees what is my net worth I have assets worth 10 lakh I have liabilities worth 2 lakh means what is my net worth my net worth is 8 lakh correct now how did you find this assets minus liability that only we call it as what also net asset so indirectly net asset is nothing but the net worth of a business so if PC is not given means whatever is the worth of the business that much is paid to buy out the business is the normal rational assumption okay only if PC is missing then net asset will be assumed as PC for our calculation purpose this is one more pointer you need to keep in mind when you're solving the question now NE First Step what do we find net assets of the selling company Second Step find out PC third step is this net assets and PC you compare net assets and PC is compared let's say net assets is 5 lakh rupees assumption net asset is 5 lakh rupees PC is 8 lakh you are selling company okay what's your name tan tanushri let's say tanushri has a company tanushri company Net asset is 5 LH now I purchase tanri company business by paying it that means you tell me I a Smart buun looks like Bud No 5 lakh is the worth of our business net worth net asset means the net worth of a business correct no the worth of our business is only how much 5 but I paid how much crazy fellow I paid 8 L that means from my perspective I made a profit or I made loss loss 3 lakh rupes extra I have paid that only as14 says you treat it as Goodwill that extra loss loss you treat it as Goodwill that will be arrived as a balancing figure okay due to the Goodwill tanu has generated I'm ready to pay 3 lakh rupees extra is the assumption as14 is trying to say understood okay let's assume the Ulta scenario the net worth of our business is how much 10 L but I paid only how much n LH now I am bud I made her Budu probably I made her yes no so worth of our her business is 10 lakh but if I pay only 9 lakh means from my perspective I made a loss or I made profit profit this is everyday activity or once in once that means this is a revenue profit or Capital profit cap this one lakh rupees Capital profit in that case will be transferred off to Capital someone is saying you're so rich you only paying 3 lakh rupes extra I would have taken 30 L rupees in there I won do business with you go okay cut so this is the drama around purchase Method easy people okay all this we will apply it in Pro question just see this is the third step is what I've written over now one more thing probably you need to keep in mind is in your if it is a purchase Method if it is a purchase Method purchasing company will only take over assets and liabilities of selling company only assets and liabilities of the selling company you can take over not the share capital and reserves and surplus these are some pointers any doubt in this anybody no all cool so I think uh I don't know whether we have specific question on purchase I think it was a combo question that I've chosen one minute let see one second H H okay actually it's a combo question huh yes but what is it done Equity will not be included huh no to calculate net assets you simply take assets minus liability okay that is from asset liability approach or you can take equity share Capital plus reserves andace that way also you can get we have remember we discussed Capital employed is nothing but net assets you can work from liability angle also you can work from asset liability angle also your choice however you want to the number will be sa fine this is one step I'll have to discuss the merger method also and then take up the problem so far okay one more problem we will I mean we will discuss maybe concept we'll do off then we'll go for so what we discussed previously was the steps to solve the purchase Method what is the steps once again simply first find out the net assets of the selling company Second Step find out the purchase consideration compare net asset with PC accordingly you'll get Goodwill or bargain purchase gain then you'll have to pass some journal entry these are some working notes that you need to prepare in purchase Method then some journal entries will come after that at best they may also ask you to prepare balance sheet that's all balance sheet is a very simple exercise this is for purchase Method okay next next is merger method next is merger method okay now merger method no people it is not really a business purchase it is just a reorganization or it is just a reshuffling how just check here let us say Mr X One individual was there he was controlling a limited he was controlling a limited he was also controlling B limited so one individual is owning how many companies two companies now X told I am very busy I'm very busy I can't manage two two entities you both come together and form a new company called AB liit so X is telling a limited you wind up you close down B limited also is telling you shut down you to come together and form a new company called AB limited okay now you tell me this is really a business purchase now legally the paper will say a limited took over the business of a limited and B limited AB is the purchasing company A and B are selling company is this really a business purchase or just a reorganization reorganization instead of having two companies the person is saying you become one so that it becomes easy to manage I mean this is not really a business acquisition it is just a reshuffling not reshuffling only we call it as what sir merger method okay people now now now use your common sense okay is this really a business purchased or just a reshuffling just a reshuffling so in reshuffling should do we need agreed value or everything will be taken over at Book value because in reshuffling are you really business purchased that you did no just two companies data you adding no hence merger method says if it is a merger method every single asset every single liability should be taken over and they should be specifically taken over at what value they should be only taken over at book okay suppose you you're owning business what's your namea rtia owns one business okay in that business she has land worth let's say 1 CR rupees she's sewing land in her books at one market value of that land is 10 she purchased it few years back by paying how much one now I want to buy rika's business okay now if I buy rika's business all rikas assets and liabilities belongs to me now if she if I have to buy business from her means I have to pay money to her how will she calculate the money by taking market value of all assets and reducing market value of all liabilities will she value her business by considering land value at a book value of one or market value of 10 CR market value of 10 CR she'll consider and value her business yes or no because she's interested to get that much money but if it's a reshuffling I need market value or only book value book value that's the reason merger method says every single assets and liability should be taken over and they should be taken over at Book value only that's a first all right now in merger method what are the simple steps first is calculate the PC PC steps are same the way you calculated PC before that's a common thing calculate PC second step is find out your paid up Capital find out the paid up Capital you just need to they will have they would have anyway given the balance sheet in that balance sheet paid up Capital will anyway be there take that now in the the purchase Method what did you do PC you compared with net assets here PC you'll comp compare it with the paid up Capital why very simple if it reshuffling means what andol will be taken over by purchasing company you tell me here AB limited is taking over a limited and B limited what in all AB will take over AB will take over a limited assets a a limited will take over a limited liability also they will take over a limited car reserves and surplus because it is only reshuffling means everything will be taken over and all this will be taken over at what value book only thing AB limited cannot take over is what only thing relating to a limited AB limited cannot take over is a share Capital because the share capital is a limited there legally or shut down shut down hence a limited share capital B limited share Capital AB cannot take over instead of that they will give new shares as PC that's all yes or no that is the reason here PC is compared with the paid up Capital not taken okay people then the difference you compare okay whatever say let's say PC is ideally the difference should not be there if it is there suppose PC is 10 lakh PC is 10 lakh paid up capital is 8 lakh now you analyze here paid up Capital just for understanding purpose analyze here paid up Capital denotes net worth of the business paid up Capital here denotes the net worth of the business how much is the worth of the business 8 lakh how much did the purchaser pay to get the control 10 lakh Rupees that means purchasing company made a profit or loss for 8 lakh worth of company they paid 10 lakh Rupees that means they made profit or they made loss how much loss 2 lakh Rupees is a loss in the purchase Method this loss we call it as Goodwill right it's a Goodwill this is purchase or it's just a reshuffling in reshuffling method this loss will not be accounted as Goodwill it will be adjusted in reserves it'll be adjusted in reserves that's what I written over here if PC is greater than paid up Capital then you'll get something called loss that loss no sir instead of accounting it as Goodwill you adjust it in the reserves why do we adjust in reserves because selling company even reserves in surus are taken over by the purchasing company that's the reason you don't show another logic for this is so again asking the same question is it really a business purchase or just reshuffling resuing if you show Goodwill here if you show this Goodwill it'll amount to self-generated Goodwill it'll amount to self will you show self-generated Goodwill we already studied as26 and all only purchased Goodwill should be shown is this really a business purchase no that's the reason standard says in merger method do not show Goodwill loss means adjusted in the reserves that's all it is because anyway are taking over reserves to selling company no adjust it there that's all manageable if it Ulta scenario let's say the paid up capital is paid up capital is 7 lakh okay PC paid is let's say only 5 lakh rupees PC paid is only 5 lakh for 7 lakh worth of business PC paid is how much 7 lakh that means purchasing company made a loss or they made profit 2 lakh rupees profit they made okay ideally in my view this 2 lakh rupees profit should be transfer to capital reserve because all this will happen What regularly or once in a it's all non- recurring activities ideally they should go to capital reserve but our study material transfers this profit to pendl only for examination we will transfer it to P earlier they used to transfer it to Capital Reser in the last 3 four years may they started using pel so we will use that only my opinion still capital reserve but I nobody what I say doesn't matter what our mother body says is what finally what is our mother body saying pel pel means pel only we will show that's all it is so if it do profit means under merger method we show it in pnl loss means we adjusted in reserves to get this profit or loss we simply compare PC with paid up capital is my statement right everybody we will apply don't worry but just see Okay Okay Okay g all right wait or carry on carry on and this is the last Point online everybody still there h j motherboard yeah correct mother means always J on you know yeah under merger method you know this already under merger method assets liability and reserves and surplus of the selling company is taken over by the new company that's a distinction between purchase method and merger method great next one is something called Mutual oing Mutual Owings this is a common concept it can come for under purchase Method or it could come under merger method doesn't really matter Mutual Owings means what anybody remembers we did this in amalgamation we did this in consolidation also what does mutual o mean perfect it's a transaction happening between purchasing company and selling any transaction happening between purchasing in company and selling company only we call it as mut let's say here a limited was there okay or maybe I'll give a simple example here a limited sold goods worth 10 lakh to B limited a limited sold goods worth 10 lakh to B limited after this a limited acquired B limited after this transaction a limited acquired B limited okay that means this 10 lakh Rupees a is not recovered this 10 lakh Rupees money after selling the goods a recovered or not yet that means a will show this as 10 lakh rupes datas B limited will show this as 10 lakh Rupees creditors okay people so as long as there are two individual companies as long as there are two separate legal company one can pay the other or one can receive from the other now what happened a has acquired B limited a has acquired B limited who will pay home a has acquired b means now there are two companies or only one company from two they become one company so if you show this data then indirectly it is saying I have to receive 10 lakh Rupees from myself if you show this creditor then it looks like I have to pay 10 lakh Rupees to myself hence after this business combination or after this particular uh amalgamation happens can you show this datas and credits or cancel you have to cancel this this only we call it asoo as in mutuals any transaction that's what I've written here any transaction happening between purchasing company and selling company only we call it as Mutual Owings so in the books of the new company what you do can you show this Mutual Owings or you need to cancel you need to cancel the mutual Owings this Mutual Owings can come usually in three forms one could be datar creditor another one bill receivable bills payable or it could be a loan taken loan usually it is either datar creditor or drbp that's the examiner favorite that's what they'll ask so now you tell me in this particular case may we'll only cancel asset or we'll also cancel liability both asset and liability both will be cancelled liability will have what balance credit balance assets will have what balance debit balance sir how do you cancel an asset which has debit balance credit how do you cancel a liability which has credit balance debited so the journal entry for cancellation of mutual Owings is what basically liability account debit to assets account if it's mutual o in the form of De or credit R means the journal entry will passes credit RS to De if it is BR BP means you'll write BP to BR if it is loan taken loan given means loan taken account to loan given account like this you don't pass like entry like this this is just a sample if there are three Mutual Owings means all the three cancellation journal entry you need to show it separately that is your Mutual Owings concept can I carry on to the next one hope everything is coming back I know it's been a long time since we have covered the syllabus and all but I still feel it is not looking like greek latin no nothing of that sort okay saying okay next one is stock stock stock res some names in online are similar okay fine fine great we remember sir they're saying oh awesome if you remember great on yeah how can you forget and all chanceless okay no problem that's nice on now coming back uh ah still they have not forgotten that one habit of throwing things so still they have maintained consistency I tell you huh next is something called stock Reserve stock Reserve means what let's take a small example again a limited acquired B limited a has acquired B now before this a has acquired B A had sold Goods to B limited a had sold Goods to B the cost price of this Goods was 10,000 but a had sold it for 15,000 10,000 worth of goods has sold by a limited to B limited worth 15,000 I means through this transaction did a limited end up making some profit yes a limited has made a profit of 5,000 rupees okay sir now that means who has this Goods now initially who had the goods a now after sale who is having that Goods b b limited still has that Goods in their Factory they've not yet sold means B limited will show this as a closing stock okay sir if a has sold the goods for 15,000 means B limited has purchased the goods for 15,000 one entity selling price is another enti entity purchase price so B has purchased for 15,000 hence they're valuing the closing stock at 15,000 so far okay now after the sale purchase and all happened a has acquired B limit so once a acquires B limited B limited all assets and liability now belongs to after a has acquired b b limited all assets all outside liabilities belongs to whom a limited that means this stock also now belongs to whom a limited but unfortunately B limited is valuing the stock at what price 15,000 that means this stock will again come back to a limited but now the stock value is is it 10,000 or now it has become 15,000 15,000 correct honestly you touch art and D from a limited perspective is the cost of this closing stock really you know that closing stock should be Co validate cost or NRV whichever is low NRV in these sort of problems will not be given eliminate that that's okay that means you'll have to Value the closing stock at cost from a limited perspective is a cost really 15,000 or it is 10,000,000 10,000 because a limited sold this good Goods at a profit that 5,000 rupes profit is included in closing stock that profit element included in closing stock only we call it as stock Reserve stock Reserve simply means the profit element included in the closing stock now you tell me should we show this profit in the closing stock or eliminate this eliminate this that elimination only we call it as stock Reserve so in this particular case a limited will value this stock of at 15,000 or 10,000 from 15,000 you'll have to bring it to 10,000 so 5,000 is the unrealized profit or stock Reserve or loading element which we need to eliminate that's the meaning of stock risk it's a common concept both in amalgamation as well as consolidation same thing we'll repeat manageable now sir we know that we need to remove this next question is Sir how do what entry we pass what is the journal entry for stock result that depends on the method and that also depends on the case what are the two methods of amalgamation purchase Method merch me first you need to check what method is this whether it's a purchase Method or a merger method under purchase method merger method also you can get two cases either it will be a case of profit or it will be a case of loss so let's analyze this let's say purchase Method it's a profit case so under purchase Method if it's a profit what do we call profit in purchase Method Goodwill or capitalism in purchase Method what do we do go one step back again we find out net assets compare it with PC after comparing either you'll get Goodwill or you'll get capital resis in case of loss scenario you will get what sir Goodwill in case of capital in case of profit scenario you get capital reserve so elimination of stock Reserve or stock Reserve journal entry is dependent on the method if it is a purchase Method and if it's a profit scenario if it's a profit scenario the journal entry will be capital reserve account debit to stock Reserve capital reserve account debit to stock Reserve is a journal entry you will pass either you can credit stock Reserve or directly you can credit closing stock why closing stock simple right now the value of closing stock is shown at what value 15,000 does this 15,000 include any profit element yes how much profit element is included 5,000 can we include profit element in closing stock or eliminate eliminate so since profit is already included closing stock is overvalued closing stock is overvalued which you need to reduce closing stock is an asset assets are what balance debit balance how do you reduce that credit hence the journal entry will be capital reserve account debit to closing stock if you don't want to use closing stock you can also credit stock reserve and reduce the stock Reserve from closing stock directly in balance sheet that way also you can approach this is the journal entry and the purchase Method if it is What scenario profit scenario suppose you get a purchase Method only but you got a loss scenario in that case may the journal entry for stock Reserve will be under purchase Method loss scenario we call it as capital reserve or Goodwill Goodwill so in this case what will be the journal entry Goodwill account debit to closing stock or you can write Goodwill account debit to stock Reserve so that will be the journal entry all this will come as an adjustment in our problems which we are discussing an individual individual concept after that we'll take one or two questions and we will collate everything and try to sum up the whole pointers fine people okay this is the journal entry for stock Reserve in case of which method purchase Method what if it is merger method okay go back in merger method may tell me the steps once again what do you do first find PC compare this PC with PC you'll compare the only component not taken over under merger method what is the only component of selling company purchasing company can't take paid up Capital so compare PC with paid paid up Capital accordingly you'll get either Goodwill or either you'll not Goodwill you either get a profit or you'll get a loss if it is a loss do we call it as Goodwill or adjust in reserves under merger method loss is adjusted in reserves profit you'll transfer it to P account so same scenario keep that in mind if it is merger method and if you get profit for profit where will you transfer P so the journal entry for stock Reserve will be P account debit to stock Reserve or pendal account debit to closing stock if it is merger method and if it's a loss loss under merger method do we call it as Goodwill no we adjust it in reserve usually we adjust it in generalism usually we adjusted in general Reserve so hence the journal entry under merger method for stock Reserve will be General Reserve account debit to stock Reserve or closing stock if General Reserve is not available you can also adjust it from P so that's the entry for stock Reserve under various methods you need any time to review or can I go for the next one next one is okay po H okay next is amalgamation expense amalgamation expense sir amalgamation is a small activity or looks like a big activity so suppose you want to buy aru Pro you got bugged how long to take the order now we will start giving orders to these guys since about one year they're doing too much Tantrums yeah they're making us sit they're making us slog so much work homework then all they're giving so you thought you'll buy a pro you'll buy aru Pro sir when you have to buy aru Pro man is it a simple exercise or you will check arua records you'll check no I we might say we have 10 CR worth of something you'll also check no be like whether these guys are actually saying this or it is just uh all whatever FAL types right so you will appoint your chared accountant and do your audits correct now you'll check whether have you paid PF on time whether have you paid all statutory dues on time correct now all that you'll check right so all that you will check or you'll appoint somebody to check it usually you get it done you appoint a CA this only we call it as a due diligence audit you must have heard about it in your auditing and all right when you buy a business usually we do something called due diligence audit Al the somebody will do it at free of cost or they will charge money all that expense only can be clubbed and said that as amalgamation expenditure so you have to find a lot of documents with Roc income tax etc etc so all that we refer to as amalgamation expense so if purchasing now there are two companies no purchasing company and selling company so amalgamation expense can be either taken up by either can be paid by purchasing company or it could be paid by selling company that's a negotiation if purchasing company is incurring amalgamation expense if a purchasing company is incurring amalgamation expense what is the journal entry for amalgamation expense is what we are trying to analyze that's the same if you know stock Reserve entry same entry is for amalgamation expense also tell me sir what did you do for stock stock Reserve first you check whether it is a purchase Method or merger then you'll check whether it's a profit scenario or loss SC okay now here if it is a purchase Method and if it's a case of profit under purchase Method profit we call it as what capital reserve now purchasing company has paid amalgamation expense so money is coming in or money is going out going out I means we will credit bank account debit will be given to what capital reserve so under purchase Method under profit scenario we for journal entry for amalgamation expense will be capital reserve to bank if it is purchase Method and if it's a loss scenario if it's a loss scenario and on a purchase Method loss we call it as what Goodwill so in this case the journal entry for amalgamation expense will be Goodwill account debit to B that's a scenario done people next is if it's a merger method if it's a merger method and if it's a profit under merger method profit we will book it where in PN that means the journal entry for amalgamation expense will be pnl account debit to bank okay in my old chartbook I had written it as capital reserve I think it's still continue cancel that and wherever it capital reserve is that substitute with p I thought I will change that that's the reason I didn't change in my chart book unfortunately still now they have not changed so this will continue okay sir if it is merger method and if it's a loss loss do we accounted as Goodwill or we are just in reserve Reserve so that means you can pass the journal entry Reserve to bank which reserve for expenses usually we use General Reser or P for expenses for all your normal expenses we use General res or P so I hence we write first priority we write you can write P and L to B under this this is the journal entry for amalgamy expense okay people okay next scenario is a statutory Reserve statutory Reserve there will be some reserves of the selling company which are required as per the statute or as per a particular act now go one step back under purchase Method listen to my sentence carefully under purchase Method will the selling company take over reserves and surplus under P under purchase Method will the purchasing company take over reserves and surplus of selling company or they will not take over they not take over under purchase Method we'll only take over assets and liabilities reserves and surplus are not taken over reserves and surplus are only taken over when it's actual business purchase or it's a reshuffling reshuffling that reshuffling only we call it as what merg so under merger method all the reserves in surplus of selling company purchasing company takes over but under purchase Method reserves are taken over or not taken over not taken over but the question will say there is one statutory Reserve there is one statutory reserve of the selling company purchasing company has to compulsory take it over because it is required as for a particular act maybe Income Tax Act gratuity act whatever act some ACT requires Reserve to be made that Reserve can purchasing company ignore or they have to take over they have to take over but this Reserve belongs to purchasing company or it belongs to selling company this Reserve actually belongs to selling company but since purchasing company has taken over selling company we have to account to this Reserve got it now if this stat reserves are taken over in this case may what to do again check sir whether it is a purchase Method or merger method tell me under merger method for statutary Reserve taken over should we pass any journal entry or no entry required no entry required why because anywh under merger method all the reserves and surplus of selling company are anyway taken over that means all reserves means even the statutory reserves are taken over I mean should we pass any separate journal entry for this or not required not required so because anyway that method itself takes over all the reserves but however under purchase Method will the selling company reserves be taken over or not not taken over it will not be taken over but one Reserve can we ignore or we should take over we should take over what is the name of that Reserve stat is that means we need to pass journal entry anybody remembers what is a journal entry for statutary Reserve taken over under purchase Method amalgamation adjustment account debit to statutary reserve account this amalgamation adjustment adjustment is a dummy account okay sir you have debited amalgamation adjustment Reserve means that account has what balance if you have debited amalgamation adjustment means that account has a debit balance don't show it on the asset side there's also a reserve this amalgamation adjustment also will come in the balance sheet under reserves and surplus only but as a negative balance because this usually reserves will have what balance credit balance but this particular amalgamation adjustment Reserve since you have debited it'll have a debit balance hence in reserves and surplus me you will show this as a negative number that's all this is particular treatment all about okay all this will come as a separate separate adjustment in your question all these are we discussing everything in question may maybe maybe you'll get everything or maybe you'll get only one or two how Institute wants to ask it depends on them but we will discuss everything and then we'll see how to put forth clear any doubt so far everybody anybody so now we till now we have studied if it is a in the books of purchasing company what and all should we do for purchase Method as well as merger method next is selling company or let's do a thing I think we have one question on separate question maybe we'll do that off just to have a little bit of clarity H look at this this question we will take over okay the following are the balance sheets of P limited and V limited as on 31st March 20 X1 two company balance sheet they have given all the numbers are in lcks so balance sheet FAL they'll make it very big go no problem leave that but the one thing maybe I'll catch my ey is reserves and surplus how many reserves are there we have one or multiple multiple reserves are there that's okay fine okay this also cool now let's go further to the adjust what are they saying all the bill receivable held by V limited are where P limited acceptance all the bill receivable of V limited belongs to which company P limited for V it is Bill receivable means for p limited it will be a bills payable got it all so how much is the bill receivable of V limited go back to that particular question where is Bill receivable let's identify that have they given anything yeah trade receivables they have given but have they given the value or actually they've given it in table here they've given the breakup of trade receivables trade payable in the separate table okay so if you just check what is the total trade receivable of P limited 2120 vaa 1,100 that breakup of 21120 and 1,100 they've given it over here so we need a bill receivable of V limited how much is Bill receivable of V limited 80 correct for one company it's a bill receivable means for another company it will be a bills payable so then they will say these two companies got merged or whatever that means this will become what now this for one company it's a bill receivable for another company it is bills payable means this only we call it as Mutual Owings should we show Mutual Owings or cancel in the books of the new company or Amalgamated company or purchasing company we should cancel Mutual Owings by passing what journal entry both Bill receivable and bills payable both we need to cancel bills payable has credit balance to cancel we will debit Bill receivable has debit balance to cancel we will credit so BP account debit to BR account is the cancel journal entry for 80 lakhs we will do it at the end okay now check on 1st April 20 X1 what is the day on which they've given balance sheet they gave the balance sheet on 31st March 20 X1 immediate next day what happened P took over V Limited in the amalgamation in the nature of merger when they say merger method will we test the condition again or not required not required so merger method here they're see merger is really a business purchase or it is just a reshuffling go back again tell me merger method steps first find out PC second find out paid up Capital compare PC with the paid up capital okay when you compare you'll get either a profit or you'll get a loss if it's a loss Will you show it as Goodwill now if you show Goodwill it will become self-generated Goodwill can we show self-generated Goodwill no so if you get a loss in merger method loss be adjusted in reserve usually we adjust the loss in general Reserve if there is a shortage we can adjust it in pnl like that okay if you get a profit means profit will be transferred to p and okay all right now with that in mind let's proceed further so p is the purchasing company V is the selling company here and it's a merger method it was agreed that in a discharge of consideration of business P limited would allot three fully paid up Equity shares of 10 each at par for every two shares held in V limited so for every two shares held in V limited how many shares are given as PC three shares that means this is what is PC right PC means what amount paid by the amount paid or payable by the purchasing company to the owners of the selling company here what are we giving the owners p is the purchasing company what are they giving they are allotting three Equity shares for every two shares held in V limited now go back to the question what is the share capital of V limited 6,000 okay if they don't tell the face value we usually assume face value to be 10 General assumption that's all that means can you tell me how many shares are there in V limited number of shares in V limited is total share capital is 6,000 each share face value if it is assumed as 10 means the number of shares will be 600 so is PC given directly or through some ratio ratio so old and new so how much sir how many shares are you allocating purchasing compan is giving three shares for every two shares held if you are having two shares in The Old Company how many new shares will be allocated three so two Shares are there means two three new shares will be allocated how many shares are already existing 600 if 600 Shares are there means how many new shares will be allocated 600 into 3x2 if you do how much is that 900 so this is 900 lakh is a value of shares or number of shares so what is the value of the shares 900 lakh into 10 if you do it will be what 9,000 lakhs is the value of new shares issued by the purchasing company is my statement right for everybody comfortable this only we call it as what sir here PC is missing or PC is given PC is given that's a first working note you need to put up that's what I put up here check PC is 9,000 lakhs Okay g First Step got it can we go for second step in merger method what is the second step in merger method paid up share capital of which company selling selling company is V limited what is v v limited share Capital 6,000 so PC is 9,000 paid up share capital is 6,000 third step is compare PC with paid up capital here paid up capital in a way substitutes net worth the worth of the selling company is 6,000 but how much was paid as PC 9,000 for a 6,000 worth of PC 9,000 new Shares are issued correct or no that means purchasing company here made a profit or they made loss for 6,000 worth if they issued 9,000 means purchasing company made a loss how much loss 3,000 loss that loss it's a merger method loss you accounted as Goodwill or adjust in reserves adjusted in reserves check once again again does a selling company have enough balance in general Reser usually we do adjustment in general Reser selling company is V limited what is V limited General Reserve V limited General Reserve is 3,200 do we have enough balance yeah out of 3,200 can't you adjust 3,000 you can easily adjust yes or no that means here this 3,000 will be straight away adjusted in which Reserve General Reserve this is the working note you need to put it up before you start the question manageable yes sir okay now let's read the requirement what and all they're asking this is okay it was also agreed next point you just check it was also agreed that 12% debentures in V limited would be converted into 133% debentures in P limited of the same amount and denomination sir you are giving something to the debenture holders of selling company correct check read this once again 12% debentures in V limited V limited a selling company how much is that debenture the debenture value is 1,000 okay now use your common sense is we V limited there legally or Damar P has acquired V limited so is V there or V gone V gone sir if V limited is legally not existent suppose you are a debenture holder in this company what will you tell you are a debenture holder in one company and that company is in legal existence or it's it's acquired by another company it's acquired by other company so what will you say as investor either you'll say give my money back give my money back or give new company debenture give new company car debentures here repayment is happening or swap is happening swap it is agreed that 12% debentures of V limited would be converted into 13% debentures of the P limited so instead of V limited debenture now you are getting debenture certificate of the purchasing company value changed or same same interest rate changed yeah from 12% it rather became 133% chance pance for the investor instead of 12% now they'll get the interest at the rate of 133% that's all it is okay sir sir is this PC is this PC no PC means what amount paid or payable by the purchasing company yeah this is paid by purchasing company only to whom PC means what is paid by the purchasing company to the owners of the selling company to the owners of the selling company are debenture holders of the selling company owners or they are not owners they're not owners so should this be considered as PC or it should not be considered as PC this should not be considered as PC hope that Clarity is come okay all right this simple Journal interview we need to pass one we'll see so tradeables trade payable break up they have given that's fine amalgamation expense theyve given amalgamation expense one minute stop amalgamation expense amalgamation expense B is based on the method it is based on the scenario which method here merger method and we have already worked out it's a profit scenario or loss scenario loss that loss only we adjusted in general Reserve no so if it's a merger method and if it's a loss and if it's a loss what do the journal entry for amalgamation expense pendl account debit to bank account 1 lakh one yes no people you can also write General Reserve to bank but usually expenses are adjusted with pnl hence ICI uses for amalgamation expense pendl account debit to bank account all the numbers are in lakh so you can if you want instead of one lakh you can just write one and one done people okay you are required to pass journal entries in the books of P limited that we already know okay you know the journal entry we quickly revise and also prepare P limited balance sheet after Mar okay working notes are done now we'll start with the journal entries in fact I have told you whether it is purchase Method or merger method three journal entries will come in every problem what is those anybody remembers first is first journal entry will passes business purchase account debit to Liquidator of selling company where it went one minute instead of passing I thought I can take here okay first journal entry is business purchase account debit to Liquidator of the selling company who's the selling company here V limited okay now what is the amount we paid to purchase this business how much is the PC what is a PC paid to purchase this business 9,000 so the journal entry is business purchase account debit to Liquidator of V limited because whenever the company shuts down right we appoint someone called Liquidator so this PC will be paid to the Liquidator and Liquidator will distribute it to the necessary concern person okay now this is the first journal entry done people is this really a business purchase is it an actual account or it's a rooting account it is just a roting dummy account it'll stay or it'll get cancelled cancell okay stop when you purchase someone's business what will you get when you purchase someone's business now if you buy arua business what in all you'll get all the assets of aru as well as all the liabilities of aru pro but stop this is really a business purchase or reshuffling reshuffling in reshuffling or merger method what and all will be taken over chasing company will take over assets of the selling company liabilities of selling company as well as reserves on surplus of the selling company at agreed value or compulsory Book value compulsory at Book value so line by line all the assets will come in with what balance all the Assets Now purchasing company has to record so all the assets will come in with debit balance all the liability you it will come in with credit balance all the reserves and surplus also you have to credit it with a book value one by one you have to go on recording so quickly we'll review this what all assets be limited as a selling company what and all assets they have they have property planning equipment they prepared note number four for it come to note number four what all assets is that land is not there leave that machinery and Furniture 5,175 debited okay next what assets is there these two are over next is inventory 4041 trade receivable 1,00 and cashing cash equivalent 609 so check have they taken everything 40 41,100 and 609 all the assets taken over at what value book value that's all or even liabilities liabilities also only liabilities or even reserves and surplus also reserves and surplus also come back to the liability they have given a breakup for reserves and surplus come to note number two first reserves and surplus is foreign project Reserve so credit foreign project Reserve has 310 next is General Reserve 3,200 can we take over 3,200 or there is an adjustment there is an adjustment how much adjustment sir paid up Capital was 6,000 PC was 9,000 how much we have to adjust in generalizer 3,000 so though selling company has General reserve of 3,200 we have to adjust how much due to the loss we have to adjust 3,000 means general Reserve will only be shown at 200 hope you got this yes we will okay next one what is the next Reserve we have pnl account of 825 so credit pnl of 825 so amalgamation expense separate entry we will pass okay that amalgamation expense and all separate entry will pass okay these are all liabilities or rather reserves only reserves will be taken over or also liabilities liabilities what are all liability selling company has borrowings of 1,000 trade payable 463 short-term provision 702 so 1,463 and 72 done people so all assets all liabilities all reserves and surplus we have accounted it now here business purchase we have debited is this an actual account or just a routing entry so how do you cancel which is debited over here credit so here you will credit business purchase and that sum up sums up the second journal entry so actual journal entry is only what sir actual journal entry is what here assets account debit to liabilities account to to to your reserves and surplus to whatever you have paid as PC but it is rooted through multiple entries that's all over here done okay sir can we just account Liquidator or we have to settle the Liquidator also settle what does a journal entry offer amount paid to Liquidator if you paid cash to Liquidator means Liquidator to bank or cash or bank here did we pay the Liquidator cash or bank or Equity shares Equity shares how much Equity shares we paid as PC 9,000 so that means tell me if the purchasing company issues Equity shares means will they show it as Equity shares or equity share Capital equity share Capital so the entry will be what sir next entry will be Liquidator of the selling company to equity share Capital 9,000 rupees manageable these three basic journal entries will come in every amalgamation problem after that adjustments like stock Reserve amalgamation expense statutary Reserve all this will be extra fittings Mutual Owings also for that matter now we let's record that one by one first bill receivable of V limited are having P limited acceptance this only is what sir interc company transaction or mutuals how much is the bill receivable of V limited we have already marked 80 should we show this or cancel this cancel cancel only BR or also BP entry is what for this bills payable account debit bills payable account debit to Bill receivable account 8080 done so mutual Owings cancelled anything else is there yeah debentures now how much debentures was actually there in V limited check the V limited debenture how much was the debentures in V limited th000 that's what you have recorded in second journal entry check here 12% debentures of V limited is V Limited in existence now or it is shut down shut down and did you repay this debenture holders their money or we give them new debentures new debentures that means this old V Limited debentures we need to take over and we need to cancel and issue them new debentures of different value or same value same value sir you have taken over and you have credited this after this can we show this or cancel this cancel how do you cancel this 12% debentures of V limited account debit th000 instead of 12% debentures we are issuing new debentures new debenture interest rate is how much 13% so don't write to 13% debentures of P Limited in P limited books will we say p limited or it's understood if you write 1 % debentures it means that this debentures belongs to P limited okay this a swap Arrangement even if they don't mention this in every problem do this this particular entry you do this selling company Dentures first take over then cancel and substitute with new company Dentures sometimes they mention sometimes they don't even if they don't mention do this compulsory okay anything else is there uh amalgamation expense we already wrote the journal entry for amalgamation expense which is pnl account debit to bank account one lakh one lakh that's what it is is a joural in yes people very pretty straightforward adjustments yes or no don't worry we'll take up one or two I mean amalgamation more or less will be easy only usually in PC may they may give some adjustments tricky here and there but otherwise in journal entry and all it's pretty pretty pretty straightforward because same entries almost will come in every problem the only thing is you need to manage the time all this you need to answer within 30 minutes tops that becomes challenging when time goes no you you are already seeing you just did working note already 15 minutes is passed now in 15 minutes may you have to do a journal entry remaining whatever working notes and balance sheet means heart will go it will start racing then instead of debiting you'll start crediting multiple journal entries you'll come by you you'll forget all that will happen so that's all is the IC Trick In keeping you retaining at that particular level it's a Time Time based papers usually at CA examination will be lendy that's what I used to see in regular classroom always go with a mindset that it is a three and a half hours paper you need to solve in 3 hours so already you have how much less time half an hour less you have go with that approach so that later on that freakiness should not happen so approach that write some mock papers improve your writing speed speed not at the cost of legibility don't write kakauka okay let it be V visible whatever I I told a simple rule what is a simple rule I told whatever you write your friend should be able to understand it he is able to read it as long is happening that much good enough don't concentrate on writing beautifully underlining this okay you do it after the classroom not in the examination H because you will definitely not have time have you don't even carry pen pencil I mean pen you carry pencil and all please don't SC scale and all please don't carry at all even if you have carried please don't use it don't waste your time there paper will be lendy especially people who are writing for the first attempt no sometimes they go with full Gala attitude see what see then they to Super then they'll come and start R they will start okay so please don't do that okay you are not writing your normal examination this is probably the first time where you are writing a professional examination because some of you would have come from the direct entry rout so don't take it lightly okay I know that each and every one of you are smart but to clear CA examination along with smartness you need to be present that moment if you are not physically present at that moment a lot of silly mistakes will happen which can cost you an attempt please don't let that attempt cost happen okay I've already told you one attempt to loss means almost three to 4 lakh rupes going now okay now 3 lakh rupees now if you want okay do a ma 100 rupees note you take out from your wallet put it on fire light a fire will you do it sir 100 rupees to fire or to tear away only your heart is uh heavy now three lakh rupees how can you give up that easily sir correct no right 300 Rupees is a big amount means 3 lak rupes is much much much bigger so do not do that don't let an attempt get passed by okay write it it is possible no matter whether you have one month one and a half months doesn't matter write it go with an attitude that you will clear it and and and to clear you don't need 100 on 100 you just need 40 at Best in aggregate 50 so ICA is just expecting you to get 50 k 50% that's all 50% sir after thought we are used to scoring 9900 100 and all in our 10th 11th 12th we can't score 50 say we will do in fact we should tell IC I will write for 70 you keep 5 rupees for you five five marks you keep it it's okay like that our attitude should be it will happen okay just that keep your positive framework don't freak out especially during the last one month you always have that comparison K up I am doing this my friend is there he already revised or she's already revised three times so you have not even opened your book somebody has already completed two times revision means automatically that everything will start okay so don't let that attitude come in your examination you only have to write with your own preparation focus on your things it's okay no matter whether you have 15 days also no problem still go and write the examination at least if not anything you'll get an experience okay so go write it because once you registered it's counted as an attempt don't waste an attempt I've seen many students registering for examination then they say I not prepared enough so I will not write this attempt please don't do that it's okay just go and write as much as possible try to cover up that's all I would say ah yeah great that happens not only you Ma okay there are many people due to nervousness will forget are you also in that category only see how much things I've forgotten in class anyways okay so far good with this H yeah so journal entry we have passed next thing we need to prepare is balance sheet balance sheet as I told you is very very simple affair take a question balance sheet and look at the journal entries go on doing it maybe one balance sheet quickly we'll do it merger method and all if they ask you balance sheet no what a SW I tell you okay because anyway in merger method everything is taken over at book line by line every asset every liability you need to add that means question balance sheet only literally you need to Omit okay that's all it is merger method because no agreed value nothing no so same let's quickly take the calculator uh P limited share Capital how much 15,000 Jo Jo May don't add up this 6,000 right selling company share Capital can we take over no now this we can't take over check your journal entry how much equity share Capital purchasing company issued 9,000 so 15,000 plus 9,000 you do how much is that 24,000 so in your balance sheet when you compare where is balance sheet here balance sheet share capital is 24,000 okay this is one now what about reserves and surplus reserves and surplus also we can do shortcut so will selling company reserves in Surplus be taken over by the purchasing company under merger method yes at what value book value okay so take 15370 plus 4335 if you don't have time I'll tell you how to do it shortcut don't give break up of each Reserve you'll any lose one Mark that's okay but you'll be able to at least complete it so take add these two how much is this 19705 okay now two adjustments are there what are those one in merger method you compare PC with paid up capital you have to adjust something in reserve how much you have to adjust in reserve 3,000 that means reduce 3,000 okay that is one then is there any amalgamation expense how much you adjusted amalgamation expense from Pendle one so reduce one it's there in journal entry also I'm just directly telling how much are you getting 1670 directly got the value so you don't have to even given the breakup if you have time do it properly with notes with schedule everything otherwise do it like this it's okay one Mark think that you have donated to your mother body one Mark if you give it to your mother you'll feel bad no no let mother be enjoy it's okay fine no so like that so you should go ahead with few shortcuts like this next long-term borrowings now onward should have to worry or line by line addition so this is 0 plus th000 how much is 0 Plus th000 in India to 1,000 only H next these two cardition you do 1,200 plus 463 how much 1663 but hang on is there any Mutual Owings Mutual Owings yes Mutual Owings was there in Bill receivable for one company it's a bill receivable means for another company it will be bills payable so how much is bills payable 80 sir trade payable means not credit trade payable means credit R plus bills payable put together that put together that name only we call it as trade payable so these two you add Mutual Owings you reduce 80 how much you get 15 1583 yeah next for shortterm provision any adjustment or nothing so add these two 1830 plus 702 you do how much is that 253 balance sheet liability say d okay now the asset side these two you add how much is PP 22304 plus 6750 your calculator should show 29054 next what is the next one uh inventory again these two you add is there any stock Reserve is there any stock Reserve there or not there there which problem ma no ma she compared to the last problem s if it is there if it is there you will reduce the stock Reserve okay here it is not there so minus Z so only these two you add what is the inventory value 11,093 okay great next to trade receivables these two add is there any Mutual Owings yes so from bills payable if you reduce 80 means from Bill receivable also you should reduce 80 so these two you add minus 80 you do how much are you getting 3140 awesome next what is next cash one14 + 609 that's all or any any expenses there yes one expense was there which was amalgamation expense paid check your journal entry also you pass the journal entry pnl account debit to bank so bank balance will reduce by 1 lakh so how much is the balance 172 that's all as a balance sheet match out okay so balance sheet matching is a very very straightforward exercise but the only thing is will you reach to the balance sheet extent in the examination is a Crux okay that is the F but usually you'll be able to AR T the balance sheet so that's not a big deal at all okay so till now we saw if it's a merger method what to be done okay now let's understand what to do in case of the purchase Method but one good question is there what they' have done is theyve asked the treatment in the books of purchasing company also for purchase Method and also selling company also theyve asked so what we'll do is selling company revision first we will do then we'll take up the next question usually combo questions are examination examiner favorite how amalgamation questions usually they ask us from selling company they'll ask you to prepare one or two working notes and a purchasing company either they will ask you balance sheet or journal entry like that they ask because number of adjustments here are very less since they want to make this question leny they will ask multiple treatments in purchasing company either journal entry or balance sheet they ask in selling company either they will say prepare realization account or close the necessary ledgers or journal entry like that they will ask okay first let's understand that and then we'll be able to approach this better till now what to do in the books of purchasing company for purchase Method and merger method we've understood next is what to do in the books of selling company so is selling company there or g go go that means if a company is shut down it's a very simple exercise what you'll do sir if a particular company is legally shut down means what in all you'll do every single Ledger not only asset every single Ledger you have should have a balance or it should be closed every single Ledger has to be closed both assets liability share Capital reserves and surplus every Ledger one by one they need to close now one quick way to close multiple ledgers is by preparing realization account you have done from your ban 11th grade and all so what you'll do sir first tell me first step in realization account in fact I've given you each step and joural entry also in our regular class anybody remembers the steps of realization account first you'll have to close all the assets assets have what balance debit balance how do you close something which has debit balance credited that will closed by transferring it to realization account so the journal entry is realization account debit to all the assets account one by one assets are shown in our books at what value assets are shown in our books at Book value so I mean this entry you'll pass always at Book value okay agreed value market value only is relevant for the purchasing company selling company intention is to close down all the ledgers since the all the ledgers are shown at Book value cancellation entry will always be passed at Book value this the entry to close all the assets you'll only close the assets or all even the outside liabilities outside liability outside liabilities means your current liabilities and noncurrent liabilities liabilities will have what balance credit balance how do you cancel them debit so the entry will be what all the liabilities account debit one by one to where it will be transferred to realization account so you'll post it as buy liabilities in realization account this account also will be use what agreed value or Book value only book value manageable so far okay okay next one is Sir amalgamation expense can be there so is it mandatory that only purchasing company should bear amalgamation expense or selling company can also incur it's a negotiation right purchasing company may tell selling company you bear it you incur it possible so if purchasing company incurs amalgamation expense what to do you already see that depends on the method and that depends on the case if selling company pays amalgamation expense what to do all right now what is the journal entry for expense paid sir expense paid expense account debit to bank account let's say 10,000 and this expense will be transferred where P so the journal entry will be pend account debit to expense correct if you add these two entries what is effectively journal entry you're getting expense debit expense credit so effectively what is the journal entry pendal account debit to bank account to 10,000 is the effectively the correct so for one one expense you want to prepare whole p and no that means here all the expenses can be rooted through which account realization so instead of pnl account debit to bank you'll pass what journal entry realization account debit to bank account so hence for amalgamation expense the journal entry will be realization account debit to bank account yes people this is one okay let's take another scenario sir selling company uh 1 minute hang on tell me the correct journal entry for amalgamation expense here realization account debit to bank account let's assume it is 10,000 10,000 this is the effective entry you will pass okay now let's visualize a case like this selling company first incurs amalgamation expense of 10,000 after that 4,000 rupees they get reimbursement from purchasing company so what is happening selling company first will pay expense after that total expense are they recovering or only 4,000 4,000 that only we call it as this is what sir this is a journal entry for expense incurred after incurring the expense they will keep quite or they will get the reimbursement reimbursement means get back they will get this money from which company purchasing sir for expense incurred what is a journal entry realization to B for reimbursement what is a journal entry whatever entry you passed you will pass the Ulta entry so let's say the reimbursement is 4,000 assume okay then the entry will be what sir bank account debit 4,000 to realization account 4,000 that's what I've done over here buy bank account liquidation expense reimbursement if it is there all of it may not be there in the problem but if it is there we are now discussing conceptu level so everything can come right so if it is there you bring it in here that's all manageable ah now one second hang on what is a journal entry for um planted missionary sold one L plan and missionary sold one lakh book value is one lakh you sold for one lakh tell me the journal bank account debit you usually pass the journal entry bank account debit to PP account correct one lakh one lakh yes yes now now now no now now in case of selling company in this particular scenario can we credit PP account when an asset is being sold can we credit PP account no why sir all the assets are already transferred to which account realiz that means all the asset Ledger is already closed all the asset Ledger is already closed again if you credit asset Ledger now assets Ledger will be closed or it will come in with credit balance credit balance so when a business is sold what will you write when an asset is sold will you write bank account debit to PP no where did this asset go to realization that means the journal entry will passes bank account debit to realization manageable this is what you've been doing in your 11th grade in dissolution of partnership form if you remember whenever asset was sold you used to write bank account debit to realization when liabilities was settled you used to pass the journal entry realization to bank okay now use the same concept test it back here in this particular case selling company is selling individual assets or they sold whole company in this case man company sold are they selling individual assets or whole company whole company so hence the journal entry will passes have you recovered the money immediately or you will recover recover hence instead of passing the journal entry bank account debit to realization you have to recover PC from the purchasing company so the entry you will pass is purchasing company account debit because we have to recover PC from purchasing company I means as far as selling company is concerned purchasing company is our datar datar will have what balance debit balance so you'll write purchasing company account debit to realization account that's the reason if you just check my steps refer the notes I would have written record PC on the credit side of realization account I don't record because of this particular journal entry instead of writing Bank to realization since we are not selling individual assets rather we sold the whole company and we sold the whole company to which entity purchasing company that means we have to recover money from purchasing company so hence the entry will be instead of bank to realization it will be purchasing company to realization account so when you post this entry in realization account where will be the posting you'll write here by purchasing company to the extent of PC recover that's all it is yes people so far we have ticked the majority of the things done okay one more thing that can usually happen in this cases let us say let us say prefering share capital or one minute let me ask this question to the online folks online people still there are any doubt Papa you guys are AR say waiting go so that's the reason just being little polite and asking any any repetitions required any help required or everything going smooth amas no doubt sir awesome you people I tell you come yeah great now let us say preference selling company has a preference share Capital worth one LH selling company preference share capital is worth preference shareholders no cranky people like me they told they told I will settle I will agree because sir if you want to sell the company means you have to take their approval also every shareholder approval is required yes or they told fine I will agree to sell the company but I want one and a half lakh I want one and a half lakh rupees you give me cash you give me new company preference shes whatever you give me but I don't want one lakh I want one and a half lakh Rupees is what they're seeing okay now is preference shareholders the owners of the selling company are preference shareholders the owners yes whatever you pay to the owners is it PC yes but come back one step here how much is a preference share Capital 1 lak but how much you have to pay them as PC PC issued to them is how much 150,000 that means did we give anything extra PC to preference shareholders yes how much 50,000 sir you might have given extra PC to preference shareholder means preference shareholders will be full smiling but one person will be full sad who is that Equity shareholder because that came from his share no correct no yes that means this 50,000 from Equity shareholder perspective it's a loss this loss you'll have to transfer it to realization account this loss you have to transfer it to realization account that's what I've written over here okay to preference shareholders account amount paid in excess of preference share Capital here preference share Capital was how much 1 lakh but how much was settled one and a half lakh so how much extra was paid 50,000 this 50,000 is a loss right the now you if you're confused you can mean we can Al sort this out through ledgers or one quick easy fixes realization account is like P account only yes or no correct no sir correct now visualize all your when you prepared your pendl account Golden Days trading pel all expenses and losses came on the credit side or debit side trading pendl you visualize all the expenses and loss came on the debit side all the incomes and all sales and all came on the credit side now this particular extra amount paid to preference shareholder is a profit or a loss loss loss means where we should post it debit side that's what I've written here I'll also prove it to you with Ledger with Journal entry but this is a quick way to remember it because on the examination day we can't go behind General entry logic of everything we need to know shortcut ways to finish everything h ah correct sir only these are the elements that comes under realization account yes P correct Manoj if you want to put two or three components you can tell me much I'm eager to learn yeah so far okay all right now the the next one is sir sir sir the after preparing realization account ideally ideally realization account should match if there is any balancing figure that means Equity shareholders got extra money Equity shareholders got extra money that is your realization profit or real why do you prepare realization account in Golden Days you already know this you when you prepare realization account you either get a realization profit or realization loss if it is realization profit means you'll get it on the balancing figure on the debit side like gross profit net profit and all they used to right credit side or debit side debit side so if you are having realization profit means you'll get balancing figure on the debit side if it's a realization loss you'll get balancing figure on the credit side that's all it is and who gets this remember in your golden days realization profit and all where you used to transfer to Partners to Partners here realization profit will be transferred to equity share holders so you will transfer this off to equity share holders account that's all it is this is the one thing or few things you'll have to do in realization account can we have a quick recap of things yeah because I know I mean actually when you don't need to mug up any of this or remember any of this adjustment by adjustment if you remove Aram say you'll get it but sometimes what happens know if you have a particular format you can answer the things little fast so that's what we are trying to achieve over here every single goddamn component you can without knowing anything also Aram say you can put it but when you know the steps the things becomes a little faster so let's try to remember the steps if you can first step in realization account is what to transfer first of all we prepare realization account to close down many ledges okay first step is to close down all the assets assets have what balance debit balance how do you cancel it credit so the entry will be realization account debit to assets all at book Val next to close down all the liabilities liabilities have what balance credit balance how do you cancel it debit so the journal entry will be all the liabilities debit one by one to realization account that is one next two now normally in our dissolution of partnership case we used to sell individual assets one by one assets we used to to sell one by one liabilities we to settle here individual assets are sold or whole business is sold whole business is sold are you selling the business to somebody at free of cost or you will recover the money recover the money from whom purchasing company that means purchasing company is your dat are so what is the journal entry purchasing company account debit to realization account is the recovery journal entry recovery of PC then amalgamation expense incurred by the selling company so the entry for expenses p p to bank but for one expense year do we prepare pnl or adjusted through realization itself realization itself so entry will be realization account debit to bank account if you get any reimbursement of that means ult entry that is bank account debit to liquidation expense or realization expense whatever you call it done and one more component is watch out for all this is if you have paid any extra money to the preference shareholders that means from Equity shareholders perspective that extra money given to preference shareholders is a loss that loss where it should come on the debit side okay and then after you prepare this account any balancing figure is there in the account means that represents your realization profit or realization loss goes off to equity shareholders account this is one okay next one more if you want means very simple now in a selling company books May every single Ledger you need to close correct assets Ledger is it still there or closed the moment you prepare realization account all the assets Ledger closed the moment you prepare realization account all liabilities account is also fully closed few ledgers still have a balance can you give me a recap what and all ledgers still have a balance what and all ledgers still have a balance one equity share Capital another one preference share capital and then all the reserves and surplus is it okay now let's see this preference share capital is 10 lakh Rupees okay now preference share Capital has what balance credit balance whom will you repay this preferen share Capital to to preferen share holders that means the entry will passes what you need to cancel preference share Capital which has credit balance let's assume it's 10% preferen share Capital so the entry will be 10% preferen share capital account debit 10 lak to preference shareholders 10 got it everyone cool okay so this way when you pass preference share Capital Ledger will get closed managed but which account still has a balance preferen share holders account has a credit balance sir can you just pass this entry and keep quiet or you also settle the money settle the money you paid 11 lakh rupes to preference shareholders what is the journal entry preference shareholders to bank so that means the next entry you will pass is preference shareholders account debit okay people right okay to bank account to bank account let's say you paid 11 lakh rupees easy correct but do we have 11 lakh rupees balance in preference shareholders account or only 10 lakh 10 lakh correct no yes that means that balance 1 lakh rupes is the loss balance 1 lakh rupes is the loss that you'll have to transfer it where to realization multiple ways to root this entry that only I said that to realization account rup so if you paid any extra amount to preferent shareholders means it becomes a loss okay that's all this is fitting clear clear we can also root it another way also if you want you can also pass the entry like this preference share holders account debit 11 lakh to bank account to bank account 11 lakh like that you can do okay but is preference shareholders account Ledger matching now or there is a balance you credited preference shareholders by 10 lakh you debited by how much 11 LH that means one more entry you need to pass what is that realization account debit to preference shareholders account one lak one L there the balance that's the reason I said over here if you paid any extra money to preferent shareholders means that will come on the debit side it's a pure journal entry yes people okay but remember L this in examination every time becomes a little bit of difficulty hence the shortcut formula will help us in a big way to reduce the burden of time okay people on this way preference share Capital also D preference share holders account also Damar which account still has a balance equity share Capital has a balance reserves and surplus also has a balance in fact if you remember I've told you Equity shareholders get six things six components Equity shareholders will get what are those equity share Capital whom will you transfer to equity share holders account all the reserves and surplus also will be transferred to equity share holders account that is the two things in your balance sheet in selling company balance sheet if by chance if you have any preliminary expenditure or deferred revenue expenditure rare but if at all you have that that will also be transferred or adjusted against Equity shareholders itself this is a third component okay fourth component is when you prepare realization account what will you get as a balancing figure in realization account what do you get realization profit or realization loss that realization profit or loss also will be transferred to equity share holders okay last bit which they majorly interested is what all this drama is okay but Equity shareholders are looking for one key component what is it give me PC give me pc pc is the fifth component that will be transferred off to equity share holders okay sir selling company every drama is over but selling Company still has 3 lakh rupes extra cash what will they do everybody they have settled still 3 lakh rupees Surplus cash selling Company by chance has what will they do Equity shareholders are the Risk Takers so whatever final money is remaining still it will be given off what sir to equity shareholders so sixth component is Surplus cash or bank balance if at all if it is remaining it may not be remaining in every problem if it is there you'll transfer this to equity shareholders account so these are the quick six pointers you need to remember as a checkpoint to see whether have you considered everything in a quick way okay fine and finally finally finally to check whether you have done the answer is right or wrong Equity shareholders account should perfectly get matched meaning debit side total and credit side total should match if it doesn't match means Ma sorry you did some something wrong recheck your calculations that is your checking Point okay people that's all now all this we will apply we will apply in the next question next question is if it is a purchase Method what to do and what to do in the books of selling company all adjustments will not come whatever we discussed few things will be coming in okay ah sir when cash and bank balance has to be transferred to equity shareholders and went to realization VRI is saying sir one point you forgot sir you tell sir one more point is Sir in our uh 11th or 12th grade and all our teacher used to give this dialogue we prepare realization account to realize assets and we prepare realization account to settle the liabilities cash cash is already realized what you will give Gandhi note and take dollars no right cash is already realized so your teachers used to say realization account me cash balance don't transfer cash is already realized so don't transfer cash to realization account correct only correct only but but hang on here are you selling the assets individually or you sold it to the whole company whole company right so if if by chance the purchasing company says I want your cash balance also I want your cash balance also that means the PC will be paid considering cash balance also so in this case what in fact I ref if you refer my notes Ive dictated this transfer all the assets to realization account except cash and bank balance if cash and bank balance of the selling company is also taken over by purchasing company means then transfer cash and bank balance also to realization account because PC will be including that if you flip over you will see if you forgotten no big deal okay but once again I will repeat that that's a rare scenario but if it is there no problem simple if you want it as one liner formula I've explained you the logic of all this I'll not go into all that now okay so point is if selling company has taken over cash balance if the rather if the purchasing company has taken over cash balance of selling company then cash also you transfer it to realization account otherwise don't transfer okay oh in fact I've told you also even if you don't transfer cash to realization account it's absolutely fine you can open Cash Ledger separately and also close it that method is also acceptable so that way also you can somebody's posting also of that thank you sha my pointer I think she you sent it Ulta neck is paining now thank you thank you I only said that you have written it confirmed I have said also she has written also confirmed okay now got it so but did you understand the final thumb rule what is it simple if if if purchasing company has taken over cash balance of the selling company then cash also your transfer it to realization account if by chance purchasing company has not taken over cash and bank balance of selling company then no need to transfer cash to realization account you can open Cash and bank balance as a separate Ledger and close it okay that that's what I've said if you want you can open the notes you'll get it all that I've said you the reason for all that okay if you don't consider realization profit will be slightly distorted I told anyways now I think that's not that very important in considering this time concerned so I will not like to dwell so much on that so far good H again just having a quick recap what are the six components Equity shareholders will get as a checkpoint for us equity share Capital all the reserves and surplus preliminary expense miscellaneous expenditure or defer Revenue expenditure if at all it is there then reserves and surplus already over realization profit or loss PC and surplus cash if it is remaining these are the six things and also keep in mind that finally Equity shareholders account should have a balance or it should not have any balance if debit side total is l means credit also should be one LH if it doesn't match you need to recheck your calculation somewhere some mistake has happened that's a way to confirm this are the things that we need to do in the books of selling company can we take up one question quickly to review whatever we have learned okay come to this harur and Vu question is quite popular it has come quite a few times in the examination it is simple only but I don't know why examiner has a little bit of favoritism towards this question so we will also review this question because conceptually it's good to revise here we have selling company what to do also on purchase Method what purchasing company should do also is given so that way we will learn okay excuse me okay financial position of two companies hurry and viol limited as on as under they've given on this particular date that's fine simple balance sheet uh few goalies they've given a notes to accounts that is also okay but one thing maybe I'll keep in mind is equity share face value is 10 both the company preference share face value is 100 just that the rate of dividend and preference shares is slightly different that's okay now check Hur has absorbed y limit that means hurry is the purchasing company Wu is the selling company on the following terms first 10% preference shareholders are to be paid at 10% premium by issuing 9% preference shares of harur liit stop sir 10% preference shareholders are first of all prefering shareholders of the selling company owners are preference shareholders the owners of the company Yes means whatever you give it to the preference shareholders of the selling company is it part of PC yes and what are you giving to this preference shareholders first of all what is selling company why is a selling company selling company preference share capital is how much one L but are you settling one lakh to them or you're giving 10% extra instead of giving 1 lakh rupees prer share Capital back you are giving 10% premium means you are giving 1 lakh plus 10% which is 1 lakh 10,000 okay sir new company is giving 1 lakh 10,000 to them what are they giving cash off no they are giving new 9% preference shares of hurry limited instead of 10% preference shares in the selling company preference shareholders are getting 9% preference shares in The Limited first of all is this part of PC yes and the value of PC is 1 lakh 10 manageable okay all right now check Goodwill of V limited is valued at 50,000 sir I don't see any Goodwill in balance sheet at all correct no intangible assets note number five if you just check there is no in fact it is here shown as 25 but Goodwill to be taken over at what value 50,000 that means that itself is good enough for me to conclude or conclude one thing what is that one thing perfect it is a it is not a merger method it is a purchase Method why so if it is merger method will you revalue the assets or everything will be taken over at Book value everything will be taken over at Book value Goodwill Book value was 25 but it was taken over at 50 and building was taken over at 150 building value was 1 lakh but it was taken over at 1 lakh 50 similarly missionary and all has got revalued so since the assets are not taken over at Book value even if one asset is not taken over at Book value means automatically it becomes purchase some problem they will mention the method some they will not mention in this problem even if they've not mentioned we know that it is a purchase Method because assets are not taken over at Book value rather they are remeasured inventory are taken over at 10% Less on datar you need to make a provision for doubtful debt at 7 and a half% indirectly datar are taken over at right value or 7 and a half% lesser value 7 and a half% lesser value check this Equity shareholders are w why is a selling company so you are giving something to the equity shareholders of the selling company so whatever you give to them is PC what are you giving them Equity shareholders of a limited will be issued necessary how much is given or not mentioned they only said necessary Equity shares we will give what is necessary don't know how much over is required now what is required given or not given sir PC means what you give it to the equity shareholders and what you give it to the prefering shareholders of the selling company what we give it to the preference shareholders of the selling company clearly given yes but what was given to equity shareholders of selling company mentioned or missing so if one component of PC is missing means I can say that the whole component is missing correct so in this problem PC is given or PC is missing PC is missing yes sir that's a way to conclude that PC is missing and you know the approach when PC is missing what to be done what denotes the net worth net assets so find out net assets and net assets only becomes your total PC not PC for Equity shareholders net assets only becomes total PC is it okay so first working note in this problem is to find out PC okay then you'll have to also find out to find out PC we also need to find out net assets and PC and net assets will be different here or same same because if PC is missing net assets only will be assumed to be PC okay okay go one step back again how do you get net assets tell me this one again that assets means what assets taken over at one minute assets taken over by the purchasing company but that asset belongs to the selling company and the value will be taken over at Book value or agreed value assets taken over at agreed value minus outside liabilities taken over at agreed value fine people now if you read the question they only mentioned about few assets correct so we have many other assets also say see check they did not mention mention anything about cash they did not I think inventory and all they mentioned for cash they did not mention anything and we have various liabilities also we have longterm Provisions we have trade payable if nothing is mentioned means we'll assume that it's been taken over at Book value itself whatever remaining assets and liabilities of selling company we have it'll be taken over at Book value if nothing is mentioned yes that's what we have to do so let's calculate now we'll do the selling company the requirement is see this is how usually examiner question will be prepare necessary ledger accounts What Ledger you have to decode of which to close the books of V so in selling company books not journal entry you need to pass you need to prepare ledger accounts What in all ledger is required according to you you need to prepare and close that is one then show acquisition entries acquisition entry means who acquired hurry acquired are you when you acquire you pass journal entries remember that journal entries they are asking in the books of hurry limited and also they're asking you to prepare balance sheet after absorption easy question but lengthy question so in the books of purchasing company you need to pass journal entry as well as you need to prepare balance sheet balance sheet in proper format with notes to accounts with schedules which majority of them will struggle full they'll not be able to do it that is one okay and you also need to close the books of uh selling company which you know what in all you need to prepare but will you be able to put it within 25 to 30 minutes is a question so that that is a CS over here so now you're laughing no in the examination also you should laugh think okay two three marks I'll donate it to my no problem if I'm not able to complete it that should be the attitude don't cry over one or two marks lost the goal is to finally clear attempt the paper fully to get 60 65 are possible rank means it should be a little higher either ways that should be the final goal so don't look to score 100 on 100 unless you have started your like preparations like 6 to 8 months before that is quite difficult because pinpoint Precision it's very difficult to achieve not impossible but very difficult unless you you practice so much that in your sleep also somebody wakes up you'll be like you'll go on telling the interest and that is there some people do that they have that little bit of a photographic memory once they see this no they will remember it like for one month two months no they will do it it's okay some are exceptions that's okay we should not worry about exceptions we should worry about our life okay so wherever we are think about that so focus on attempting the paper fully and the focus first Focus or primary attention to get is the exemption 60 plus because if you want to clear a group in one paper May 60 plus is a must otherwise in aggregate me it lose out whichever paper don't go for favoritism over here okay whichever paper you feel you are more comfortable your preparation is L if you feel accounts is a paper where I feel I can score I have confidence keep that if you feel this Bima thought accounts so so go the only okay so account I just want to pass auditing caric sir is my favorite oh I will score exemption and audit means do that no problem but one paper in each group you should look to score heavily 60 65 ideally in that range 70 if you 65 and above if you crossed means more or less there is a very very good chance that that group will get cleared off scoring 40 in CA paper is not difficult getting that 150 in aggregate many people struggle in that we have seen so many of them get 140 142 145 148 149 yeah so so many people are there that is the worst feeling you can't even talk to them literally they will not talk to you if you talk to them they'll throw things at you I for the name sake tell I will throw bottle they literally throw only yeah so yes because it hurts a lot yes but you need to understand that these are all are no point in blaming somebody at the end of the day it's our examination we should own up so these are small small mistakes which we do unless we correct it you'll go on writing your attemps time is one component please do not ignore that always prioritize time leave space if half an hour is over no problem Wherever You Are take maybe if you are still not able to give up 2 3 minutes extra you take after that one or two pages blank you leave move on to the next question it is okay right you don't have to score 100 on 100 it's okay I'm only telling as a teacher though I should not be saying this but in CA examination I feel clearing the examination is most important if you say if you come to me and say sir I scored 17 accounts but I did not clear the group indirectly I'll be like I I don't know whether to say congratulations to you or good luck to you I I will be there because ultimate focus should be what clear the whole group so prioritize that not a single Paper okay so never do that okay I've seen so many students account are I will study Left Right Center sir law boring sir I not study sir tell me how to score 14 law sir enough sir no favoritism because I'm in your attemp law only may be easy who knows accounts may be difficult law may be easy so always give equal preparation but one or two papers try to score an exemption of your choice that you decide for yourself huh others are saying sir enough drilling sir continue sir continue so the requirement selling what do you want to do first we'll do the purchasing company Cooks first let's test our memory half an hour back we studied this so let's see how much weable to recall First Step which method purchase Method how did we get to know that given or we gotten we got how because assets were taken over at Book value no assets were revalued so that means it's a purchase Method so purchase method steps you tell me one by one find first PC second one net asset compare PC with net assets if PC is greater than the net assets that means purchasing company has made a loss loss now you'll adjust it in reserve or Goodwill it's an actual business purchase not reshuffling that means loss you'll account it as goodwi if you purchasing company made a profit means that profit will be shown under Capital correct and in this problem was PC given or PC was missing if PC is missing what to do calculate net assets and net assets only will become your total PC so first step here to is to calculate the net assets or you can call it as PC okay now for net asset calculation all the assets you'll take it over at what book value or agreed value agreed value what is the first asset sir check the adjustment Goodwill was taken over at 50,000 check here the solution Goodwill taken over at 50,000 next what ass said they gave building 150 missionary 160 so miss 150 160 yes uh next inventory was taken over at 10% lesser what is the book value of inventory they gave in the question selling company you take Jo didn't take purchasing company we want to find the PC on net assets of the selling company who selling company here Wu w inventory was how much 175 it was taken over at 10% lesser so minus 10% you do how much is that lakh 57500 is inventory value great next to datar datar was you made on datar how much provision 7 and 1 half% indirectly telling datas are not taken over at Book value they are taken over at 7 and half% lesser value so 1 lakh - 7 half% if you do it's 90 to 500 yeah so datar value is 90 to 500 these are all the assets given to you in the question but hang on don't start off like that some assets they will not give any information if agreed value is not given what is assumption all the remaining assets and liability where no information is given will be taken over at book come back to your data so did we consider inventory tradeables yes what about cash cash and cash equivalent any mention or no mention no mention I means this will be taken over at what value book value so should we consider this for net asset calculation yes so these are all your assets correct by adding all this you get net assets or you get total assets total assets we want total assets or we want net assets how do you get net assets reduce all the liability sir we read the question anywhere they told liabilities are taken over at 10% more 10% lesser or these liabilities are not taken over like that any mention or no mention I means all the outside liabilities will be taken over at Book value itself what and all outside outside liability means current liability and noncurrent liability what is the current liability where is here current liability of Wu is 20,000 trade current rather non-current liability is 20 current liability is 80 in fact they prepared note number three what is this note number three retirement gratuity fund some gratuity liability is there relating to employees that is also liability only no problem so how much is that 20 and 80 check 20 and 80 have you considered yeah 20 and 80,000 we have reduced so this is your assets minus your liability this will give you your net assets since PC was missing in the problem the total net assets itself becomes total PC how much is the total PC 530,000 comfortable okay this is one you got it now sir this PC you need to discharge or distribute PC will be distributed to whom owners of the selling company who are the owners of the selling company Equity shareholders are there preference shareholders sir how much you give it to preference shareholders was missing was what was mentioned when check one minute what did they say about preference shareholders check preferent shareholders of the selling company are paid at 10% premium their share Capital was preference share Capital was 1 lakh but are you paying 1 lakh or 10% extra that means how much are you paying totally l000 total PC is 530,000 in that 1ak 10,000 is paid to the per preference shareholders in 530,000 if you are paying 1 lak1 10,000 to preference shareholders means balance 420,000 will be paid to equity share holders easy people that is what this portion was missing that's a reason we used net asset approach to get the PC all right now no no drama not done you need to be a little careful what did they say check this D Point again Equity shareholders of V limited selling company will be issued necessary Equity shares and how much necessary we already got to know what is the necessary Equity shares value 420,000 but these necessary Shares are issued at 5% premium this word premium one minute just check the difference between these two here sir they use the word premium also Equity shareholders also they are using the word premium for preference shareholders also they using the word premium so how to decode what are they trying to say one simple way fixes some many one confusion which many student face over here is Sir are new what did you give to the preference shareholders of selling company what did we issue to preference shareholders of selling Company New preference shairs are these new preference shairs issued at premium is one common question I get are this new preference shairs issued have premium how to decode that is very simple one simple approach I would say always check the words premium in question if you're confused check where the words premium are utilized if the word premium is used next to Old shares if the word premium if it is used next to Old shares that means old Shares are taken over at higher value and new Shares are issued at par new Shares are issued at par if this word premium if it is used next to Old Equity shares that means here see in this problem what am I trying to say here check preference shareholders 10% preference shareholders sir which company has 10% preference shareholder Yol limit that mean this is the preference shareholders of the selling company so 10% preference shareholders of sing company are paid at 10% premium they're using this word premium next to the new shares or old shares old shares that means you are you paying the old preference shareholders 1 lakh or 10% more 10% more that means totally you are giving them how much 1 lakh 10,000 this 1 lak 10,000 how are you settling new preference sh and that new preference sh are issued at par only because the word premium is not next is not used next to New preference shes they're used next to Old preference shes that's how to decode whether new Shares are issued at premium or not got it pakka 100% online also because this is one mistake many students do yes yes yes repeat I got it Paka online also if you have got it this one you will tell check this Equity shareholders of I limited Equity shareholders of the selling company will be issued necessary Equity shares at 5% premium Now the premium is used next to what necessary Equity shares means new shares the word premium is used next to what new shares that means now are new shares issued at par or they issued at premium new Shares are issued at premium that's how to decode understood everybody okay that online I didn't get any response that means you saying you're writing something you want me to wait or did you get it ah writing sir wait sir we have paid full fees actually I can't use that dialogue you have paid no fees hey this is marathon is freea I am not getting any piece so you're ex student H that's okay Ma as long as you happy to watch our lectures we will be there absolutely okay don't worry if it is still not happened if you're not able to clear this attempt you will clear okay it'll happen good good that you're joining still you're acknowledging yourself that's nice Raj MAA all the very best for your this attempt and hopefully next time when you message me you will say have come to c a final I will teach you that's a dialogue I want to listen from you Mo okay no no no no sir how much you give it to equity shareholders 420,000 but what are you giving to this new Equity shareholders cash or new Equity shares new Equity shares so are this new Equity shares issued at par or premium premium so you need to find out in this new Equity shares is the face value of new Equity shares 420 no including premium it is 420,000 in this 420 you need to find how much is the face value of new Equity shares issued and how much is the premium element how to find out very simple 420,000 is a value of new Equity shares who is issuing this new Equity shares selling company or purchasing company purchasing company come back to balance sheet what is the purchasing company face value of each equity share 10 Rupees but are the shares issued at par or premium sir face value is 10 rupees and these Shares are issued at what percentage premium 5% premium premium is always calculated on face value so Calculate 10 5% if you do what are you going to get 10 plus 0.5 that means the issue price is how much 10.5 got it that means the issue price of one new Equity shares is how much 10.5 totally you are giving 420,000 as PC Val vend uh totally you're issuing 420,000 as Equity shareholders C PC and value one Equity shares is how much 10.5 easy yes tell me sir if you do this how much you going to get 40,000 40,000 is what value of 40,000 is the shares 40,000 is the new shares issued by the new company once more got ITA all right what is it again 10.5 how did I get the face value of the share was 10 what new shares was not issued at face value they are issued at 5% premium so 10 plus 5% if you do you'll get the issue price of the new shares which is 10.5 the value of one new share is 10.5 and totally how much you have to settle to equity shareholders 420,000 you're settling 420,000 by issuing each share which is valued at 10.5 means how many shares you will issue 40,000 is equity share Capital shown at issue price or face value face value 40,000 is a number of shares each share face value is how much 10 so out of this 420,000 4 lakh is towards equity share Capital balance will be towards Securities premium Now if you calculate our balancing figure into 0.5 if you go you'll get 20,000 that's so why is this required sir journal entry they asked when you settle PC the entry is Liquidator account debit to equity share Capital you can't write Liquidator to equity share Capital 420 in that 420 4 lakh is face value and 20,000 is premium okay so that's where all the small small adjustments matters one one small mistake you do two two marks going the that's where it adds up so practice and be a little careful is very much important done now people problem not over you I think you are done but problem is not over yes no okay so this is the breakup so finally to tell total PC is 53,000 in that 1ak 10,000 was issued to preference shareholders 420,000 totally is given to equity shareholders and this 420,000 was settled by issuing new shares at premium and the face value of the new Equity shares is 4 lakh and the premium element is 20,000 you got it okay first working note of purchase Method we have done that is is finding out PC in fact first working out was actually our net assets here PC and net assets are different or they are same PC and net assets are same means will you get any extra Goodwill or extra capital reserve or it will not come it will not come because one Goodwill you already taken over they told in the problem Goodwill of selling company are taken over at what value 50,000 other than this 50,000 Goodwill are you getting any extra Goodwill or no Goodwill No Good Will why because PC is also 530,000 net asset is also 530,000 so when you compare are you getting any profit or loss or no profit loss no profit or loss so that working note if you want to prepare you can prepare otherwise you can skip done now the journal entry journal entry you should tell they ask journal entry now in fact they asked you tell three journal entries first one tell journal entries in the books of purchasing company ah business purchase account debit to Liquidator of selling company selling company here is why how much is the PC total you pay to purchase business 530,000 that is entry you will pass now when you purchase a business as a purchaser what and all you'll get as a purchasing company what and all you'll get you'll get selling company assets liability also reserves in Surplus or only assets liability this is not reshuffling this is actual business purchase so you can only acquire selling company assets and liability Book value or agreed value agreed all the assets you debit one by one all the liabilities you credit one by one you don't have to go to the question you already made PC working note no all assets agreed value is already over there here all liabilities agreed value is already there over here debit so debit see check here 50 150 160 check a 50 150 160 then machinary inventory 157500 rateable 92500 and 20,000 cash all assets we have copied from PC working no need to go back to question manageable because anyway PC we calculated by net assets no for net assets we take Book value or we take agreed value agreed value so hence you can copy from this or if you don't want it you can go from question and and copy it also your choice answer huh ah no not it's not taken over at one l oh here you're saying they have written ah they you know what I say it do extra cholesterol they have they show provision for doubtful de separately 7,500 yeah you do normal you WR 9 to5 it's okay we will not remember all that stuff okay so it is okay they show datas at one lakh they show provision separately you directly write instead of one lak you direct write 90 to 500 it's fine one effect I say know sometimes they'll do extra fitting one one problem they keep changing but you write 90 to 500 hope that is fine so yes no all assets debit all liabilities we have credited then here we here we have credited business purchase it's an actual account or dummy account so how do you cancel credit business purchase 5 lakh 50,000 okay people that's all is this entry second entry all about third entry is settlement what did you settle the Liquidator PC but how and all PC is settled some by issuing equity share some by issuing preference shes so the next entry will be Liquidator of selling company 530,000 how much was given as preference shares in this 530,000 how much did you give us preference shares 1,000 stop was this this you have settled by issuing preference shares was this new preferen issued at premium or at paron paron why because they said in the previous problem in the problem that the words premium was used next to New preference shes or old one so the old one instead of settling one lakh you have settled 1 lakh 110,000 by issuing new preference shes at par so if company issues preference shes what will they credit if company issues preference shares will they write preference shares or preference share Capital preference share Capital what percentage preference Shares are issued by the new company 9% preference shares so you will credit 9% preference share Capital 1 lak 10,000 got it and balance PC was settled by new Equity shares what was that new Equity shares issued at par or at premium premium you already know the break up breakup yes total is 420,000 in that face value of new Equity shares is 4 lakh Premium element is 20,000 so you'll credit to equity share Capital 4 lakh to Securities premium 20,000 because if Shares are issued at premium means the premium element will go off to Securities premium this is the journal entry okay zaru all right after this entry extra fitting will come Mutual Owings is there any Mutual Owings over here always remind yourself of that is there any Mutual Owings no not that we see correct no so mutual Owings not there any stock Reserve is there any stock Reserve adjustment not there amalgamation expenses that is also not there then any statutory Reserve to be taken over is there if it is there you know what to pass the journal entry refer your chartbook entry is there Chapo copy P yes or no that's all all that is an add-on concept it can be brought into any question this question is probably already leny so that's the reason they've not brought in all that otherwise usually they'll bring in that also I mean these are the entries people yes yes yes yes yes yes yes okay then they asked balance sheet balance sheet for some reason I feel you can manage yes okay but just uh tell me or you want to spend and cover it Off 2 three minutes May H okay sir what is there you do huh okay no problem yeah fine sir why limited share Capital will come no har will it come yes 11 lakh what you do is share capital of har you take to this you add the value from journal entry check the journal entry take your calculator 11 lakh we are doing total share Capital total share Capital means uh we have to take equity share Capital also preference share Capital also check your journal entries is there any new Shares are issued yeah you credited preference share Capital by 1 lakh 10,000 equity share Capital you Deed by 4 lakh so add these two from 11 L if you add four it will be 15 15 plus 1.1 is 16 lak 10,000 that is a share Capital but when you solve and put it up you have to show equity share Capital separately preference share Capital separately not here in not to notes like the way they have shown here by disclosing authorized share capital in fact I've showed you three things you need to show in share Capital as a disclosure authorized Capital issued subscribed and paid up Capital out of the number of shares how many shares are issued for consideration other than cash three these three disclosures you need to give take a call based on time because it's easy for me to say you do it but I'm not doing it no yeah so that's the reason very easy to say you do it but at the end of the day we have to accept that that much time may not be available so hence I'm giving you all the shortcut method so depending on time you do whatever works out fine on that particular date and day okay coming back to next two reserves and surplus or will vuka reserves and surplus come up it's a purchase Method whenever doubt comes always ask this question whether it is a merger method or purchase meth merger method everything will be taken over assets liability and reserves and surplus will be taken over at Book value this is a merger method or purchase Method in purchase Method selling company reserves in Surplus will come no will purchasing come yes but hang on any extra Reserve came because under purchase Method you may get capital reserve and if new preference shares or Equity shares if they're issued at premium Security Premium will come I think here Security Premium came for 20,000 if I'm not mistaken capital reserve is not there but SP is there for 20 I mean reses and surplus should be 90 yes where is it here 90,000 n okay next what is next long-term provision any change or no change so 50 + 20 70 trade payable any Mutual Owings no add 170 + 80 is 210 so 70 and 210 sha 70 and 210 balance sheet liability side match to come to asset side asset side you need to be little careful PP of hurry will be taken over at 8 LH what about W PP can you take over it 8 lakh or there is agreed value agreed value so you take 8 lakh don't take this agreed value they've listed at 1 by one so don't take over this this is Book value but we have taken over at agreed value what is agreed value Goodwill is an intangible ass don't add that is building a PP yes add 8 lakh of hurry plus agreed value of w for building is 150 add plus machinary 160 so 310 so 11 L 10,000 now so 11 lak 10,000 must be PP value given done okay next intangible asset what and all intangible assets we have good will of harika 50,000 will come as it is wuka can we take 25 or they've given different value they've given 50 so harika 50 wuka 50 so that makes it total one lakh taken yes next what is next uh where where ah here inventory sir Hara 250 but Woka can we take 1 l75 or 10% lesser 10% lesser so do that 175,000 minus 10% you do then add 250 what are you getting in fact you can refer your working node also in PC working node also it is there 4 lakh 4 lakh how much 4 lakh 7,500 if there is stock Reserve do not forget that if there is stock Reserve you need to reduce okay usually the stock Reserve adjustment more than amalgamation they ask it in consolidation examination but it can come in your amalgamation also it's a common concept that's our indication they're saying get out okay fine we we'll try at least we'll finish this trade receivables 2 lakh of harur wuka 1 lakh or 7 and a half% lesser that is 90 to 500 so total will be 2 lak 90 to 500 yeah got it then Cash Cash may be careful some adjustment may be there 50 plus 20,000 is there any cash any adjustment check the journal entry that's the best way to figure it out anything in journal entry no that means it's a straightforward here and there no adjustment balance sheet matched that's fine so I hope you can manage the balance sheet activity so far whatever we did it is accounting in the books of purchasing company for purchase Method that's all they asked or they also asked to close wuka books selling company books also they asked do what all you prepare luckily they ask Ledger sometimes they will irritate you too much by asking Journal because all selling company we are comfortable because we know the format to structure format to pointers for Ledger I will put Bouncer and say prepare journal entry then each Ledger you need to visualize and put it up in journal entries you will get it but one or two minutes extra they can ask that to how they can ask is I call I is not your dman so don't think that what sir they're playing with our emotions so much your one signature later on will carry lot of value okay so you need to also remind yourself that it is not lkg exam or bcom exam you are writing one of the toughest course after IAS probably the next toughest exam is CA right so when C get so much of credibility in the market CA students has to be tested otherwise the course will lose its value so just remind yourself that for me to pass I need to put the efforts if many people don't pass the value for me as a ched accountant will increase you can be selfish that way it's okay if everyone is selfish then it is not selfish because everyone will put efforts no more so it is okay yeah all right so it is fine don't curse anybody okay so no point in regretting you need to do it everybody has gone through this grelling journey just like that nobody gave certificate to us even we had to also study for 12 hours 14 hours sometimes I remember studying for 17 hours a day also other than sleep I don't remember I mean sleep and few other things okay so even I don't remember doing anything only thing was study studies and studies at last few days me everyone has to get into that Zoom part and parcel now bindas no you can also become bindas little later now not so bindas because I have to study now for you for me to pass was very easy at least if you don't know means M this comes means do that but for you know I have to tell logic also I have to tell pointer also this also that also 101 things so that means more job now but still it is nice to bring see that smile on your face ultimately when you clear so for that particular smile it's okay these efforts are worth it now come back so why limited Ledger what in our Ledger we need to prepare realization account okay now let's remind ourselves of that realization rules though one problem if you do it properly and recap everything that is good enough so first is what is Step sir all the assets you need to close Okay assets have debit balance how do you close credit so the journal entry will be realization account debit to assets sir you are closing the ledger so will you take agreed value or Book value book value now which ler Jo May don't take purchasing company you closing selling company ledgers so what is selling company assets I have cancelled a [Music] few okay PP value in fact IC has done one small jard over here you can also probably follow that ideally in my opinion sir PP is a separate Ledger intangible is a separate ledger so every Ledger you need to close separately you know what IC has done they added everything what is the total assets 570 they passed the journal entry realization to sary asset 570 if ICI mother body gives a short shortcut means La no questions in my opinion it should be passed individually because each are separate separate ledgers but I are giving shortcut we will take shortcut so all sunry assets we will credit at 570,000 at at at Book value only one so all assets so all assets dearu now outside liabilities what are the outside liabilities 20 and 80 so 20 all liabilities have what balance credit balance how do you close it debit it so the entry will be what liabilities account debit to realization account so when you post this entry and realization account you'll post it as by liabilities list out 20 and 80 liabilities they called out separately 20 and 80 done now two steps come okay third step sir are you selling the assets individually settling the liabilities individually or we sold the whole business business we sold the whole business and what will we recover PC okay that means PC we have to recover from purchasing company means purchasing company is our dat so what is the journal entry for PC recoverable purchasing companies our datar means we should record datar you will credit or you debit off something okay just one second P time out Factor this is also giving signal get out huh I can't even ask is everything all right no response only screen is blank 1 minute online guys the screen is off I don't know whether you are there or you able to hear me just give me a minute I think it came but it I think it is back yeah I think OBS is still running thanks here also fin online also you confirm p are you able to see me hear me okay all perfect super okay come back now I think now it will not I think every 50 15 minutes I have to shake this I think to avoid the timeout okay so PC recoverable PC recoverable what ENT you pass purchasing company account debit to realization account what is the PC value sir total PC value is 5 lakh 30,000 so in realization account you'll write by harur limited that is a purchasing company for 5 lakh 30,000 easy this is one next is realization expense it is not there in this problem if at all it is there what entry you would have passed realization account debit to bank account in this problem not there zero if there is any reimbursement of realization expense means you'll write buy bank account not there zero okay people this is how the format is working next is if you paid any extra money to preferential own or if you feel no sir I'll not be able to remember everything here means no problem so far you remember don't close any Ledger don't close any Ledger till you have done that's okay then move on to the next ler that way you'll automatically get any adjustment if you have missed out so come back to the problem all assets you have closed on yes all outside liabilities have you closed yes next the only two Ledger spending is what sir share capital and reserves and surplus okay share Capital they've given a breakup come to note number one in note number one we have one kind of share capital or two types two types one is preference share Capital how much one lakh okay now preference share Capital has credit balance how do you cancel it debit who gets the preference share Capital value Equity shareholders will get of preference shareholders will get so when you have to close preference share Capital what journal entry you will pass preference share Capital has credit balance to close you will debit this will be transferred to which account PR preferen share holders account that means the next account the next Ledger I'll be opening is to close a preference share Capital account I have to open a ledger called preferen share holders account so next Ledger is preferen share holders so in preferen share holders account you'll write by preference share Capital One got it all if you don't know the steps don't don't close any Ledger as as much as you know put it up then leave some space and move to the next leder that way you'll not do any mistakes fine so this is done now sir did you pay any money to prefer share holders don't pay we paid no out of PC how much we gave to preference share holders 1 lak 10,000 hey you want means don't tell some nonsense you'll tell enough enough class okay how much we paid to preference shareholders 1 lakh 10,000 sir if you pay cash to preference shareholders what is the journal entry preference shareholders to cash did we give cash to the preference shareholders or new preference shares new preference shares that means what is the entry instead of saying preference shareholders to cash you'll write preference shareholders account debit to don't write preference share Capital sir for a company issuing preference shares it is preference share Capital who is issuing new preference shares purchasing company you doing all this drama in which company books selling company did selling company issue preference shares no I mean instead of writing PR PR share Capital you'll simply write preference shares of the new company what is the new company har limited that's all you worth how much 1 lak 10,000 is The Ledger matching or there is a difference difference so instead of paying one lakh you pay to the preferent shareholders 1 lakh 10,000 how much extra 10,000 extra sir if you paid extra means for Equity shareholders perspective it is a loss that 10,000 loss will be transferred to realization okay so even if you don't remember this point remember we wrote it as a point if you paid any extra money to preferent shareholders you have to account it as a loss even if that doesn't click when you open this Ledger that point will automatically click like that one way or the other you'll be able to solve it so you have posted what here in preference shareholders account you have written by realization that means in realization account you'll right two preference shareholders account and that's all it is so preference shareholders account is fully closed off now done all right so why do we prepare realization account finally to get to know whether to close the assets and Li ability SC Ledger that is one and to know whether we ultimately made a realization profit or realization loss if it is realization profit means it'll come balancing figure will come on the debit side just like your normal trading pnl account if it's a profit means you'll write it as 2 GP to net profit no so if it's a profit means you'll get balancing figure on the debit side otherwise you'll get if it's a loss means you'll get balancing figure on the credit side realization profit or loss and all no you used to transfer it to Partners here you is there any Partners or we have shareholders which shareholder is still pending Equity shareholders so this 50,000 is arrived as a realization profit to be transferred to equity shareholders calculated or balancing figure balancing that way this Ledger is also closed off okay people now only Ledger still open is what equity share Capital all the reserves and surplus and equity share so next all that will be closed when you open equity share holders so this if you remember that six components the closure will happen soon six component is what Equity shareholders will get six components I told one is equity share Capital all the reserves and surplus miscellaneous expenditure rare but it could be there then realization profit or loss then PC and surplus cash if it all it is remaining okay now first go back to question how much is equity share Capital 3 lakh so equity share Capital has what balance equity share Capital has what balance credit balance how do you cancel it debit so you'll pass the journal entry equity share Capital account debit three who gets this equity share Capital preference shareholder or Equity shareholder so you'll write here two Equity shareholder 3 LH yes so in equity shareholders account you'll write by equity share Capital 3 lakh yes people similarly all the reserves and surplus how much is the reserves and surplus of selling company 70,000 all the reserves has what balance credit balance how do you close it debited so all the reserves you need to debit and this will be entitled to whom you'll transfer this off to equity share holders account how much 70,000 so in your equity share holders account the posting will be each Reserve you have to debit one by one okay here I think only one Reserve is there called General Reserve 70,000 two components over what is the third one preliminary expenditure or deferred revenue expenditure we read the whole question did we find that no rare if it is there consider fourth one is uh check your Ledger in realization account what did you get realization profit the entry here you passed is realiz account debit to equity share holders in equity shareholders account what will you post it as buy realization account realization profit of 50,000 Okay g all right next component is PC how much PC you give in total to equity shareholders the total PC you give it to equity shareholders 420,000 sir if you paid cash to equity shareholders what is the journal entry if you paid cash to equity shareholders the entry is equity shareholders to cash cash here did we settle this 420 in cash or new Equity shares so what is the journal entry for that Equity shareholders account debit don't write equity share Capital it's a selling company will selling company issue new Equity shares no that means instead of equity share Capital you'll write what to equity shares of the new company which is Hur limited 420,000 n people Surplus cash is there or every cash is taken over by new company Surplus cash is not there that means this particular if you just check this side total is also 420 that side is also so what debit to credit to match do that means anything more to be done or everything done everything done that's all this is crunks so conceptually not difficult few things small mistakes here and there can happen that if you are able to identify incorrect you will get good amount of marks provided you solve within time okay sir all right sir just on the safer side one more problem on PC calculation I would like to do would you be fine with that right another 10 minutes would you be able to B with me on that for another 10 minutes okay so even if you say no also I will still do it that's a different issue uh question number 16 this is a question which emphasizes more on the PC element how to calculate the PC study material question only but a good question J is saying mistake my previously uh whyu limited had cash equivalent of 20,000 you did not open Cash Ledger only he told but JJ forgot one thing sir in realization account we pass the entry individually or we pass Sury assets check in realization account we wrote Sury asset 570 to get this 570 cash is already added so cash is also transferred that's what I said in the point if cash and bank balance is taken over by the new company can transfer cash and bank balance also to realization it's done it's not done individually ICA suggested a shortcut of passing and it's taken over much I didn't do mistakes okay now I can do but this one I didn't do yeah uh next is uh 16th question in our class notes so sun no Neptune question all right we have done I think two or three questions on this PC concept but anyways we'll see how much of it you remember at this point of time sun and Neptune had been carrying on business independently that is their problem they agreed to algate and form a new company Jupiter with authorized share capital of 4 lakh divided into 80,000 shares of 5 each H this is where IA you have to give credits to ICA okay sir now here and all if you say they will say we are issuing new shares and all they will give drama okay what students will say huh new shares face value not given generally Equity shares face value is taken to be 10 I will take it as 10 but unfortunately that student forgot that in the first line only they told each equity share value is not 10 it is only five PC is wrong means your journal entry your balance sheet everything is wrong so invigilator has the option entirely to cancel your answer sheet because every working note amount will not match so that is where small small small things makes a huge difference then a student will come out of the examination Hall saying IC will not give marks only Dill small mistake here that means what will the invigilator do every working note is wrong means can you give the marks if you are an invigilator if someone says you check working note and accordingly give marks if none of it matches means will you give marks or you'll give zero zero so that means it's our mistake we can't blame so be a little careful Aram say it's okay all right so new shares face value is not 10 it is five that is one no I'm not scaring you by sharing all this okay just saying that at least let us know it here so that we don't commit in the examination Hall here in the classroom setup as much as possible let's commit any mistakes okay but common mistakes which I identified and few things which students have shared with me I'm sharing it so that we can avoid this the intention is never to put you down people that's the least thing I will do all right the intention is to make sure that you don't commit the silly mistakes and ultimately kind of get into the negative side of things that's only intention please don't take it any other way okay I'm still your Weller okay you are our sadas if you are not there who will feed my family who will feed my foreign trip oh no nobody you are only reading me everything come yeah on 31st March 20 X3 respective information of sun and nepe they have given okay so they have not given full balance sheet they've given some abstract some necessary data they've given share Capital current liability PP and current assets these four information of the two companies they've given and here who is the purchasing company sun and Neptune have Amalgamated and formed a new company Jupiter so Jupiter is the purchasing company sun and Neptune is the selling company so who will get PC owners of selling company here one selling company is there or two selling companies since there are two selling companies you need to calculate PC for sun also you need to calculate PC for Neptune also we can do it parall but two PCS are required done all right next revalued figures of non-current assets and current assets they have given so this is the book value this is the revalued amount okay s all right for accounting if it's a purchase Method if it's a purchase Method will we take Book value or revalued amount revalued revalued means agreed value okay all right we will just conclude in fact uh revalued assets are revalued then probably that's an indication that this is not a merger method it is a purchase Method because you tell me in merger method should we have to revalue any asset is that required or it is just a reorganization reshuffling in reshuffling man all agreed value will not come the moment they give you agreed value that's probably a strong indicator that this is a purchase price because why do you revalue any assets because you want to take over that asset that agreed value sence it's a purchase Method indicator probably now dears and credits include 43 350 owed by sun to Neptune sun has to pay to the Neptune 43 350 for sun is a credit for Neptune it is a dear this only we call it as what Mutual Owings what should we do for Mutual Owings eliminate eliminate more importantly where will you eliminate in selling companies books or purchasing company books see if you're confused think of it sir as long as star is one company NEP star which is other one s so as long as sun is a separate company Neptune is a separate company can one pay the other can Sun pay Neptune as long as sun is a separate company Neptune is a separate company one can pay the other but the moment they amalgamate the moment they amalgamate they are one there are two companies or they become one they become one now who will pay whom nobody so that means where you need to cancel when they amalgamate and become one company and that time you need to cancel so cancellation should not be done in selling company book cancellation should be done in new company's books and here Mutual o is come in the form of datar and credit worth 43350 great purchase consideration PC check is Satisfied by issue of the shares and debentures so debenture is not PC sir debenture given to debenture holder is not PC debenture holder is owner or not an owner so whatever you give it to the debenture holder of selling company is not PC but whatever you give it to the owners is PC you can give the owners Equity shares you can give them new preference shares you can give them debentures you can give them cash or any other asset doesn't matter whatever thing you give it to the owners every component will come part of PC so they only question is clearly said that the PC is satisfied so PC is given by issuing shares and debentures is this debenture given to the debenture holders or is this given to owners all these are given to owners that means is it part of PC very much yes 60 ,000 Equity shares of Jupiter new company 1 minute face value is not 10 face value is five it's given in the question okay to Sun and Neptune in proportion of their profitability of respective business based on their average net profit so shares how many shares are totally given here PC is missing or given one part of PC that is the share part of PC is missing or given given how much 60,000 shares each value how much five that means the total value of the shares given is 3 lakh are one selling company or two selling company I means this particular 60,000 you have to distribute among sun and Neptune you will distribute based on what they said average net profit for how many years 3 years is average net profit given yes quickly find out how do you find out average if they give you three years profit and if they ask you to find out average how will you find that add all the years profit and divide by three if any year if there is a loss means you'll add or you'll subtract subtract so do this plus minus and tell me and divide by three plus minus and divide by three you do how much are you getting are you getting 275,000 similarly you add these three and divide by three what is average profit quickly quickly quickly tell I'm also hungry you're also hungry 325,000 so that means average profit so 60,000 Shares are distributed and average profit ratio of 275 is to 325,000 so basically in 275 and 325 ratio you need to distribute the shares so how much sun will get quickly tell out of 60,000 shares 275 275 plus 325 if you add you'll get 600 H correct that means I think this is 27500 okay then nepon is other company right 60,000 shares distributed in 275 325 ratio so if you distribute in that ratio you'll get 32500 this is the value or shares Shar shares sir for accounting we want the number of shares or we want value of shares value of shares to get value of shares don't multiply by 10 each new company share face value is not 10 it is five so multiply if you multiply what is the value value of new shares will be how much 27500 into 5 is how much 37,00 1 lak 37 500 and this one will be 1 lakh 6 to 500 that's what they've got it here the PC given for first company is 137500 another one is 1625 got it off it's done pretty easy in fact childish game next they only give shares or they give debentures also dentures also are issued this is the highlight of this question check this 15% Dentures of Jupiter new company at par these new de benur are issued at par only to provide an income equivalent to 8% return return business as on Capital employed in their respective business after revaluation of assets you should not ask me to repeat this and all you should know this adjustment we are revising are you able to recollect whatever it is one okay if you forgotten also no problem at least they've used the word Capital employed sir Capital employed net assets are one and the same okay Capital employed means your shareholders funds shareholders funds Capital employed net assets are used interchangeably they're all same okay now at least if you didn't get the full thing they use the word net assets right they use the word Capital employed which is nothing but net assets at least let's do that first let's find net assets how many selling companies two selling compan or net assets will we take Book value or agreed value in fact problem is so nice they only told that we should take after revaluation that means we should definitely take what agreed value so prop this is this is the book value and this is the agreed value yes no so let's calculate net assets what is the agreed value of pp 710 390 take a 710 390 then current assets agreed value 299 500 157 750 taken if you take this these are two assets we want assets or we want net assets how do you get net assets minus liabil outside liabilities also you need to do what is the only outside liability we see in the question liability which is how much 597 and 180 1802 if you do this you'll get net assets you can call it as shareholders funds you can call it as capital employed you can call it as net assets whatever it'll look sir this number is not matching with share Capital sir why will it match sir you are taking net assets at Book value or agreed value agreed value share capital is Book value why will it match correct or no yes so net assets means what you have to take agreed value sence it will not match here if they give you by chance agreed value of share Capital you can take that also and directly get it here we don't know that so hence we are ignoring that yes people okay what is the total Capital applied or net assets 42,5 37500 now let's read the sentence once again we are issuing debentures new companies issuing debentures at par to to to concentrate on this to provide an income equivalent to 8% on Capital employed that means when we read this segment in B fortification or when we segregate to provide an income equivalent to 8% return on Capital employed they're talking something about 8% on Capital employed let's find that capital employed is this multiplied by 8% what are you getting 8% I am not saying 8% question said I 33,000 here 29400 there okay now all right what is the sentence Now read the sentence once again you have to issue debentures you are a new company now we have to issue debentures as PC to such an extent that income equivalent that debentures generate an income equivalent to what 8% return on Capital employment very simple sir I'm the company you have invested in my company debentures what will you expect I I have issued debentures to you that means I have to pay interest you will you as an investor you will pay interest or you will receive interest rece receive interest indirectly they're saying you should issue that many debentures so that the interest to the debenture holder should be 33,2 because the return for a debenture holder what is the return for a debenture holder the return is interest so that means the debenture interest the new debenture interest should be this much got it up everybody manageable and what is this new debenture percentage 15% sir tell me quickly how do you calculate interest amount of debenture uhuh interest on debentures how do you calculate first you'll take debenture value and multiply by the interest rate if you take debenture value and multiply interest rate you'll get interest amount correct if I give you interest amount if I give you interest rate can you find out debenture value for me how do you find out deure value interest amount divided by interest rate yes or no here do you know interest amount yes 33,000 do you know interest rate on new debenture yes 15% interest amount is 33,000 interest rate is 15% means divide the 220,000 you have to issue new debentures worth 220,000 that's all it is okay sir if you want can cross check also 220,000 is a value of debentures each debenture carries an interest rate of how much 15% multiply 220,000 into 15% you do 33,000 you are getting the interest that's what they said in the problem understood are yes sir okay next one same way you'll have to calculate for the other company also what is the return for the new debenture holder should be 29400 that means this 29400 is a interest amount do you know the interest rate on new debenture yes 15% how do you get debenture value interest amount divided by the interest rate 29400 divided by 15% if you do you'll get 1 lakh that is the PC given in the form of debentures so PC given in the form of equity shares is this much PC given in the form of debenture is that much if you add the two you will get the total PC manageable everybody once more or okay good question I think we have done three questions like this in a regular class same okay they'll use the words interchangeably instead of 8% I think in one of the problem instead of debenture I substituted it as preference shares for return for the preference shareholder is preference dividend that's all like that also they can ask but it's pretty much the same thing if you want to find preferen share Capital amount then the instead of Interest amount you'll write the denominator dividend amount instead of interest rate you'll write the denominator divid that problem also we have solved same okay all right now this is the main highlight of this question done people now 2 minutes quickly can we review of this yes okay now first since assets are revalued automatically it is which method purchase Method in purchase Method what is the step first step is to find out net assets have you find out already net assets yeah Capital employed and net assets are same which is how much 42,500 and 367 500 got it second step is to find out PC have you find out PC yes for uh Sun we gave Equity shares PC worth 137500 we issued debentures worth 220,000 add these two what is the total 137500 plus 220 if you do my I'm saying it is 357 500 correct similarly for the other company I think Neptune these two you add 160 to 500 sh 196 debentures if you add I think you should get 35800 done G yes sir okay net assets denotes net worth of the company compare what is the net worth of sun 42,500 but PC paid is just 357 P that means the purchasing company paid more or they paid less less that means they made loss or profit profit profit under purchase Method will be transfer to capitalism so these two difference is capitalism again here also same thing capitalism both the scenario is as capitalis so if one comes Goodwill one comes capitalis means what to do net off and take whichever is higher suppose capital reserve is 55 Capital right capital reserve is 55 Goodwill is suppose 10,000 Which is higher Capital so Capital res Only You net off and take it as 45,000 like that you do the accounting but here anyway both are capital reserve so both you add totally capital reserve how much 64,000 okay got it this question highlight is only about the PCA calculation but what is the requirement we didn't read that compute the amount of shares and debentures already done and they directly ask to balance sheet ah this is the killer because normally our mind is used to Preparing working notes journal entry and then balance sheet now journal entry you have to visualize and directly prepare balance sheet okay but here un I mean fortunately the data is too much or very less very less so in this you can manage but if they give a bigger problem like this little bit of carefulness is required there here problem okay balance sheet they're giving now you tell me purchasing it's a purchase Method so assets and liability was taken over at Book value or agreed value what is the agreed value of pp 710 quickly take 710 and 390 so that's your balance sheet or maybe I'll do off the asset side because that information is available 710 and 390 11 lakh okay for current assets how much is current assets 299 500 and 157 500 Jo J don't forget Mutual lowings where you should can sell Mutual Owings in selling companies books or new companies books is there any Mutual Owings over here yes dears and credits include 43350 by star to Neptune so here they have not given datar and all separately dat datar and all will come where under current assets so they have not given breakup of current Assets in current assets maybe some portion is dat are some is Bill receivable some is Cash we don't know so what is the addition of these two add these two and mutual Owings we should keep it or eliminate so minus 43 350 you need to do that's what we have done here 4 299 500 plus 1575 750 agreed value minus Mutual Owings of this much that gives you a balance sheet asset total done G now the liability side sir how much share Capital new company shares new company issued 60,000 each share face value how much five that means the share capital of new company will be how much three LH direct then reserves and surplus only one it's a purchase Method it's a purchase Method so selling company reserves and surplus will be taken over or not taken over not taken over only two extra Reserve make come in this cases one is capital reserve another one is if Shares are debentures if it is issued at premium that premium will be transferred to Securities premium satary reserve not there ah one more that can come is satary I stand corrected three things can come thank you okay in this problem do we have Securities premium no do we have capital reserve yes the total capital reserve is how much 64,000 we don't have any statutary reserve so reserves in Surplus capital reserve will come for 64 then current liability these two you add because there is no agreed value if agreed value is not given we'll take over at what value book value but do not forget Mo Mutual you have to reduce from datar also you have to reduce from credit AR what ISO value 43 350 so these two you add and minus 43 350 you do how much are you getting 7 lakh 33 got it this is the value we got it from the question but hang on was PC given only in the form of shares or also debentures debentures so if a company has issued debenture means it's a current liability or non-current liability non-current liability under non-current liability you have to create a category called long-term borrowings under long-term borrowings what is a percentage new debentures 15% you need to show okay sir how much debentures we already know we already done as a working note uh for this company 2 20 for other company 196 add these two these two if you add you'll get how much 46,000 there goes your balance sheet C to that's all this is balance sheet matching yeah I told this a simple exercise but PC was the highlight of this particular question so with this amalgamation as much as possible from my end I've tried to conceptually and practically revise with you right so I think today it's good enough you already reached that time so today it's good enough so we will take up the balance sessions tomorrow same time come at the same time all right every day it's going to be same 7:30 to whatever time ending time don't ask me even I also don't all right have your nice SAU enjoy take care see you bye-bye study also happy morning people so continuing our marathon discussion further so the next topic we shall be revising is a big ticket topic called Consolidated financial statements here we talking when we say Consolidated financial statement in our syllabus there are three consolidation one is consolidation with subsidiary consolidation of associate company consolidation of joint venture company here we are talking about as21 Consolidated financial statement which talks about holding company and subsidiary we're talking about holding and subsidiary consolidation that's given in accounting standard 21 okay so what it says we'll see usually a 14 marker question usually is expected from this particular topic let's see how we can Pace it out okay first of all this particular a 21 consolidation any random companies can you consolidate no first of all Consolidated financial statement simply means adding to or more company financial statements that added financial statement only we call it as Consolidated financial statements okay so Random company of financial statements you cannot add if you want to consolidate one company of financial statement with another one key component that we look for is control only if control is there we prepare CFS as per as21 otherwise we don't and when can we say we have control if one company owns more than 50% voting power in the other company okay like let's say a limited owns let's say 70% shares of B limited with 70% will a get control yes if one company owns more than 50% shares in other company then we say this particular a limited has control over B limited a limited we call it as holding company B limited we call it as subsidiary company in Consolidated financial statement a limited B limited financial statement we added that added financial statement only we refer to as CFS as an Consolidated financial statement okay that mean very easy job no simply take the calculator and just go on adding no it is not simple as that we there will be certain consolidation adjustments that will come okay so what are those remember we had a particular format for this i' explain to you the logic of that which we have solved many questions let's have a quick recap of that format in Consolidated financial statement preparing Consolidated balance sheet is the easiest but working notes is what you need to keep in mind first working note in as21 consolidation is to find out the shareholding percentage now in this particular example May a limited owns how much percentage in B 70% that means who's holding the other 30% or somebody else is owning other 30% that's somebody else only we call it as mi mi is in minority interest so the first working node in Consolidated financial statement is to prepare is to know shareholding percentage of the holding company and shareholding percentage of the minority interest that's a first working sometimes we need to calculate this sometimes they would have given to you directly this particular data that is one second one is to find out the general Reserve you you prepare General Reserve Ledger account of the subsidiary company that's the second working note third working note is to prepare pendel account of the or P The Ledger of the subsidiary company third one fourth one is analysis of post acquisition profits of the subsidiary company here all the reserves and surplus of the subsidiary company you'll analyze that particular working not only we call it as working note number four you remember what happens in working note number four in working note number four all the reserves and surplus of subsidiary company we split into two categories first one is pre-acquisition profit and another one is postacquisition this pre and postacquisition profit of subsidiary company who are the shareholders in subsidiary company who are the shareholders in subsidiary company holding company and Min if you remember balance sheet you give the heading what is that under shareholders funds what and all you will show share capital and reserves and surplus reserves and surplus correct that means the share capital and reserves and surplus Belongs To whom it is whose entitlement shareholders entitlement so in this particular working not me all the reserves and surplus of subsidiary company will be distributed among holding company and minority interest because they are the shareholders in subsidiary company but instead of plane Distributing first we have to categorize the reserve as pre-acquisition and postacquisition we will apply it in the problem first we will quickly recap this and then we will apply all right next working note is to find out minority interest minority interest is a shareholder what will the shareholder get their share of share capital and their share of pre-acquisition profit and their share of post acquisition profit basically shareholder will get share capital and reserves and surplus but the reserves and surplus of subsidiary company is now split into two parts what are those two parts pre-acquisition and postacquisition hence you take minority interest their share of share Capital add their share of pre-acquisition profit their share of post acquisition profit this you will get it from working note number four Pi all right next step is to find out the Goodwill or capital reserve for this also there was a simple format what was that take the cost of investment the cost of investment if they have any pre-acquisition profit reduce if there is any pre-acquisition dividend reduce reduce the face value of the share capital of the subsidiary company to the extent of holding company share do this particular particular calculation if you get a positive number I told it is Goodwill negative number it's a capital reserve that's the next working note all right last working note is to find out the the reserves and surplus that you have to show in your Consolidated balance sheet in this case may what we have to do first take the parent company or the holding company all the reserves and surplus to that if you have any you you also have post acquisition profit holding company post acquisition profit if you have you add and above working note what it give it'll either give Goodwill or it'll give capital reserve if you get capital reserve consider this as well then certain consolidation adjustment like stock Reserve stock Reserve adjustment we saw in amalgamation yesterday so so if that is there that will come and if you have any pre-acquisition dividend that also needs to be reduced all this we will discuss in little more detailed way I'm just giving you this is the format we have followed for at least six seven questions that we have solved on consolidation in our regular class yes in this format may we used to present after this working Noe is over we used to prepare Consolidated balance sheet let's do a thing maybe some of you would have forgotten all this so to bring back our memory let's take up one particular question how it applies okay all right this this usually this sort of question is quite popular in examination pay attention to one in case you have forgotten okay otherwise it'll be a recap for you we'll see okay let's review this once from the following balance sheet of H limited and its subsidiary s limited drawn up on 31st March 20 X1 so they have already prepared hka balance sheet and Esa individual balance sheet is already given to you in the question using this data we need to prepare Consolidated balance sheet okay prepare the Consolidated balance sheet with respect to the having considered the following information reserves and pel account of s limited S limited is what here hedge limited is the holding company and S is the subsidiary company subsidiary company reserves and pandle data stood at 25,000 and 15,000 respectively on the date of acquisition on the day parent got control or the holding company got control over the subsidiary company on that particular day Reserve had how much balance 25,000 pnl had how much balance 15,000 okay sir that's what they have given and when was the shares acquired shares was acquired on 1st April 20x Z sir current year is ending on 31st March 20x 1 so what is our current year current year starts on 1st April 20 x0 and year is ending on 31st March 20x 1 which day did the parent get the control in subsidiary company they got the control on 1st April 20x zero I means on the first day of the current year itself the holding company has acquired the shares in subsidiary company if I say the word parent don't worry I've just finished my CA final class income in CA Final in indas we use the term parent we don't use holding company that's the reason that parent parent may come last three four months I've been doing C final that's a reason okay now so don't feel bad H all right but in your exam don't write parent you right holding company only all right uh now having said that so when did the holding company get control over subsidiary company at the first day of the current year on that particular day on this particular day only reserve and pnl balance subsidiary company they have given means indirectly they giving you what sir opening balance of General Reserve or rather opening balance of reserve and opening balance of P that has been provided to us so far cool all right next adjustment machinary Book value of that machinary is 1 lakh Furniture whose Book value is 20,000 of s limited subsidiary company they were revalued and they revalued at what value 150 and 15,000 respectively on 1st April 20x Zer okay for the purpose of fixing the price of the share great all right it's very simple suppose what's you said nidi you said ah tanu sorry suppose uh I want to buy tanu has one company okay I want to buy control in her company all right let's say 100% of her shares I want to buy all right what will she say now let's say there is a shares will have a face value will she sell the shares to me at face value or market value market value yes or no she'll say market value of the share is 150 rupees means for each share you give me 150 correct or no so that is what they said over here so for your consolidation purpose we should take we should take the book value of assets of subsidiary company or market value market value because the money you pay when the money to get the control holding company has to pay money to the subsidiary company will the money be decided on the face value or market value market value hence subsidiary company all the shares you should take it at or rather all the assets and liability you should take it at fair value is it okay with you two assets of fair value theyve given what is the book value of that missionary 1 lakh but the what is the revalued amount of that missionary 1 lakh 15,000 sad phase or happy phase happy phase Book value is one lakh revalued amount is 1ak 50,000 so market value is more than Book value yes or no all right similarly with respect to Furniture Book value is how much 20,000 market value is how much 15,000 now sad face because value of the Machinery in our books is only or furniture value in our books is only 20 but its market value is only 15,000 that's what they've given we'll see if you forgotten this adjustment in fact this adjustment three questions I remember doing it only on this adjustments alone but no problem we will recap it once again for you if you have forgotten because some of you wondering ah okay rates of depreciation based on useful life is machinary 10% Furniture 15% okay then they've given you usual balance sheet that's absolutely okay but watch out sometimes what happens they will give you here just check other non-current investment here holding company has acquired shares in subsidiary company now that means holding company will show this as an investment what is the value of the investment given in balance sheet 6 lakh don't conclude that H limited has paid 6 lakh to buy control over subsidiary company because is it necessary holding company should only have investment in subsidiary or they can have other investment also other investment also always check come to note number four what are they saying in note number four check we have a non-current investment which is how much total non-current investment is 6 lakh in that 440 is normal investment shares in s limited how many shares have we acquired in s Limited 800 and what per share 200 that means how much have you paid 1 lakh to get control over subsidiary company parent has paid only 1 lakh 60,000 that means this is the investment made by the holding company in subsidiary company is this investment made by the holding company subsidiary company or this is other investment these are other investment Okay g all right why is this important very simple sir for holding company this 1ak 160,000 is an investment it's an asset it's an asset correct but for subsidiary company this is share Capital because subsidiary is issued shares to holding company means for subsidiary it is share Capital so same component can you show both as an asset as well as share Capital because for holding company this is an asset it's an investment but for subsidiary company this is share Capital both can you show or both should be knocked off both should be knocked off instead of that what will come instead of that Goodwill or capital reserve will come is what we ear understood yes or no so both will get knocked off H all right all that knocking off exercise we will do other than that pretty usual notes. maybe if you want you can pay attention to the face value what is the face value of each shares of holding and subsidiary company 100 each great so General I mean all the reserves have given absolutely okay all right let's go back let's revise what is our format the main thing of consolidation is each format called logic I've explained I will not go into too much of Logics for the time being because I want to solve one or two more questions in in this regard so let's try to recap what is the first working node in consolidation problem and one second is it mandatory that consolidation problem you have to present in that working note only not necessary but I have created that particular format so that it works in all the problems we have a particular way of solving so it becomes easy for us so we will we have followed for all our consolidation question same format here also revision also we will follow the same format what is the working note number one we say shareholding percentage in subsidiary company should we have to find or given they only told parent owns how much percentage in subsidiary company 80% that means first working note is done or maybe first once all the working notes we'll recap first is what is working note number one shareholding percentage of holding company and minority interest okay second one General reserve of the subsidiary company if it is given in the question in this case it is not there or it is there it is there we saw Reserve here Reserve here you can treat it as General Reserve only it's fine third one is pendal account of the subsidiary company leder that is the third one fourth one analysis of post acquisition reserves and surplus of the subsidiary company that is your working note number four working note number five is for your minority interest working note number six is for your Goodwill or capital reserve working note number seven is your Consolidated reserves and surplus that you have to show in your Consolidated balance sheet last step is to prepare Consolidated balance sheet one by one we'll go in case if you want me to go a little slow on the first problem Tak fine okay all right working note number one sir holding company owns how much shares in subsidiary company 80% sir if holding company owns 80% means minority interest will own 20% so working note number one we don't have to prepare it's been given to you in the question that is done next is working note number two what is working note number two general reserve of the subsidiary company or any reserve for that subsidiary company that we will prepare I'm just calling it as general Reserve because that's what we used in our regular format if you want you can just write reserve of s limited that is okay now check what when is the current year beginning 1st April 20 x0 on that particular day do you know Reserve balance yes Reserve balance stood at 25,000 on 1st April 20x zero what is this 25,000 then Reserve car opening balance all the reserves will have what balance credit balance something which has credit balance there opening balance where it will come like credits has credit balance credits opening balance Which side will you write debit side or credit side credit side you will post it as what buy balance brought down 25,000 easy so far good all right now check the balance sheet when have they prepared the balance sheet the year beginning or year ending year ending that means in the balance sheet do you show opening balance or closing balance closing balance we are preparing General reserve of which company s limited come to S limited balance sheet check General Reserve General Reserve they prepared note number two come to note number two what is the general Reserve balance of subsidiary company 75,000 this is opening balance or closing balance closing balance where will closing balance of General Reserve be posted on the debit side as two balance carry down 75,000 clear opening was 25 closing has become 75 we read the whole question did they give you why it changed any reason they gave opening was 25 closing became 75 the reason for that change they have not given think logically how can General Reserve from 25 become 75 no only way of that is we have transferred some money from pnl to General so 25 for it to become 75 means something should come 50,000 balancing figure on this side what is that 50,000 amount transferred from pnl to General Reserve so you'll write here by pnl arrived as balancing figure so this particular Ledger is fully closed off any questions or confusions in this working note those of you who are seeing for the first seeing me for the first time and solving this in the first time I hope there is no such student like that is there all are our your like you're not see you have not seen me at all just like that you walked in okay so is it okay what's your name huh Uno un an R okay so an G Okay g all right next G online I don't I not even ask that question so so many people if they respond means I'll be going huh okay come back to the next sir working note number three is to prepare pel account of the subsidiary company now check similarly have they also given subsidiary company pendl balance yes pendl account of limited balance was how much 15,000 on which date 1 April 20x Z that means this 15,000 is what P account opening balance okay so opening balance of pendl where it will come on the in when you prepare pendl account Ledger of s limited opening balance will be posted on the credit side buy balance brought down 15,000 easy okay similarly balance sheet you prepare at the end of the year come to subsidiary balance sheet what is subsidiary company pnl balance sheet value 25,000 what is this 25,000 P account closing balance so pnl account closing balance where it will come to balance carry down 25,000 easy all right so did you transfer anything from pnl to General Reserve yes you posted it as what by P so means what is the journal entry here pendl account debit to General Reserve so in pnl account the posting will be what to General Reserve 50,000 that posting came in pnl also easy people we read the whole question any other adjustment they gave or nothing else nothing else and that means pnl Ledger should match this side total if you add see I've picked only these two these two if you add how much are you getting 75,000 that side also should be 75 are we getting 75 or there is a balancing figure there is a balancing figure how much balancing figure 60,000 is the balancing figure correct what is that balancing figure current current year profit okay obviously sir you'll if you have run the business for whole year means current year you'll make some profit or you'll make some losses so this 60,000 is coming on the credit side means obviously pnl balance has increased that means this is not current year loss it is current year profit arrived as a balancing F 60,000 this is the this data will be missing to us will not be given to us to find out usually we prepare this particular working note these are your three working notes first three working notes all cool able to recall with everybody okay next is working note online also cool people especially early morning we will be a and all yes you're able to work yes super if D says I'm able to recall matter over that's all okay D cool next working note number four is to what analyze the reserves and surplus of the subsidiary company one second go back who are the shareholders of subsidiary company holding company and minority interest what does a shareholder get what does a shareholder get what does shareholder entitlement what and all you will show under shareholders funds under shareholders funds in balance sheet you show share capital and reserves and surplus that means all the reserves and surplus of subsidiary company you have to distribute among the shareholder for consolidation purpose who are the shareholders in offs limited H limited to the extent of 80% minority interest to the extent of 20% so all the reserves and surplus gets a portion in this particular one by one yes people but before you apportion the reserves and surplus of subsidiary company you'll have to categorize it into two parts what are those two parts one is pre-acquisition profit another one is postacquisition profits first you categorize them and then you do the distribution okay so first of all what does pre-acquisition profits or pre-acquisition Reserve means name itself is saying pre-acquisition pre-acquisition means before holding company got control in subsidiary company what and all reserves and surplus subsidiary company already had that only we call it as pre-acquisition okay now come back to the question when did the holding company buy the shares 1st April 20 x0 correct that means what was the General Reserve balance on 1 April 20x 25,000 on the day holding company bought the uh shares 25,000 General Reserve balance balance was already existing I mean this 25,000 is postacquisition or pre-acquisition PR pre acquisition got it that means this 25,000 should come under post category or pre- category pre category that's what we doing here so line by line we do the apportionment first is opening balance of General Reserve how much is opening balance of General Reserve 25,000 that come should that should come under post or it should come under pre under pre 25,000 we have done what should we do instead of opposing the closing balance of General Reserve we go line by line item and we oppos each component will get distributed so 25,000 is the general reserve of the subsidiary company it'll be distributed among the holding company and minority interest in what ratio in 80/20 ratio so 25,000 into 80% if you do you'll get 20,000 25,000 20% if you do you'll get 5,000 like that first component easy all right next 50,000 this 50,000 came from General Reserve or it came from pnd am I Distributing only General Reserve or will I distribute also pel also P so that mean should I have to distribute this or it'll be taken care while P distribution when I distribute P this amount automatically will be taken care should I have to worry about that or not required not required so these two addition only 75 no these two if you add only you'll get 75 so if these two are taken care means closing balance is also automatically taken care so should I have to do anything more on General Reserve apportionment or not required not required so General Reserve apportionment is fully done yes people okay next can we go to the Pendle yes line by line item we'll go again p and Dela opening balance how much 15,000 sir when did we get the control 1 April on 1st April subsidiary already had a pnl balance of 15,000 I mean this 15,000 should come under post or it should come under pree it should come under pre so same thing opening balance of pendl how much is opening balance of pel 15,000 that again you distribute this is subsidiary pel again distributed among the shareholders who are the shareholders of subsidiary company holding company hedge limited and minority interest so in 8020 ratio distribute 15,000 15 80% is 12,000 15 20% is 3,000 like that okay s okay next uh right 60,000 Rupees 60,000 Rupees is what current year profit sir when did holding company again acquire the shares first April on the first day only holding company has acquired the shares and this profit is generated for the current year I means this profit was already existing when hold company acquired the share or it came later it came later that means this 60,000 should come under pre or it should come under post it should come under post so under post acquisition profit you will put current year profit how much is current year profit 60,000 okay zaru again this 60,000 distribute among H and minority interest in 8020 ratio 60 80% is 48 60 20% is 12,000 rup that way we are doing the apportion got it all right now sir how much did you distribute 15,000 did we distribute already Yes 60,000 did we distribute already yes correct sir what is the total of this 75 in this 75 only 50,000 you transferred to generalism have I already distributed 75 yes that mean should I have to take care of this 50 adjustment separately or already done already done because out of the 75 only out of the 75 only 50 have transferred to General reserve and entire 75 have given it off to the shareholder no that means again should I adjust anything for General Reserve or not required not required in that 75 50 of distributed means how much is remaining 25 if these two have distributed means 25 should have to do any adjustment or not required not required so that way even P andl account all the apportionment is done for easy people yes people no people once more people p now I'll be targeting tomorrow you not come okay okay all right next next adjustment is one second go back remind your yourself of that working note what is working note number four again analysis of post rather analysis of reserves and surplus of subsidiary company so it's only one Reserve or all the reserves all the res now this one check book value of missionary okay what is the revalued amount of missionary 15 sir Book value is 1 lakh and revalued amount is 150 means it's a revalu uation revaluation gain which you will park it in revaluation Reserve correct revaluation Reserve how much revaluation Reserve g 1 lakh became 150,000 means RR is how much ,000 correct correct should we ignore this or distribute this also distribute this correct so that is what should come in your working note number four again where is that P here revaluation adjustment on missionary how much 50,000 Rupees okay people so why you should come under pre sir it should come under post sir sir you have revalued what you have revalued what Machinery you have revalued machinary did subsidiary company purchase this missionary on 1st April or it was already existing it was already existing if it was already existing means this should come under post or it should come under pre it should come under pre that's the reason we put that revaluation adjustment under pre-acquisition okay people so 50,000 again you distribute among there is a revaluation Reserve again this Reserve will be distributed among who H limited and minority interest in 8020 ratio so 50,000 you distribute in 8020 ratio you'll get 40,000 and 10,000 restricted clear people okay sir only one asset is getting revalued here or one more one more which is that one more furniture check again Book value of furniture is 20,000 but market value is only or revalued amount is only 15 that means here it's a case of revaluation gain or revaluation loss revaluation loss doesn't matter right you all have to consider both evaluation gain as well as revaluation loss so revaluation gain if you're giving us a positive apportion mean positive apportionment means revaluation loss you'll give it as what negative for your furniture we have revaluation gain or revaluation loss how much revaluation loss the book value was 20,000 revalued amount is only 15,000 so if you compare 20 with 15 there is a revaluation loss of 5,000 where should I put this 5,000 under postacquisition or pre-acquisition pre-acquisition as a positive apportionment or or as a negative negative ation 5,000 okay zaru okay this 5,000 you also distribute among hch and minority interest in 8020 ratio 5 80% is 4,000 5 20% is 1,000 okay zaru all right sir should we can we net it off and record this it's a working note should be okay but ideally I would suggest do the things separately okay show it separately because this will have one more effect so ideally I wouldn't recommend the net off approach show showing it separately is what I would recommend but even if you net off also it's okay it's not a big deal so far good sir yes yes yes yes yes okay 1 minute 1 minute one minute hang on this particular adjustment no it'll have one more impact it will have one more impact can someone remind me what is that one more impact depreciation perfect one minute again come back to the data so subsidiary has charged missionary cut depreciation on what value one on Book value which is 1 L but for consolidation purpose are we taking Book value or are we taking revalued amount reval first of all why are we taking revalued amount because when parent when the holding company bought shares or got control in subsidiary company was a share price decided on the face value or market value market value that means all the assets and liabilities of the subsidiary company we should take over at what book value or market value market value only two assets market value is given that's the reason we are considering yes not people no so what is the book value of the subsidiary company missionary one that mean subsidiary company has charged mission has charged depreciation on 1 lakh do you agree with me so one lakh was check here if I've done it for your reference okay this is with respect to plant and missionary on 1st April 20 x0 on the day parent company or holding company got the control over subsidiary company what was subsidiary company missionary Book value one okay Zar what was the rate of depreciation on this missionary they have given check here the rate of missionary missionary depreciation is 10% that means how much depreciation subsidiary company charged 1 lakh 10% they have charged and it has become 10,000 okay sir at the end of the year the value of this asset is after depreciation 90,000 this is what subsidiary has done clear yes but should we take take Book value for consolidation purpose or market value market value is the market value on 1st April 20 x0 on the day holding company got control is the market value 1 lakh or 150,000 for for for missionary the value is 1 lakh 50,000 for it is lak 50,000 sir we are considering 150,000 for consolidation purpose means depreciation can you calculate on 1 lakh or 15 only for consolidation purpose if you are taking the asset value as 150 means a nice ringtone but I think we can keep it on silent yeah all right so if you're consolidation purpose if you're taking 150 means depreciation also should be charged on 1 lakh or 150 only 150,000 that means for consolidation purpose how much depreciation should be accounted 150,00 10% which is how much 15,000 got it okay subsidiary has charged how much depreciation 10,000 for consolidation purpose we should consider how much sir 15,000 got it that means subsidiary has charged more depreciation or less depreciation they have charged 10 but we should consider 15 so subsidiary looks like they have charged less depreciation how much 5,000 rupees easy enough they've charged less depreciation to the extent of 5,000 should we ignore this for consolidation purpose or consider consider okay sir sir depreciation you will charge at the starting of the year or ending of the Year ending of the year so depreciation adjustment should come under postacquisition or pre-acquisition depreciation should come under pre- column or post column post column yes now how much depreciation extra we should consider for depr uh consolidation purpose 5,000 this 5,000 I should put it under again pre or post colum post column one moment hang on Sir what was current year profit what was your current year a profit 60,000 now on depreciation did subsidiary charge or they have not charged not charged so due to depreciation what will happen to your profit depreciation is an expense due to this expense what will happen to your profit it should reduce correct but have you reduced or have you distributed 60 already it's distributed because are we Distributing at total level or individual item level we going line by line yes or no I mean 60,000 we have already distributed sir is 60,000 Rupees post acquisition profit is only 55 is it 60 or 55 why why 55 because there is extra depreciation we should charge now we should charge now after charging depreciation will profit be 60 or it'll become 55 55 but 60 I've already distributed that means I've distributed more means what will you do for depreciation you give it as a negative apportionment yes or no correct so you give it as minus 5,000 you put it understood people because due to this depreciation profit will reduce that is the reason yes since we have already distributed 60,000 you give X's depreciation as a negative proportion of 5,000 and this 5,000 same you distribute among holding company and minority interest in 8020 ratio that's why this is D done clear this is a good adjustment usually this is one of examiner's favorite from this particular topic this depreciation revaluation W stock Reserve adjustment which you have studied in amalgamation same thing okay and mutual Owings these are four adjustments usually we see in Consolidated balance sheet question usually they ask it okay all right sir we have this revaluation adjustment only on uh Machinery or also Furniture so on furniture so let's do the furniture same exercise come back I think I prepared it okay so what is the furniture Book value here here Furniture Book value is how much 20,000 and this is the book value on 1st April 20 x0 means opening balance so as for subsidiary company Furniture Book value is 20,000 so on the first day or the starting of the year if Book value is 20,000 means subsidiary would have charged depreciation on this 20,000 on on on furniture what is a depreciation rate given in the question on furniture the depreciation given in the question is 15% so how much depreciation subsidiary company has charged on this furniture they've taken 20,000 they multiplied 15% and they have charged a depreciation of 3,000 rupees okay sir after charging depreciation the value of the asset is 17,000 as per them yes people correct people if you want that match out with the balance sheet value also if you just check see check here miss furniture value as per subsidiary companies how much 177,000 at the beginning of the year it was 20,000 they charged depreciation of 3,000 so closing balance of the asset has become 70 this is what subsidiary has done this is what subsidiary has done but but for consolidation purpose we should take Book value of the asset or market value market market value is the market value of furniture on the date of control that is 1st April 20,000 or 15,000 that means for consolidation purpose we'll consider 20 or 15 15 for consolidation purpose we should take the market value of 15,000 yes people we already considered that and this was your 20,000 and 15,000 you compared and you got a revaluation loss of 5,000 that you already showed it under pre-acquisition that is already done yes no all right now sir if a consolidation purpose if you're taking the missionary value as 15,000 means depreciation also for consolidation purpose you should charge around 20 or 15 only 15 15 only what is the rate of depreciation on furniture 15% what is the opening balance 15,000 what is the depr for consolidation purpose depreciation 15,000 50% which is 22 5 for consolidation purpose depreciation should be 2250 but for subsidiary has accounted how much 3,000 that means in this case may subsidiary has charge less depreciation or more depreciation they charge more depreciation for consolidation we should take two 250 but subsidiary charge 3,000 how much more they have charged compare these two if you compare these two how much is that 750 subsidiary has charged more depreciation should we now now you tell me now for this 750 we should book additional depreciation or we should reverse subsidiary is charged more so that means we should charge more or reverse reverse sir when you book more depreciation profit will reduce now you are booking more depreciation or reversing reversing so when you reverse the depreciation what will happen to your profit profit will increase got it this is 715 we should show it as a positive apportionment everyone understood this because of this adjustment profit will increase got it but this should come under Posta or it should come under PRI it should come under post why because depreciation adjustment you do it on the date of control or end of the year end of the year I mean this 750 should come as a positive apportionment under postacquisition profit that only I'm calling it as reversal of depreciation with respect to furniture already calculated the value you don't have to put a separate working node you can show like this only the way I've shown it here directly you can show it but I have put up this working note like this here just for your reference to have better Clarity that's all in examination straightforward may you can present it like this only all right this 750 negative or positive apportionment positive why positive apportionment again tell me you you're charging more depreciation for consolidation purpose or reversing rever when you reverse depreciation profit balance will increase but have I increased profit balance or 60,000 have already distributed 60,000 have already distributed is the profit 60,000 or 60,000 plus 750 60,000 plus 750 hence the 750 give it as a positive distribution 750 80% is 600 750 20% is 150 that's all okay people any more adjustment or that's all that's all now just a total all this total you'll get 68 H limited pre-acquisition profit is 68,000 minority interest pre-acquisition profit is 17,000 total is 85,000 that's d g similarly post acquisition profit total I add all this you'll get holding company post acquisition profit share is 44600 minority post acquisition share is 11,150 and total is 55750 this is your most important working note in consolidation if you don't do any mistake in this working note you can have a big smile on your face that you have got full marks for consolidation ah except maybe in Consolidated balance sheet when they ask you may not have time to prepare notes to accounts so one or two marks at best may be deducted there but otherwise if you have done this part like out of 14 easily you can say that 10 to 12 marksa we have done okay remaining if you do the notes to accounts out of 14 you can get 14 that is based on your time you decide okay but watch out for especially for this working note can I move on to the next working note so working note number four over working note number five is what sir minority interest go back minority interest is a shareholder go back to your balance sheet you know balance sheet liability side you will show shareholders funds what and all you will show under shareholders funds share Capital reserves and surus that means what are the entitlements what belongs to the shareholders share Capital reserves andace minority interest as a shareholder and holding company or subsidiary company subsidary company that means minority interest will ask two things in subsidiary company what are those minority interest will ask their share of share Capital their share of reserves in Surplus now subsidiary reserves and surplus is reserves and surplus or it has got distributed into two categories what are the two categories pre and pre and post that means here you'll write what sir minority interest will ask their share of share Capital their share of pre-acquisition profit their share of postacquisition profit that's okay s come back what is the share capital of subsidiary company share capital of subsidiary company is one lakh entire one lakh minority interest will get or their share what is their share 20 20% so 1 lak 20% is how much 20,000 Okay g similarly this is your pre-acquisition profit of subsidiary company minority interest their share of pre-acquisition profit total is how much 17,000 so you will add Okay g similarly minority interest their share of post acquisition profit total is how much 11,150 add that so totally the minority interest that you will show in your Consolidated balance sheet is 48,1 15 this will come in your Consolidated balance sheet directly as minority interest need time to review or next able to recall everything again okay online also cool okay you be are awesome I tell you okay next one is uh cost of control in instead of Goodwill we call it as cost of control here okay either you can call it as Goodwill or you can also refer it to as cost of control one in the same so this particular working note will either give you Goodwill or it'll give you capital reserve Okay g all right how to do this we know this already sir for subsidiary if hold holding company has bought shares in subsidiary company means for holding company it is an investment which is an asset but for subsidiary company it is a share Capital right same component can you show it both as capital as well as an asset no it will get nullified instead of that what will come Goodwill or capital reserve will come so why will it come if it get knocked off completely no share capital is always shown at what value face value but investment is shown at market value correct no you purchase the investment at what value face value or market value market value so investment is shown at market value where a share capital is shown at face value so there will be a difference that difference only is accounted as Goodwill or capital reserve and consolidation purpose okay zaru yes people okay the format is what sir first we'll take what what are the two things we are nullifying here investment and share Capital so what is the parent how much did parent pay to get control total investment of the parent company is 6 lakh entire 6 lakh rupees the holding company paid to get control in subsidiary company or only 160 these are other investment to buy subsidiary investment parents spent only 160 so take that first is cost of investment 1 60,000 got it saru all right next to one second hang on H limited which is a holding company what is their share of pre-acquisition profit 68,000 now stop sir this is what sir this is pre-acquisition profit that means before holding company became shareholder this was the reserves and surplus got it total reserves and surplus is 85,000 in that holding company share is 60 now touch your art until tell should should should holding company get a share in this or they should not sir this is pre-acquisition profits pre-acquisition Reserve pre-acquisition Reserve means what all these reserves were made after holding company became shareholder or before before suppose before you became shareholder I have one lakh rupes profit ideally you should get a share in that or you should not you should not but company does not work like this I had told you company Works On All or Nothing approach okay now as I I had given you a regular class me example if you remember suppose you buy Reliance shares at 900 9 9 hours 45 minutes at 9 45 you purchase one shares of Reliance at 9 hours 50 minutes 5 minutes later you sold the shares 9:45 you purchase the shares 950 you sold the shares can you write email to Reliance and say 5 minutes I hold the shares give me my share of profit my share of profit you give can you write a mail like that my share of dividend you give me for 5 minutes like that and all if the company starts giving dividend no accountant will literally quit only there will be no CS in the world because sir every second May thousands of people buy the shares and thousands of people will sell the shares for one one minute one one second you'll go on Distributing dividend no it is not possible I means this company works on what sir when you company Works On All or Nothing approach as long as you are a shareholder you'll get everything the moment you sell the shares nothing is yours it's like the spiritual they say no nothing is ours okay as of my everything is mine once I leave even my body is also not mine like that so company also is giving the same dialogue as long as you are a shareholder everything belongs to you once you quit once you sell your shares nothing belongs to you got it so that means should ideally ideally holding company get the 60 68,000 share or they should not get they should not get but in reality will they get it yes hence hence hence hence hence look at it over here now how much did the holding company pay to get control and subsidiary company 160 sir on one hand May holding company is giving 1 lakh 160,000 on another hand may they are entitled to get a pre reacquisition Pro Reserve share of how much 68 on one hand May they're paying 160 on another hand May their entitlement they're getting is 68 is the cost of investment really 160 or lesser it's like one hand you're paying 160 on other hand May you're collecting 68 that means is a cost of investment same or lesser so that's a reason we have to reduce pre-acquisition profit and that is one of the reasons why reserves and surplus a subsidiary company we distribute as pre and post because pre-acquisition profit should be reduce from the cost of investment there is one more explanation for this I'll tell you but this one did we get it comfortable everybody so that's the reason if you just check subsidiary company all the reserves and surplus be distributed as pre and post because pre-acquisition profit share of the holding company will be reduced from the cost of investment which we did can I move on to the next one okay sir why are we preparing this working note again to net off two things what are the two things investment and share Capital have you done that already or not yet not yet so that means what is my cost of investment now from 160 it has reduced by 68 means how much it has become 1 lakh 2,000 so far okay everybody all right no no no no no what are the two things we are knocking off investment my net cost of investment now is how much 1 lakh 2,000 one more thing we need to knock off is what share capital of which company subsidiary company what a subsidiary company share Capital 1 lakh sir entire 1 lakh belongs to holding company or only their share sir in this one lak 20% belongs to minority interest minority can you cancel or they will get their only parent parent there is a drama why sir parent has purchased shares in subsidiary company means for parent it is investment but for subsidiary company it is share Capital same component is being treated as both as an asset for one company and liability for another company hence they will be knocked off but entire one lak can you knock off or only parent or holding company share holding company share what is holding company share % hence you take the next one face value of share Capital only to the extent of holding company share which is 80% how much sir 80,000 got it h yes so it's like this 80,000 is the value of investment value of the investment face value of the investment is how much 80,000 but how much did the holding company pay to get control 1 lakh to face value of the investment is 80,000 but parent paid or holding company paid how much to get the control one2 that means the holding company paid less or paid more pay more more how much more 12,000 rupes or one more is there2 this is not 102 it is 92,000 okay thanks this is not uh this is 92 correct okay so the value of the face value of the share capital is 80,000 but the holding company paid to get control how much 92 that means the holding company made profit they made loss they made holding company made profit loss they paid more they instead of paying 80 they paid 92 that means they made loss at loss only we call it as good Goodwill that's all it is that is referred to as Goodwill over here yes people if it was profit scenario means instead of Goodwill we write it as capitalism if you don't want all this drama it's simply given the format plug the numbers in format positive number Goodwill negative number capital L whichever works for you done D done g once more G got it g got it got it okay give you a quick one minute to review this working note then we will dive into the next question really recalling like is saying calling okay m i I trust you H okay super next one the last one which is what sir Consolidated reserves and surplus you have to show reserves and surplus in balance sheet what is the reserves and surplus that you'll show in your Consolidated balance sheet is what we are trying to say over here okay first come back what is the reserves and surplus they given a reserves and surplus breakup in note number two okay first sir s s s sir will reserves and surplus of the subsidiary company come in Consolidated balance sheet or it is already considered already considered where it got considered sir already subsidiary company reserves and surplus you distributed you apportion it as pre and post yes and minority pre-acquisition reserves and postacquisition Reserve already went to minority working parent company pre-acquisition profit already got considered for Goodwill working not again if you consider where balance sheet match or it will not match not match so hence will will subsidiary company reserves and surplus come in Consolidated balance sheet no or another explanation so when you get control in one company what can you control suppose you got control over aru Pro what can you control first probably you'll try to control me only no you'll fire me probably okay what enough nonsense of your huh okay but on the real terms coming back to the topic when you get control over another company what can you control company assets and Company land yes or no reserves and surplus and all can controller can holding company control reserves and surplus of subsidiary company no can they control share capital of subsidiary company no that means this should come in your Consolidated balance sheet or it will not come it will not come that's another explanation okay people all right what about hge limited reserves and surplus will you cancel that sir subsidiary company reserves and surplus you already considered in separate separate working notes hence it will not come what about these two is it considered anywhere or nowhere so far nowhere so far so this you should ignore or consider consider so so General Reserve closing balance of holding compan is how much 2 lakh p closing balance how much 1 lakh say 2 lakh and 1 lakh we have added done people now above working note above working note will either give you Goodwill or it will give you capital reserve if by chance if it gives capital reserve do not forget to consider that this is one adjustment many students will forget okay watch out for that all right in this problem we didn't get capital reserve we got Goodwill that's the reason capital reserve have written and amount column have written zero if it comes remember to bring it in yes people okay stop go back again subsidiary company reserves and surplus what did you do first split into two parts what are those two parts pre and post after splitting pre and post what did you do you distributed among whom holding company and minority interest sir is minority interest reses and surplus already considered in minority working note yes what about parent share car sir parents share of pre-acquisition profit parents share of pre-acquisition profit or pre-acquisition Reserve is already considered yes in Goodwill working not parent or the holding company has a share only in pre-acquisition profit or also post acquisition post acquisition what is parent company their share of post acquisition profit 44600 is this considered anywhere or not yet not yet so post acquisition profit post acquisition profit means these are the profit generated by the subsidiary company after holding company got control that means this is what sir this is your normal profit this is your normal profit that means what you should do this in the the profit is not 1 lakh you'll add to this 1 lakh rupees you'll add post acquisition profit of subsidiary company which becomes 446 got it so that 44600 holding company their share of post acquisition profit of 44600 gets considered over here can I move on yes All right after this some consolidation adjustment like stock Reserve pre-acquisition dividend if it is there it'll consider I'll discuss about this little later it's a format so I brought in everything just to revise everything so it is not there so add everything how much is a total 3 lakh 44600 this is the value that you will show in your Consolidated balance sheet as reserves and surplus that's it so all these are working note in fact none of this they asked they asked only simple one thing what is the simple one thing they asked they asked us to prepare Consolidated balance sheet have you prepared that no instead of that we doing every D damn thing now we will prepare the requirement which is what sir Consolidated balance sheet the easiest exercise because it is consolidation means simply adding two company data you need to add but few things gets excluded which you need to be aware of okay take your calculator one by one maybe we'll prepare it here only Consolidated balance sheet sir will share capital of subsidiary company come no use your logic for subsidiary company it is share capital for holding company it is an investment same component can you show it as investment and share Capital no one explanation another explanation when holding company got control in subsidiary company can they control subsidiary company reserves and supp in share capital or they cannot they cannot so reserves in Surplus and share capital of subsidiary company will it come in Consolidated balance sheet or it will not it not what about holding company their own share Capital will it come yes that means in Consolidated balance sheet the share Capital will be 6 lakh rupees maybe I'll bring that solution little closer so that we can cross check immediately check here this is a Consolidated balance sheet of prair share capital is how much 6 lakh rupees easy okay next is reserves and surplus reserves and surplus should we have to work it out or we already prepared working note we have prepared working note number seven as per our working note number seven what is our Consolidated reserves and surplus balance 344 600 check is it shown in Consolidated balance sheet yes 3 lh44 600 done G okay now next one is Sir one component they will not give it over here but we need to consider which is what minority minority interest minority interest is also a shareholder so what is minority interest balance so they we worked out in working note number five as for our working note number five minority interest balance is 48 150 check consider yes minority interest should be shown as a separate category 48 150 N sir do not forget this is one more which many people will forget Goodwill capital reserve minority interest Mutual Owings stock Reserve usually these are the five adjustments that comes which many students will forget in the last stage so remind yourself of that if you want you can write this make a small note somewhere to ask yourself or check whether I've considered the sort of adjustment like that you can put a reminder to yourself okay next remaining everything sir straight by straight line by line addition so trade payable what you'll do 150 plus 57 but if there is any Mutual Owings means if there is any Mutual Owings means you need to reduce Mutual Owings means what amalgamation concept what is that if if holding company and subsidiary company if they have done any transaction let's say holding company has sold Goods to subsidiary company I means holding company if they have not received money they will show it as data subsidiary company will show this as a creditor same component holding company is showing as an asset called dear and subsidiary company showing as a liability called creditor same component can you show both as an asset and liability or cancel cancel sir as long as there are two separate companies you can show both asset as well as liability in for consolidation purpose are we treating holding company and sub subsidiary company separate company or treating them as one treating them as one hence all this Mutual transaction should be eliminated in this problem there or not there we have applied all that in amalgamation a common concept so add these two how much is it 2 lakh 7,000 rupees balance sheet liability side matched up that's all okay J okay next PP so 450 + 107 you do 450 plus 107 correct oh oh oh oh oh oh 1 minute 1 minute sir one second did we for consolidation purpose we will take subsidiary company assets at Book value or market value market value correct so there were two assets there were two assets which got Ral so should we ignore that for consolidation purpose or consider consider for for I think for planted missionary it was a revaluation loss or revaluation gain it was a revaluation gain I think we have already worked out why is that working not V revaluation gain for missionary was 50,000 got it revaluation gain means asset value will reduce or it will increase increase that means you'll have to do plus 50,000 this is your revaluation gain got it okay but for furniture it's a revaluation gain or revaluation loss revaluation loss here only we can find out if you want Book value of furniture is 20 market value is 15,000 that means it's a revaluation loss how much 5,000 revaluation loss means asset value will increase or reduce reduce that means I have to minus 5,000 correct sir this revaluation has only one adjustment or one more corresponding adjustment one more corresponding adjustment sir if you are increasing the value of the asset means we should also charge additional depreciation because subsidiary has charged add depreciation or not done not done we have already worked out on planted machinary how much extra depreciation we should charge for consolidation purpose 5,000 so when you charge more depreciation asset value will increase or it will reduce reduce that means what I have to do relating to missinary additional depreciation on planted Machinery I should plus or minus orus 5,000 got it but on furniture we have to charge more depreciation or we have to reverse reverse how much is a reversal of depreciation on furniture 7 when you reverse depreciation so planted machiner b or Furniture balance will be same or it will increase when you charge depreciation asset value will reduce when you reverse balance will increase so the 750 have to minus or plus so that means this is additional depreciation or reversal reversal do this adjustment this is your consolidation adjustment subsidiary has not considered it's not a mistake we have to consider this and prepare Consolidated financial statement so add all this now 450 plus 107 plus minus all this you do how much are you getting 5 lak 97750 number okay now that's all it is then people you'll have to give the breakup of each asset separately in proper format now we quickly discussing so I'll not waste time in the format of things yes people okay PP over next after PP what is there sir other non-current investment one second hang on in other non-current investment we had only subsidiary investment or also other investment other investment the total investment is 6 lakh in that 6 lakh other investment made by the holding company is 440 subsidiary investment value is how much 160 now you tell me sir will subsidiary investment come in Consolidated balance sheet or it will not come for holding company this is an asset but for subsidiary company it is a share Capital both got knocked off instead of that what came Goodwill or capital reserve which we have not accounted which we will show okay s so will this come in Consolidated balance sheet or no no whe this will come yes subsidiary investment will it come yes so these two you add how much is that 5 lak9 9,000 590,000 is shown as investment or check here yeah 5 L90 is an investment okay again one more thing we should not forget is the Goodwill or capital reserve so is is in this problem we get what we got the capital reserve or we got Goodwill we got Goodwill how much Goodwill 12,000 Goodwill will come under which category under non-current assets we have a category called intangible assets under intangible assets we have to call out Goodwill called 12,000 manageable okay next any other asset is there that's all over correct okay so that's so it's a simple problem so current assets is not there balance sheet totally matched that's all W I hope this particular problem has given you recap of what and all we need to do for consolidation purpose yes people okay sir there is one more explanation if you want I will give it to you okay which we may have to apply it in the next problem that's a reason is it okay but for bigger problems you follow this format only whatever we did in working note here now follow the same format do not change it okay so but just one more way we can calculate because some students may also get this doubt so is it okay 5 minutes extra cholesterol I have can iify that okay what is this sir I have one doubt sir you never explained sir sir in amalgamation to get Good Will We compare PC with net assets sir we compare PC with net assets here you singing a different song Only sir here you told take cost of investment reduce pre-acquisition profit reduce some pre-acquisition dividend and the io reduce share Capital then you'll get goodwi what one explanation you give us why are you giving multiple multiple things and confusing us sir that doubt we never had sir it came now sir okay got it people all right sir sir sir sir it is not a different approach okay it's a same only okay they say no Allah that's all it is okay instead of going like this instead of going like this we went like this that's all it is you can work out the same Goodwill in your amalgam method also you'll get the same answer okay but but but it sometimes you'll find it a little difficult to work out on the method some adjustments you will miss out hence I have made this nice format where it will work in every question okay now for just for your reference in amalgamation the way we worked out Goodwill same way can we try it out okay recall me once again recap me how do you get Goodwill in amalgamation under the purchase Method sir here here holding company has actually got control over subsidiary company it is not merger method it is not reshuffling it is actually business purchase okay what is the difference first of all if you're confused sir what is the difference between amalgamation and consolidation sir sir first time when you get control first time when you get control you should apply as14 amalgamation amalgamation talks about immediately when you get control what should we do okay consolidation is like our uh some disease once it comes means it is it stays with you forever so consolidation is a recurring activity it's a recurring activity so first year if you get control means at the end of first year you need to prepare CFS second year if you have control means second year also you need to prepare CFS like this if you have control for 10 years means for all the 10 years you need to prepare C so till you have control you have to go on preparing Consolidated financial statement but amalgamation no only once only once it's like first attempt CA exams only it'll come once okay first time when you get control you'll apply as14 got it that's a distinction right so calculation of Goodwill under both the methods are same only no change just that it is presented in a different way I hope this is sorted for everybody now going back to amalgamation how do you find out Goodwill Goodwill in amalgamation scenario compare PC with net ass sir how much is the cost of investment the holding company paid to get control and subsidiary company 1H 160,000 in amalgamation terminology we used to call this as PC correct no p means what money paid to get control money paid to get control is PC in amalgamation it was always 100% control it was always 100% control here we got 100% or only 80% that's a distinction that's all it is but to get control we should have 100% or more than 50% is good enough more than 50% is good enough okay sir that means why in amalgamation less than 50 80% scenario and all was not soled sir CA final IND is 103 sir it'll come okay it is there just that in your ca inter syllabus all the amalgamation was 100% control it was 100% 70% control 80% control and all was not tested it will be tested in indas 103 CA final got it fair enough so it will come just that it is not there in our syllabus hence I extra wordings I have not used okay wait for one year we will discuss that also that is also Big Ticket topic there also that means you're saying all this will come there also sir yes sir amalgamation consolidation are two topics which has significant weightage and C final also okay in fact we be spending double the time in CA final to cover the same topics but more or less same approach is there so I indirectly I'm saying redo don't forget keep it okay it's like a treasure okay keep this because this will help you in your ca final also next okay come back to the question now so PC is 1ak 60,000 got it okay we compare PC with what sir net assets sir net assets means what sir tell me once again sir make me happy sir how do you calculate net assets sir assets taken over at agreed value minus outside liability taken over at agreed value agreed value means Book value or market value come back to subsidiary company now sir subsidy how do you find out net assets same assets minus liability okay assets value of subsidiary companies how much first asset plant and machiner property planning equipment is how much 1 lakh 7,000 but this is a book value should we take Book value or we should should take market value market value sir market value of planted Machinery has reduced or it is increased increased by how much 50,000 take your calculator take 1 lakh 7,000 take 1 lakh 7,000 add 50,000 because market value has increased furniture market value increase or decrease decrease minus you we on now maybe one minute I'll get this a little closer loading element okay one second one okay yeah so far good H one minut minute 1 minute hang on I think we can't use this approach over here can you tell me what why this approach will not work first of all what are we trying to find net assets sir we want net assets at the end of the year or the day you get control the day you get control we want net sir you got the control sir this is the balance sheet at the year beginning or year ending year ending we want net assets on the year ending or year beginning year beginning so all these are assets value at the end end of the year can we take end of the year and calculate Goodwill no the moment you get control you should calculate Goodwill as per S4 that means we want net assets on which date we want net assets on the date of cont yes people so hence we'll have to use a slightly different approach what approach simple sir net assets another way is that which we have done in amalgamation what is that either you can calculate net assets as assets minus liability or or or shareholders funds is also known as capital employed that is also known as what net assets we can work from that angle we can work from that Angle now do you know the share capital of subsidiary company do you know the share capital of subsidiary company yes how much is that one L check I've worked out here maybe you can take the calculator Sim simultaneously do it one comfortable then reserves and surplus sir this is share Capital at the end of the year sir correct have they told in the current year subsidiary has given extra shares will company go on issuing shares every year or it's not so recurring shares and all will not issue every year that means the assumption is this one lakh is a share Capital at year beginning also how do calculate shareholders funds again tell me how do you calculate shareholders funds what and all will come under shareholders funds share capital and reserves and surplus share Capital have you already considered yes next what do we need to consider reserves and surplus but but we will we want reserves and surplus at the end of the year or on the year beginning year beginning why year beginning because we got control on the year beginning okay sir sir that means can we take this as the reserves and surplus or they have given sir they have given subsidiary company Reserve opening balance is how much 25 subsidiary company P andl opening balance is how much 15 so add that 25 is the opening balance of General Reserve P andl opening balance is 15 got it got it got it got it yes yes yes yes yes one second sir all these are market value or all these are Book value book value this this we took from the books no in the books you show market value or Book value book value but for Goodwill calculation we have to take net assets at Book value or market value market value yes no so to this you have to add add or reduce fact fire value adjustment you have to add fire value adjustment so only two assets had a market value change which is what only two assets had market value change which is what machinary machiner machiner book value was how much 1 lakh market value was how much sir we have to take for consolidation purpose 1 lakh or 15050 sir there are two ways to do it one either you can take 1 lh50 directly you can take 150 directly or if you take carrying amount of 1 lakh how do you get 150 from 1 lakh how do you get 150 add add what add 50,000 that only we call it as fair value adjustments add fair value adjustment or that only we learned it as revaluation gain revaluation gain how much is a revaluation gain on missionary 50,000 add that fair value adjustment of 50,000 on missionary got it people yes people once more people yes got it all next Furniture we have revaluation gain or revaluation loss revaluation loss revaluation loss means asset or another explanation if there is a revaluation loss means what will happen to asset value Asset value will reduce sir if asset value reduces means net asset will increase or net asset also will reduce net asset also will reduce so if you have any fair value loss means you have to plus a minus a this is your market value adjustment got it you took the book value and if you give fair value adjustment automatically what you will get market value or agreed value of net assets okay okay okay okay not that you have to apply this in this one we will apply it in one of the chinu chinu problems this is a easy meth method in so much adjustment will not come okay tell me sir adding all this how much is it 185 so this is your net assets so in amalgamation what you used to do compare PC with net assets directly yes but in amalgamation problems PC was paid for 80% control or 100% control PC was for 100% that's the reason net asset also we should us should take 80% or full net assets full net assets here we have got 100% control or only 80% 80% sir if you have 80% control mean can you take full value of net assets or only 80% 80% so 1 lak 185,000 80% you do how much are you getting 148 got it now compare 168 and 148 you compare net asset is a net worth of the company the worth of our investment is 148 but how much did we pay 160 that means we paid extra extra only what do we call it as Goodwill how much did we get 12,000 as per our this step how much did we get it's a same it is a same but another approach okay that's it because since I made this as a format I didn't want to change that format okay because it's on the examination day logic G can all more okay we want proper format so that we can answer the things faster so that's since we have followed this this format will work almost in every problem so we made this as a format so hence I've not followed this but in case you have a doubt between amalgamation and consolidation hope that is sorted so it is not different different way whether you calculate this way or whether you calculate this way answer will be same and people ultimately what are we doing ultimately in one ler what are we doing comparing PC with Netflix but in consolidation since we don't have full control we can't take full net assets we should take only take 80% share why 80% but in this problem holding company only has 80% suppose it was 70% means what you would have done you would have taken 70% of Nets that's if you want you can present Goodwill in this format also if you want you like it I wouldn't recommend it but just saying that you can do it because I see some new students that's the reason I thought some other teacher of yours maybe explained like this also I thought you can come much if you want he's wondering you only can I attend this class and door only is checking okay comfortable 100% Okay one minute hang on just for my satisfaction recap the whole problem for me let's see how well you know it because I'll not have time to cover multiple problems one problem only let's learn everything properly okay okay first step we will stick to the working notes normal working notes which we have done first working note in consolidation problem is what shareholding percentage in this working note we are trying to find out how much percentage holding company has how much percentage sub minority interest has okay that is one second one is General reserve of the subsidiary company find out opening balance will be given closing balance will be given and at best May some money can be transferred from PN to General Reserve in this problem that Mone money was 50,000 next working no is to prepare PN account of the subsidiary okay same format okay working on number four is analysis of reserves and surplus of the subsidiary company so in this working room first broadly of to category is a reserve as pre-acquisition and post acquisition pre and post whether it is pre or post it doesn't matter all the reserves will be of the subsidiary company will be distributed among holding company and minority interest in their respective shareholding percentage okay all right next is the post acquisition profit or maybe one more thing you need to keep in mind in Pre acquisition profit is for consolidation purpose should we take Book value of the assets of subsidiary company or market value we have to take market value so because you consider market value you may get some revaluation gain or you may get some revaluation loss revaluation gain where it will come under post or under pre under pre if it's a revaluation gain you'll give it as a positive apportionment if it revaluation loss you'll give it as a negative ation that is one next one is due to revaluation there will be one more corresponding adjustment which is what depreciation for consolidation purpose if you taking subsidary assets at market value means you should charge depreciation also on market value but subsidiary would have charged the depreciation on Book value that's the reason you need to compare market value depreciation versus book value depreciation through this you may have to charge more depreciation or you may have to reverse the depreciation if you have to charge more depreciation means if you are charging more depreciation for consolidation purpose profit will reduce so if you want to charge excess depreciation means you have to give that that's a negative opportunity if you want to reverse the depreciation means when you you reverse depreciation pnl balance will increase so that will be distributed as a positive proportionate okay next why do we distribute this as pre and post because holding company share of their share of pre-acquisition profit where will you do it it'll be reduced from the cost of investment that's the reason we need to know subsidiary profit as pre and post so next working note is minority interest minority interest is a shareholder they ask for three things what are the three things they ask their share of share Capital their share of pre their share of post all right next working node is to find out Goodwill and capital reserve Goodwill and capital reserve format what are we doing first take the cost of investment if you have any pre-acquisition profit reduce if there is any pre-acquisition dividend reduce then reduce the share Capital entire share capital or holding company share holding company share okay that if you do it when you if you by doing this if you get a positive number it's a case of Goodwill negative number it's a case of capital Lisk if you don't want to use this method you can use amalgamation method of comparing PC with net assets but don't take full net assets take only holding company share of net assets that will also give you the same answer okay last one is Consolidated reserves and surplus that you show in your balance sheet okay so here will subsidiary company reserves and surplus come no so take the holding company all the reserves and surplus if you have any capital reserve due to consolidation add that do not forget it then one more thing which is what post acquisition profit of the holding company share should come over here then any adjustments consolidation adjustment like stock Reserve pre-acquisition dividend if it is that has to come I'll talk about these two in a bit okay sir that's all this this number and when you prepare finally Consolidated balance sheet will share capital and reserves in Surplus or subsidiary company come no okay all other assets line by line you add but if there is any fair value adjustments give it in missionary we saw that missionary and furniture and few things we should not forget is one Goodwill capital reserve minority interest and mutual Owings and stock Reser C that's all is all about consolidation and do not freak out since these are bigger problems it may be a possibility that one or two adjustments we may miss and some errors we may commit so learn to forgive yourself for it on the examination don't freak out some people will freak out and literally cancel the whole answer please do not do that because you may not have time I've seen so many students they did one mistake they'll cancel off the whole answer and work it out again but unfortunately time is not there then that means whatever they soled accounts for nothing because in whatever they cancel no at least maybe one or two mistakes were there but rest everything was correct so if you had kept it as it is you would have got instead of zero you would have got three to four marks at least if you want to rewrite the answer first don't cancel first rewrite then see huh whatever I have solved is it correct or not then only cancel the old one do not do this this is also one of the reasons why many students because in that particular atmosphere all these sort of silly silly things will happen Okay moving on to the next but one more takeaway of this example is through our Goodwill calculation through net asset method it happened to me in costing paper ah okay no problem let it not happen to you in this attemp much everything is a learning experience don't worry okay no no no no no no no no I'll take you through this question make me happy in this question we have spent almost half an hour 1 hour for this question this one you will solve you will solve Paka I I will take you through the question will you solve they're wondering Zoom limited acquired 70% of stars at 30% Sir with 70% do you get control yes with 70% do you get control yes okay all right and how much did you pay to buy each share of subsidiary company 30% how many shares we don't know we'll see following is the extract of balance sheet of star limited Z Zoom acquired so that means Zoom is the holding company star is the subsidiary company subsidiary company balance sheet they have not given balance sheet extract they've given extract means some information of the balance sheet they will give it to you what in all information subsidiary company has 15 lakh shares of 10 in sir 15 lakh Shar subsidiary has means holding has acquired how much 70% 15 lakh 70% is 10 and a half lakh 10 lakh 50,000 shares the parent has acquired correct uh and for each share how much money they paid 30 R so multiply and tell me so 30 31 30 uh 315 315 lakhs huh 315 or 3 15 lakh Rupees is the cost of investment or you can call it as cost of investment or you can call it as PC yes H why am I telling this you'll get to know Dentures theyve given trade payable they have given Goa by Goa so drama sir you are H that I know you tell me what is this sir normally how do you calculate Goodwill or capital reserve just now we did one format normal format is what cost of investment no okay minus pre-acquisition dividend we'll see minus pre-acquisition pre-acquisition profits or pre-acquisition reserves sir reserves and surplus data given are going Theo if you don't know that how will you apply normal format that is the reason I with your permission I explain you one more method correct which is that one more method pc pc with PC with net assets one way to calculate net assets is take share capital and pre-acquisition profit that is one another way to calculate net assets is another way to calculate net asset is assets minus liability but that assets and liability data should be there on the date of control okay s and if there is any fair value adjustments you need to do now I think you know how to solve this question because method number two will help you out yes people Paka okay checho all right so following is Sir this is the balance sheet at the end of the year sir they told like that last problem they told date of control was 1 April balance sheet was given on 31st March here when have you acquired the shares given balance sheet date given no I mean means indirectly what is the examiner telling on the day you got control this is the balance sheet extract so all these are value of assets and liabilities on the date of control so we will easily we can find out net Assets in the normal way normal way is what assets minus liability but assets liabilities we should not take Book value we should take market value that adjustment extra fitting they will give so these are your what uh current dentures and other trade payable is what sir current uh liabilities uh property planning equipment investment loans and Advance this is loans and Advan is given okay this is not loans and Advance taken this is loans and Advance given how to find out sir they have given loans under current assets I mean this is not a liability this is an asset all the liability they give oer only that means all these are asset value so how do you get net assets assets minus liability but but but also considering fair value check on the same day star limited declared a dividend of 20% 1 minute hang on as agreed both the companies property plan and Equipment where to be depreciated at 10% depreciation means you taking over the asset at low higher value or lower value lower value that means market value is greater than the book value or lesser lesser lesser by how much 10% calculate what is a PP Book value 1 or one5 lakhs one5 lakhs is a market value 105 lakhs or 10% lesser so 105 10% you do minus how much you getting 9 $450,000 is what you're getting correct no yes correct this is the market value of pp we need to take for net asset calculation yes yes yes okay one more is what next asset what is the next asset investment are to be taken over at market value of 90 lakh what is the book value of investment 67 will we take over 67 or market value market value what is the market value 90 lakh rupees add that that is also done okay next any other assets C have they given no you need to calculate only Goodwill or capitalism it's not a full-fledged question it's only Goodwill or capital reserve calculation so other assets market value not given so what is the Assumption Book value and market value are same so one2 lakh for current assets loan 33 lakh add one2 lakh and 33 lakh adding all this total assets you got it as 390 lakh 50,000 easy so we want total assets or we want net assets net assets how do you get net assets assets minus outside liabilities what are the two outside liabilities outside liability means other than shareholders whom and all you have to pay current and non-current liability 15 lakh and 82 lakh 50,000 so minus those two if you do that totally you'll get net assets as 222 lakh is your calculator and value matching yes yes but this is the value of net assets of whole subsidiary company this is in the net assets of for 100% so did we get 100% control in subsidiary company or only 70% 70% that means should we take full net assets or only our share only holding company share 70% you calculate 222 lakh 70% if you want 2 orle 2 lakh 70% if you calculate it should be 1 55 lakh 40,000 okay people so we got our share of net assets we just have to compare it with cost of investment what is the cost of investment cost of investment how much we already calculated we Cal 3 15 lakh rupees 1 second don't be in hurb 3 15 lakh is our cost of investment and our share of net assets is 1 55 4,000 normally these two you compare and you find out Goodwill or capitalism yes or no but there's one extra fitting here called pre-acquisition dividend pre-acquisition dividend what is this pre-acquisition dividend now very simple any dividend that is paid out of pre-acquisition profit any dividend which is paid out of pre-acquisition profit we call it as pre-acquisition dividend simple sir check here let's say subsidiary companies s limited S limited had let's say opening balance of pnl 10 lakh RUP okay opening balance of pnl 10 using this they declared a dividend of 10% how much is dividend 10% meaning 10 lakh or let's say they declar a dividend of 1 lakh rupes Let's assume 1 lakh rupees dividend they declared out of this yes people okay sir parent company or holding company acquired shares in subsidiary company let's say on 1st April 2027 on 1st April 2027 what is the p and Dela balance already 10 lakh that means this 10 lakh rupes is post acquisition pnl or pre-acquisition pre-acquisition because this pnl was all it came after holding company got control or it was already there it was already there I mean this is pre-acquisition profit how did the subsidiary company declare the dividend using what profit postacquisition profit or pre-acquisition profit they've used this profit and they've declared a dividend of one lakh I mean this dividend came out of which profit pre-acquisition profit any dividend that has come out of pre-acquisition profit any dividend out of pre-acquisition profit only we call it as what sir pre acquisition dividend okay Zar let's say holding company has got 80% control in subsidiary company okay subsidiary declared how much dividend 1 lakh sir if subsidiary gives one lakh dividend means holding company also will get declare will get the dividend how much dividend will they get 80% that means how much dividend the holding company got 80,000 just observe this data see if all the numbers are looking good I explain all this with the pointers if you refer the notes journal entry you'll be able to see just wondering that in case you might have for gotten so constructing one more example so far cool cool cool cool everybody okay now sir this 80,000 was paid out of postacquisition profit or pre-acquisition pre-acquisition ideally ideally should holding company get this dividend or they should not they should not why are they getting because the subsidiary company declared the dividend let's say on 1st May 2027 subsidiary company declared the dividend on which date 1st May 2027 when did holding company acquire the share 1 month before which is 1 April 2027 that means his holding company already a shareholder when subsidiary declared the dividend yes that means what will the holding company say money money money money yes or no that means holding company will say give me my share of dividend also 80,000 but this dividend was paid out of postacquisition profit or pre-acquisition profit pre-acquisition profit that means ideally or logically should holding company get this no because it this dividend was paid out of what profit pre-acquisition profit pre-acquisition profit means what those profit generated by the subsidiary company before holding company became the shareholder so since this profit is used to pay dividend ideally holding company should not get it but practically will they get it yes so hence what as13 what accounting standard 13 which talks about investment csis okay whenever you receive pre-acquisition dividend so what is the journal entry for divident received tell me dividend received dividend received bank account debit to dividend received account okay and then this dividend received is an income where will you transfer this income to Dividend received income account debit to pendl account yes sir sir this is the journal entry we pass for normal dividend is this normal dividend or this is pre-acquisition dividend for pre-acquisition dividend what as13 says is the dividend no don't transfer it to SPN that dividend don't transfer it to SPL reduce that dividend from cost of investment reduce that dividend from cost of investment so the journal entry holding company should passes bank account how much dividend holding company received 80,000 bank account debit 80,000 should we credit should we credit dividend account no we should credit investment in subsidiary account 80,000 this is the treatment recommended by accounting standard 13 simple logic how much did the holding company pay to get control or subsidiary company let's say this is 10 lakh how much money holding company paid to get control 10 LH yes use your Common Sense on one hand May parent company is giving paying how much to get control 10 lakh on another hand May how much pre-acquisition dividend did they receive 80,000 on one hand may they are paying 10 lakh on another hand may they receiving 80,000 is a cost of investment really 10 lakh or 920,000 920,000 how did you get 920,000 you took 10 lakh and you reduced 80,000 yes no Express this in words now what is this 10 lakh cost of investment what is this 80,000 pre-acquisition dividend pre-acquisition dividend that is what I had written in the previous format also if you remember everywhere it came in the cost working note number six in the previous problem it was not there see if you have want in Goodwill working note I've taken cost of investment and pre-acquisition dividend we should transfer it to pendl or reduce it from cost of investment reduce it from cost of investment in the last problem pre-acquisition dividend was not there hence I'd written it and return the value as zero now I understood but in the problem that right now we are seeing pre-acquisition dividend is not there or it is there it is there once again tell me just as a recap what is pre-acquisition dividend meaning you tell pre-acquisition dividend means what any dividend which is paid out of pre-acquisition profits is what we refer to as pre-acquisition dividend and what is the journal entry for pre-acquisition dividend will you write bank account debit to dividend income and dividend income to pnl no as per as13 pre-acquisition dividend should be reduced from cost of investment hence the correct Journal entry for pre-acquisition dividend is what bank because we have received no so bank account debit to what investment account because investment has debit balance how do you reduce the investment value because as3 says what pre-acquisition dividend should be reduced from cost of investment investment is an asset assets have what balance debit balance how do you reduce it credited hence the journal entry for pre-acquisition dividend is bank account debit to investment account yes people got it people now come back to this problem people in this problem is there any dividend check on the same day how how much control did holding company having in subsidiary company 70% on the same day on the same day same day means on the day holding company got controll in subsidiary company on that very same day subsidiary company declar the dividend of 20% crazy today you purchase the share today only if subsidiary company declares the dividend means in today only you will make so much profit that you'll declare dividend I mean this dividend is declared what profit this dividend is declared out of the profits already made this dividend is already declared out of the profits already made profits already made only we call it as what sir pre-acquisition profit so what profits are used to declare dividend here pre-acquisition profit so what is the nature of this dividend nature of this dividend is pre-acquisition dividend and you know the treatment already if it is pre-acquisition dividend what do you have to do you have to transfer it to pnl or reduce it from cost of investment reduce it from cost of investment PKA okay all right what is the cost of investment 35 lakh that we have already taken yes only thing we have to do is if pre-acquisition divident we need to find out and reduce it find out and reduce it can you find out for me can you find out subsidiary company has declared a dividend of 20% or okay in the interest of time maybe I only do Dividend sir this percentage is always applied on the share Capital value what a share Capital value 150 lakh how much dividend is declared 20% so 150 lakh 20% 15 are 30 so 3 lakh is a dividend declared by the subsidiary company sir if subsidiary declares dividend means 100% holding company will get or only their share what is their share 70% so multiply 70% how much is this 21 lakhs okay sir so 21 lakhs is what 21 lakhs is pre-acquisition dividend for the holding company and this 21 lakh holding company should they transfer it to SPL or should they reduce it from cost of investment to reduce this from cost of investment so that means the net cost of investment will it be 315 lakh or you'll reduce 21 from 3155 lakh reduce 21 lakh so your net cost of investment will become 294 lakhs so this is your PC this is your PC or you can also call it as net amount of PC net PC okay sir how do you find out Goodwill normal method amalgamation method compare PC with net assets total net asset or our share of net assets our share of net assets we already found out to be 155 .4 lakhs so the worth of our investment is 155.5 lakhs but we paid how much 294 lakhs that means holding company paid lesser they paid more paid more find out the difference between these two how much is that 1 38 lakh 60,000 if you have paid more means purchasing company made a loss that loss only we call it as what good that's it sir Paka G understood everybody you want one format or maybe this one quickly just tell me the recap how did we find out Goodwill over here this problem K recap first of all there are two ways to find out your Goodwill now tell me both one is your normal format approach which is take the cost of investment if there is pre-acquisition dividend reduce if there is pre-acquisition profit reduce total pre-acquisition profit or holding company share holding company share of pre-acquisition profit you reduce then share Capital you reduce total share capital or holding company shares holding company shes positive number Goodwill negative number capital L one format another one amalgamation method compare PC with net assets here PC was paid for 100% control or 70% so take the cost of investment which becomes your PC right B you should not forget to reduce cost of you should not forget to reduce a pre-acquisition dividend pre-acquisition dividend is common under every method so take your PC reduce the cost of reduce your pre-acquisition dividend you'll get what net PC compare that net PC with total net assets or holding company share of net assets compare that with holding company share of net assets accordingly you will get Goodwill or margain or Goodwill or capital reserve positive number Goodwill negative number capital reserve aware be aware of both the methods for smaller smaller problems smaller smaller problems amalgamation method is easy but for bigger problem bigger consolidation question it's always better to solve in a particular format so that you'll not go wrong one working note suddenly you change no your mind will not go when you know properly what to do you'll AR go on doing it one working note slightly if you change some GI will be there so I suggest for bigger method follow the same format we what we just now did but for smaller smaller question like this you can follow whichever method you want answer is okay because you'll be able to get that mean got the answer quickly there yes people or one more if you want means I can tell one more format simple if you have pre-acquisition dividend means if you have pre-acquisition dividend means reduce it from working note number 3467 that also I've written in notes only you looking at me like I've not told anything if you have pre format some of them are very big on format they'll say every godamn thing I'll mug up okay for those people this is the mug up if you get pre-acquisition divided in the problem reduce it from working note number three reduce it from working on number four working not number six and seven I told you the logic of all this also I hope you don't expect me to tell the logic once again no response that means forgotten P ah okay 2 minutes we'll spend on this so why should be reduce from working note number three simple sir working not number three is what PN when you declare dividend if subsidiary company declares dividend what will happen to that Pendle Pendle will reduce working note number three is Pendle so when dividend is declared that dividend will cause your profit to reduce hence you have to reduce it from working note number three that is the logic okay sir working note number four what is your working note number four analysis of reserves and surplus so in this particular working note are we Distributing closing balance or each component each component let us say let us say opening balance in this particular problem how much opening balance of pnl did we distribute open balance of PN distributed as 15,000 suppose pre-acquisition dividend is 5,000 means is the opening balance of profit really 15,000 or it is only 10,000 opening balance of pre-acquisition dividend means what so once again tell me pre-acquisition dividend means what any dividend paid out of pre-acquisition profit here opening balance of p andl is pre-acquisition profit using this 15,000 if you declare 5,000 pre-acquisition dividend means is the opening balance of pendl really 15 or it is 10 10 I means if it is 10 means how much we should distribute 10 but are we Distributing like that or are we going line by line item line by line item so since 15,000 you already distributed as a positive number pre-acquisition dividend you distribute as a negative number hence pre-acquisition dividend should also be reduced from working out number four okay sir working note number six what is our working note number six Goodwill that you already know what does as13 say pre-acquisition dividend should be reduced from cost of investment that's the reason we reduce from working out number six that's a logic okay sir last we should reduce pre-acquisition dividend from working out number seven why our great accountant no today's consolidation classes he would have bunked that's holding company accountant he would have bumped today's class you know what he would have done pre-acquisition dividend he would have transferred to Pendle pre-acquisition in the question they will say this not me okay in the question they will say holding company has transferred this dividend to their pendl account they've credited this dividend to P so pre-acquisition dividend should be transferred to pnl account or it should be reduced from cost of investment it should be reduced from cost of investment but our great brhaspati accountant he transferred that to PN meaning he treated pre-acquisition dividend as a normal dividend sir one income if you transfer to pendl means what will happen to your pendl balance pendl balance will increase should this income go to pnl no so that means pnl balance is unnecessarily increased what you have to do minus hence pre-acquisition dividend will also be reduced from working number s ah correct now she's asking he's smart so what if accountant attended the class like me in that case may he has not transferred this to PN he's reduced it correctly from cost of investment in that case may should have reduce from working note number seven not requir but but but but accountant would have done mistake in exam is is examiner favorite adjustment they will say that pre-acquisition dividend has been transferred by holding company to their pnl account in majority of four five problems we have done on this if you flip open that you will see that sentence so hence in 90% of the cases you will have to reduce this pre-acquisition dividend from working note number seven also but what statement you're saying is right okay now so what is this another format our formula if there is pre-acquisition dividend simply reduce reduce it from working number 3 4 6 7 whichever way you works you take it but do it properly they it okay logical formula format I don't give a damn But ultimately I want each and every one of you to write your paper and good news no no pressure okay try to give good news that's okay at least put the efforts in that direction I'm happy okay all right s break wait first this topic should be completed then only break two one and a half hours I am shouting I am not asking for break you want break what for you sir okay question number one more question just to see how attention attentive you were okay one more question this also is usually if they want to ask some six or seven marks question from consolidation usually these sort of question is examiners favorite in a way what is it let's see from the following data determine in each case determine in each case minority interest on the date of acquisition meaning on the date of control and on the date of consolidation okay on the date of control as well as at the end of the year we need to get minority interest of balance okay people very simple so minority interest is what shareholder right shareholder what and all will come under shareholders funds tell me once again what and all will come under shareholders funds share capital and reserves in yes you can call this as shareholders funds you can call this as capital employed or you can also call this as net assets yes H that means if you are a shareholder in one company means eventually you'll get share in what net assets or you'll get a share in shareholders funds you can call it whatever D people no no no how do you calc net assets how do you calculate net assets multiple ways one either you can calculate net assets as assets minus liabilities that is one approach or you can calculate net assets as what you can take shareholders funds meaning you can take equity share capital and add all the reserves and surus but you should take equity share capital on the date of control you should take reserves and surplus also on the date of control depending on what data is given you will use the method yes people in the bigger problem I think we used this in one of the previous shorter problem we used this particular approach both are comfortable with you now check this particular problem first there are they've given four separate cases these are all inter they are not interconnected they are all separate separate separate things first case subsidiary company name is a and holding company has how much shares in that subsidiary company 90% sir if holding company has 90% means minority interest will have 10% okay sir now minority interest is a shareholder what will shareholder get you can calculate minority interest in two ways one you can take the normal approach previously what did we did you can take their share of share Capital their share of pre-acquisition profit their share of post acquisition profit that is one way maybe we'll try that that is a bigger one but just for your reference I can take that so in the first case what is the share capital of subsidiary company they've given here what is the share capital of subsidiary company one lakh will entire amount minority interest will get or only their share what is their share if holding owns 90% means subsidiary will or minority interest will own 10% correct and then minority interest will also ask for their share of pre-acquisition profit sir you got date of acquisition is 1st January 20x one on the day holding company became shareholder how much pnl balance is already existing I mean this 50,000 is post of pre now pre what is pre-acquisition reserves and surplus here 50,000 okay one only one reserves and surplus subsidiary has which is pendl which is 50,000 entire 50,000 minority interest will get or only their share only their which is 5,000 got it all right add these two how much is it 15,000 so these two are existing on the date of control correct right what did they ask in the question they asked the minority interest car balance at the end of the year or on the date of control on the date they asked to find out both on the date of control how much is minority interest also on the consolidation date how much is the minority interest on the date of control what is minority interest balance 15,000 okay sir all right after holding company got control post acquisition profit came so add post acquis profit how much is post acquisition profit sir pnl balance on the date of control was 50 and the end of the year it has become 70 sir 50 has become 70 means profit balance has increased how much it has increased by 20,000 this increased happened before holding company became shareholder or after I mean this 20,000 is pre-acquisition profit or post acquisition post acquisition who gets a share in postacquisition profit holding company and minority interest so what is minority share post acquisition profit is 20,000 their share is 2,000 so if you add it what you're going to get 177,000 this is the minority interest balance at the end of the year at year ending because we prepare consolidation Midway or year ending ending so this is what I asked on the date of control minority interest is 15,000 and the end of the year it is 177,000 that's what they've written here done people this is a little big go this is little big go you need to find there's one more method you can do that is easy what is that sir minority interest is a shareholder shareholder will get what a share in net assets share in net assets sir what is the net assets of subsidiary company on the date of control how do you get net assets either you can do assets minus liability or simply you can add shareholders funds share capital and reserves in Surplus share capital and reserves and Surplus on the date of control is 150,000 so if you add this what are you going to get net assets correct how much is that 150,000 entire 150 minority interest will get or only their share what ises minority interest share 10% so 150,000 10% you do how much you going to get don't you think this is easy okay you can present in this format also your choice but this is less timeconsuming so I would prefer this so based no both you you work out whichever is better connecting with you do that approach but ideally I would suggest know both the ways manageable now similarly they asked minority interest only on the date of control or also end of the year on the consolidation means year ending okay sir if you want to find out my minority interest on the end of the year very simple minority interest again is a shareholder shareholder will get share in net assets do you know net assets at year ending yeah check on the consolidation date share capital is 1 lakh pnl balance is 70,000 share capital and pnl balance if you add what are you going to get shareholders funds the shareholders funds only also you call it as capital employed also it is known as net assets yes no so these two if you add what are you going to get at the end of the year net assets you will get it as 1 lakh 70,000 and entire 170 net assets minority interest will get or their share what is their share 10% so minority interest balance is 17,000 whether you work out this format or other format answer is dto need a minute or okay okay if you have got it just for my satisfaction work out the second scenario for me same this is a different case in second case holding company owns 85% that means minority interest owns 15% so calculate on the date of control how much is minority Interest online also calculate and type it for me on the date of control how much is minority interest at the end of the year that is on consolidation date what is minority interest T Tu T you calculator all this will come as a two marker McQ question also sometimes okay so you should know the shortcut ways to calculate ah tell how much this value on the date of control online may have not got any response 19,500 and 18,000 are the response I'm getting same both how did you calculate one more minority interest as a shareholder shareholder will get a share in net assets on the date of control or on the date of acquisition what is share capital and reserves and surplus balance 1 lakh and 30,000 respectively add these two how much is it 130,000 entire 130 minority interest will get or only their share so 130,000 15% you do how much is it 19,5 so minority interest on the date of control is 19,500 now they also asked at the end of the year that is on the consolidation date what is minority interest balance at the end of the year share capital of subsidiary company is 1 lakh and pnl balance has become 20,000 that means the total Capital employed or net assets on the consolidation date is how much 1 lak 120,000 and minority share is 15% 120 15% if you do you'll get 18,000 that's done sir other two you take care you got the format no I'll not waste time in that so first case is done next case may they asked you to calculate Goodwill or Capital you can work out bigger format bigger problem format or shortcut format shortcut format is what your amalgamation format which is what compare PC with net ass compare PC with assets so do you know the PC yes they have given cost of investment one maybe for third case I will take up what is the cost of investment in the third case 6,000 and parent has acquired how much control in subsidiary company 80% so PC is 56,000 you compare this with what total net assets or holding company share of net assets holding company share of net asss got it all right so on the day you Goodwill and you calculate on the date of control you'll calculate Goodwill on the date of control on the date of acquisition or on the date of control what was the net assets of subsidiary company share Capital was 50 pnl balance was 20 means the net asset is how much 70,000 the total net assets of subsidiary companies 70,000 entire 70,000 holding company will get or their share what is their share 80% 7 8 are 56 so this is also 56 that means is there any Goodwill or capital reserve here or zero so in the third case may Goodwill or capital reserve is zero nil that's it could be a trick question also okay nil also is an answer people especially McQ question man we never get our heart to select a negative number or a zero positive number especially positive number May if answer by chance comes in decimals full nightmare those are few things we are never comfortable but trust yourself if you have done everything properly select zero also can be an answer negative also can be an answer not applicable also is a right answer everything can be right answer it is okay if you get if you want to confirm spend maybe one or two minutes extra beyond that don't keep reading the question did I do mistake and you're right believe in yourself okay you are awesome H I believe that you also believe okay uh now one case you got it should I have to do one more case or got it how to approach all right next case may they asked holding company profit in consolidation balance sheet assuming holding companies own pendl balances 2 lakh holding company they have how much their their own pel balance 2 L now one minute hang on subsidiary company reserves and surplus we distributed into two categories first what are those pre-acquisition and postacquisition pre-acquisition profit where will you consider in Goodwill working note postacquisition profit Consolidated reserves and surplus working note that is what they're asking what is holding company their share of post acquisition profit in subsidiary company that is what is the third requirement of this question can we do that it's very simple okay so maybe we'll take up fourth case or maybe we'll take up second case interesting sir on the date of control what was the reserves in Surplus we have only one reserves in Surplus called p on the date of control subsidiary company P was 30,000 this is what sir this is free yes sir 30,000 became what is the pnl balance at the end of the year pnl balance at the end of the year has become 20 30 has become 20 that means subsidiary company made post acquisition profit or post acquisition loss post acquisition loss 30 has become 20 means it is not profit case it is a loss case what is the post acquisition loss 10,000 10K is the loss got it entire loss holding company will get or only their share what is their share 85% 10,000 85% is how much 8,000 F sir if it's a post acquisition profit you add if it's the post acquisition loss you Min that's all it is the format can be changed po losses are rare scenario but can come also that's all it is everybody cool maybe just to be on the safer side one more question fourth case we'll take up on the date of control what was pnl balance of subsidiary company 40,000 at the end of the year on the consolidation date pnl balance has become 55 from 40 it has become 55 so pel balance has increased by how much 15,000 so this increase has happened after holding company became game shareholder so this increases what sort of profit post acquisition profit so in case of post acquisition profit will holding company get a share in that yes what is holding company share here 100% I means parent holding company share here is entire 15,000 that's a answer for the last question those are the three clear two lak is tell me working note number seven format first you will take holding company there P forget generalism anyway it is not there here you take holding company their own P to that you add post acquisition profit holding company their own pel is 2 lak that so that you need to add holding company their share of post acquisition profit Wes this then you'll get the final Consolidated reserves and surplus which you have to show it in your Consolidated balance sheet if you want in this problem you can add 2 lak and get that value also IC is not adding so and this question is has come two three times in examination ideally according to me if you read read the question they asked what amount of holding company's profit in consult solated balance sheet in Consolidated balance sheet will you show this as profit or you'll add 2 lak and show ideally you will add 2 lak and final balance you show yes or no so in my view in every case we should add 2 lak and then you should show the final number but I say some for some reason they've not corrected this in their study material yet so they forgot to add this maybe we you can also write some emails about this okay they've not done it since one year so that's the reason I did not consider this okay you also solve like this only because this question has come two or three times in exam why to take chance extra knowledge is good but that should not cost us our marks and eventually our degree and 3 lakh rupees you know that ah now one last question I will take PA then I will give you break bar okay so till now we did consolidated balance sheet now we are looking at consolidated p consolidated p very simple this is lot more easier so everything you say is easy because it is easy yeah it is easy so only I say easy see that's what I keep saying if a dumb guy like me can pick up me a brilliant chaps like you you can do huh Not Butter why would I put butter now to you anyway nothing no at least if you are giving 1,000 2,000 rupes extra fees means I can put butter so no fees means no butter required from my maybe I'll put butter so that you clear the examination that is more important okay all right so consolidated p how to prepare very straightforward Consolidated balance sheet how did you prepare assets and liability line by line you added pnl also same thing line by line income and expenditures you need to add if there is any Mutual o that's all so what is mutual Owings in pnl so holding company has sold Goods to subsidiary for holding company it is sales for subsidiary company it is purchase same component is shown both as a purchases as well as a sales Mutual WIS eliminate holding company gave one service to subsidiary company and charged 10,000 rupes as consultancy fees that means that consultancy fees for holding company is income for subsidiary company that consultancy fees is expense same component shown both as an expense and income and for consolidation are you treating them as two separate company or you treated them as one I mean same component can you show both as an expense and income or eliminate like this they will give you three or four mutual Owings which you need to eliminate that's all can we do it h send QR code sir we will pay bad you pass the exam that is good enough for me okay yeah whatever you have paid as your fees that is good enough for me STI all right your results matters more than money in fact if you pass this attempt I'll think that each one of you have paid one rupes to my bank account PKA I'll treat it that but don't ask to repay this data I have paid one rupes off that will not happen okay all right now but on a serious note this not just for for Teacher most of them who like this particular profession more than money they enjoy seeing your particular smile see sir there is a fake smile and there's something called genuine and natural smile normally when you greet someone you'll say and go no you'll just smile that is okay that is normal but when you clear the day you clear your results and come and meet me know that day I'll get to know what is your real happiness for you and that will automatically that energy gets transfered to me and that day's class I've seen that day when I take class no I'll be in different mod only so that is more important okay for me personally I'm not saying money is not important I also have okay commitments I will do that is also important but this is for me is more important okay anyways no pressure just because I'm saying don't take pressure too much put your efforts that's all I would say give your best okay 10 hours 12 hours 14 hours doesn't matter stop counting the hours now this is not the time to count the hours it is the time to count the topics how much topic is there how much can I complete this hour how much I should do this minute how much I should do the thinking should revolve only in that direction okay they say know what you think is what you become so in this one month let your girlfriend boyfriend sinder Ginder whatever what not everything set aside if possible social media uninstall Focus this you know the horse is there horse they put that belt around so that it doesn't watch here and there it just goes in one way like that you become that horse of your life for the next one one and a half months okay after that you can run wild wherever you want for the time being run only on the track okay come back come to this particular track okay Moon limited it has a subsidiary called star limited provides the following information okay sir you do you remember p and Dela format by the way schedule 3 format of P once warit let's see not literally just a format just just format you tell what is that format of P revenue from operations other if you add those two you'll get total then expenses is the heading then cost of material consume then purchase of stock in trade meaning this is a purchase of finished goods if any then changes in inventory how do you get changes in inventory take opening stock of raw material to that you add opening stock of opening stock of raw material or rather opening stock of wiip to that you add opening stock of finished goods minus closing stock of wiip minus closing stock of finished goods changes in inventory means simply opening balance of a stock you compare it with closing balance of stock accordingly find out what has changed simply you have to do this particular equation so what about raw material cost stock raw material cost stock will get consumed it get captured here this is cost of material consumed how do you get cost of material consume opening stock of raw material plus purchase of raw material if any minus closing stock of raw material it get consumed over there done people then efdo after this EF d o e for employee benefit expenditure f for finance charges D for depreciation and amortization o for other other expense is a residual category anything that doesn't come here it's a God for nobody there is God no so if you can't put any expense here it'll automatically come under other expense like administrative expense selling and distribution expense blah blah blah from income if you reduce the expense you'll get profit before tax from that you reduce tax you'll get finally profit after tax that's all P andl stops at profit after tax you also have to give EPS disclosure that they will not ask it here leave that now with this format in mind can we study the next question no mode sir but we'll still do sir no problem H very very straightforward don't worry not that much headache now sir equity share Capital equity share Capital will come in balance sheet h i mean this is it will come in P I'm hungry I think H okay sir share Capital will not come in pel so this is irrelevant cut it out what about finished goods inventory now I'll read out the component you tell me which category it will fit in then we'll calculate simultaneously keep the calculator also finished goodsa inventory as on 1st April 2020 sir you are preparing Consolidated pnl on 31st March 2021 so that means year begins on 1st April 2020 and year is ending on 31st March 2021 on this particular year ending date you're preparing the Consolidated pnl they have given finished goods inventory on 1 April 2020 so this is opening or closing opening stock of finished goods all right similarly they' have given finished goods inventory on 31st March 2021 that means this is closing Stu what do you do sires finish goods inventory and all they'll come under changes in inventory column how do you get changes in inventory simply take opening stock and reduce closing stock so these two comb minus you do do it in the same format take opening stock minus 42 lakh minus 85 L 75,000 you do how much is that quickly quickly you do it or maybe I'll only see this comes under changes in inventory sir when they ask you pnl no my suggestion to you is Sir pnl is a pure format there is nothing so ideally I would suggest for pnl consolidation always prepare a notes in proper format okay this one balance sheet at least is okay acceptable that you have a lot of working notes so notes to accounts and all may be difficult to prepare but for pnl there is nothing other than this just this if you put around 50% of the mark may get cut so main Essence probably will be given mostly in my opinion to the nodes notes to the pnl account so prepare it and very simple how do you prepare notes to accounts simply take holding company data and add subsidiary company data no FY thing that's all so changes this finished goods stocks comes under which category changes in inventory you'll write here changes in inventory and call under note column note number four in that order will you good for revenue from operations you'll prepare note number one for this you'll note number two for this one note number three so this purchase of finished goods is not there in this problem hence no notes so hence changes in inventory we are preparing note number four come to note number four Moon limited changes in inventory is how much you calculated already 42 lakh minus 85 lak 75,000 you do how much is that if you do that you'll get 43 lakh 75,000 that's the number positive number you're getting negative number negative number as it is what you get you write it okay similarly similarly for Moon limited of for rather subsidiary company star limited what is their opening stock of finished goods 30 lakh 10,000 what is their closing stock of finished goods 37 lakh these two you minus these two you minus how much you going to get 301,000 minus 37 lakh 62 to find it if you do you'll get7 lh50 to find okay now as in when we see we'll take other components we'll worry about later so these two we have seen so far can we move forward all right next one what is the next one so this is done we'll take off this dividend income dividend income sir dividend income is an income income there is only two categories revenue from operations and other income so this will come under which category income for Moon how much is it 1680 for Star how much is it 437 500 so for other income we prepared note number two come to note number two dividend income for Moon 1680 for Star it is 437 500 don't worry about other things as in NVC we will take okay next is what other non-operating income did they say operating income or nonoperating so if it is operating income you can put it under revenue from operations category this they specifically saying it is non-operating so where this should come under other income for Moon 350 for Star 105 so again under other income while not stock owns category other non-operating income I've written Moon 350 starka 105 done all right moving along next what they have told raw material consumed for raw material consumed we have a separate category any which way so it will come for holding it is 1 CR or uh 1 39 lh30 and for subsidiary it is 47 L 25,000 so same data for raw material consumed we prepared note number three come to note number three where is note number three here cost of material consume for moon this much star this much copy it from the question all right next what is next selling and distribution expense sir selling and distribution expense we have any separate category no that means where it will come under other expense category for parent 3325 and here it is 1575 for other expense if you just check pnl format for other expense we have prepared note number eight come to note number eight selling and distribution expense star and moon copied the data from the question all right next next is what production expense so production expense is related to your direct materials right it is not an indirect expense so if you have production expense no we don't have any category for it show it under raw material consumed itself show it under raw material consumed itself what is the production expense for Mo and star 3150 and 14 lakh come to raw material consumer working note and production expense is 3150 and 14 lakh respectively okay so this is done next loss on sale of investment sir do you already have any other income do you already have some other income yes so laws on sales investment anyway when you buy the investment you expect to make profit no correct so loss on sale of investment don't show it under other expense category anyway we have other income instead of showing this under other expense category reduce it from other income because on investments we generally expect to make loss or profit profit so profit on sale of investment and all where you will show profit on sale of investment where will you show under other income so this loss and sale of investment also will come under other income category only but is this an income or is expense expense so instead of adding we will minus that's what we have written here reduce it from the other income category so other income we have prepared note number what is that note number two I've prepared for other income so here is your other non-operating income from there you reduce loss and sale of investment 26 to find it just here taking the data and dumping into format no calculations here absolutely whatsoever just one or once you review Once you practice this one will be sorted this also has been asked for around 10 to 12 marks previously is also equally important okay sales and other operating income for sales and other operating income we have revenue from operations category so comes there note number one may we have prepared that so copied that as well straight away is it okay now quick discussion like this I can do yes next wages and salary sir wages and salary you pay to employees for employees we have a category called employee benefit expenditure so for employee benefit expenditure category may it will come for employee benefit expenditure we have made a note number called note number five come to note number five and take off that it went by note number five here employee benefit expenditure straight away tick meaning data is as it is from the question or adjustment uh General administrative expenses royalty paid do we have any category for this no I means both will come under which category other expense category so both this you need to take off that's all other expense your last working note working note number eight uh General administrative expense and then your royalty 0 + 50 copying straight away from the question next depreciation for depreciation there is a separate category it will come there for interest and expense we have a separate category called finance charges so this for these two we have a separate category put it there that's all we have done here where is it here depreciation and finance cost accordingly copy pasted from the question this is the data from the question straight away we have put it into our notes to accounts now come to the additional information what have they told in additional info let's see okay sir current year is this keep in mind on 1st September 2018 20 80 means current year or 2 years before only years 2 years before only what happened Moon acquired 50,000 shares of 100 each in Star so the shares were acquired in the current year or two years before only years two years before so like amalgamation is consolidation onetime activity or recurring activity till you have control you have to go on preparing Consolidated financial statement Consolidated balance sheet Consolidated pnl Consolidated cash flow statement everything you need to prepare till you have control current year also you have control are yes so we need to prepare so keep this 50,000 shares in mind now 1 minute how much is the share capital of star 60 lakhs that's what they've said okay fine let's see Star limited subsidiary company they paid a dividend of 10% as on 31st March 2020 current year subsidiary company has declared the dividend okay stop so the moment dividend comes if subsidiary company declares the dividend means shareholders of subsidiary company will get this dividend Who are the the shareholders of subsidiary company holding company and minority interest okay when when you're doing for the accounting from the holding company's perspective you always should ask this question is it a normal dividend or normal dividend or pre-acquisition dividend in this problem read this line once again and tell me whether it is a normal dividend if normal dividend type ND if it's a pre-acquisition dividend write p p pre-acquisition dividend what is it ND or PD in this problem normal dividend or pre-acquisition dividend in this how are you saying it's a normal dividend yes it is a normal dividend how sir we purchased the share two years before correct and current year may if the dividend is declared means they would have used probably current year or two years profit and paid no so nowh they said that pre-acquisition dividend is used to pay this dividend so is this PD no it is a normal dividend for normal dividend what is a journal entry if you receive the dividend what entry you'll pass bank account debit to dividend income and dividend income to pendl holding company will do this accounting B but but but but but but this is emo Mutual Owings who paid this dividend subsidiary paid this dividend to holding company a transaction between subsidiary company and holding company only we call it as M yes H yes people that means can you show this or eliminate this eliminate but but Moon limited has already accounted this dividend in their dividend income their total dividend income is 16 lakh 80,000 in this some dividend is received from subsidiary company can we show this or this ISO this is a mutual o so should we should eliminate first find how much simple how much dividend subsidiary declared 10% how many shares does a holding company have 50,000 shares each share face value is how much 100 that means what is the face value of the share Capital held by the holding company 50 lakh so 50 lakh is a share Capital value held by the holding company and dividend is declared at what rate by the subsidiary company 10% that means holding company received how much divid if you want you can find out shareholding percentage and calculate or directly you can also calculate like this n people because or another approach dividend is always paid on the face value what is face value of one share 100 how much dividend is declared 10% that means on one share how much dividend is declared 10 Rupees how many shares does parent have 50,000 that means the total dividend the holding company or parent will receive is you can multiple ways to do it your choice but this 5 lakh rupees dividend Is AO that means you need to reduce where you need to reduce from the dividend income dividend income will short it under revenue from operations or other income go to other income category reduce this is a moon limited cut dividend from that reduce dividend from Star which is 5 lakh rupees because it is ano okay people Soo we reduce from two place no sir from dat are also from credit are also in balance sheet here you have reduced from income you should also reduce it from expense but is divident and expense is a dividend paid an expense or appropriation appropriation if subsidiary company declares the dividend means they will reduce this dividend this dividend reduction will be done directly in note number two reserves in sub this when subsidiary company declares the dividend their pnl balance will reduce so in balance sheet anyway you prepare note number two for all the reserves in Surplus in that reserves and surplus subsidiary will show their pendl in that pnl subsidiary company will reduce dividend declare okay are we preparing that note here or only P consolidation P consolidation so since dividend is not an expense subsid company would have not shown the dividend in their P the dividend adjustment will be done directly in balance sheet so hence we can't show the other Mutual effect it is there but we can't show it here understood because dividend is not an expense if it was an expense for one entity entity it will be an expense for another entity it will be an income both places we'll eliminate but dividend declared is not an expense it's an appropriation hence we can't show because if you just check here PN Del format stops at what profit after tax after tax only you will start all your appropriation items yes no transfer to reserve preference dividend Equity Dividend all this will come after tax but pnl ends at profit after tax hence that dividend adjustment effect we can't show it here it is there we need to eliminate but we can't show it in Consolidated SPL hope this is okay for everybody can I move on to the next Okay g next G what what they told Moon limited sold goods worth 150,000 to Star so for Moon it is sales for Star it is purchase again this is what sir this is these are all Mutual Owings you have does subsidiary company show purchases in their pendl yes does holding company show sales in their pendl yes that means you'll eliminate only from one component or both the component how mucho 17 lakh 50,000 17 lakh 50,000 has to be reduced from sales also this is your revenue from operation 17 lakh 50,000 has to be reduced from purchases also here purchase of finished goods like that have they told no that means what all the purchases are made for the raw material because they have not given purchase of finished goods separately in the problem I mean this 150,000 assume that it is a raw material purchase and reduce it from cost of raw material consum okay people once more or got it got it okay this is also donear D next one uh okay no no no no but hang on to this holding company sold totally how how much sales to subsidiary company we made 150,000 do you think all this transaction will happen cost price or selling price check holding company sold the goods to S Limited at a profit of 20% watch out 20% profit is on the selling price Okay g all right okay now holding company sold the goods to subsidiary company who has the goods now subsidiary company if subsidiary company has not sold this Goods further means they will show it as closing stock what am I hinting what am I hinting closing stock includes closing stock includes the profit element this only we learned it as stock Reserve since holding company sold the goods including profit element one company selling price is other entity purchase price correct no means the subsidiary company is showing their cost at is showing the showing the stock at their cost price or selling price selling price a profit element is included in the closing stock of the subsidiary company is this okay with you can we show that for consolidation purpose are we treating them as two separate companies or we treating them as one we treating them as one that means we should show this or eliminate we should eliminate okay so that we need to calculate but entire closing stock entire Goods is held by subsidiary company as closing stock or they've given check inventory of subsidiary company includes goods worth 7 lakh receed from those subsidiary purchase 150,000 entire Goods is remaining or some they have sold off some they have already sold how much is remaining in the 1750 only how much is remaining 7 lakh is remaining so stock Reserve means total profit or profit included in closing stock profit included in closing stock how much goods are included still in closing stock 7 so this 7 lakh is it shown at cost price or it shown at selling price selling price that means does a 7 lakh include profit yes that only we call it as loading element unrealized profit or stock Reser whatever find it out how much is profit profit is 20% on the selling price the 7 lakh is already selling price 7 lakh or 20% you do how much is that 1 lakh 140,000 1 lakh 140,000 so this is what sir profit element included in closing stock can you show this in Consolidated financial statement or eliminate eliminate that means when you eliminate unrealized profit or stock Reserve closing stock value will reduce sir is closing everybody understood this when you eliminate unrealized profit closing stock value will reduce that's what we did in amalgamation as take holding company subsidiary Company stock and reduce stock Reserve right now does closing stock shown in pnl as a separate category or under changes in inventory changes in inventory how do you calculate changes in inventory tell me once again I explained the logic of this but quick two minutes May we'll try to Value again opening stock minus closing stock suppose opening stock is 100 closing stock suppose is 80 closing stock suppose is 80 okay that means how much is changes in inventory 20 got it everybody cool with this okay sir suppose closing stock includes stock Reserve closing stock includes stock Reserve can we show stock Reserve or eliminate eliminate let's assume stock Reserve is 10 Rupees stock Reserve is 10 Rupees that means now you calculate changes in inventory how do you calculate changes in inventory opening Stock May any mistake or no mistake 100 only closing stock can we take 80 or first we have to eliminate stock Reserve eliminate that means correct value of closing stock is 80 or it is 70 70 that means how much is this 30 okay people understood everybody so that means what is the correct value of changes in inventory 30 rupees if youone cool this you can present in an easy format what is that very simple now how much is the changes in inventory before how much is changes in inventory before 20 is it 20 now or the Revis value should be 30 30 so what is the difference between 20 and 30 10 what is that 10 Stock Reserve how do you get from 20 how do you go to 30 add stock Reserve so basically in consolid at P if you have any stock Reserve simply add simply add that's what I explain you in detail half an hour discussion we made for this only okay but the end point of the discussion is very simple if you have stock Reserve in Consolidated pnl just take the changes in inventory and add a stock Reser everyone cool because if you add automatically you'll get how much 30 the correct value is also 30 Clear people now in this problem how much is unrealized profit 1 lakh 140,000 how much is the changes in inventory already calculated changes in inventory is this correct so do we have any stock Reserve in this problem yes what should we do for stock Reserve simply add how much is stock Reserve 140 add it you'll get the correct value of changes in inent that's okay people I don't have to spend much time on this I believe doesn't matter what the sign is whether this is negative this is positive doesn't matter stock Reserve you always add you'll get the proper right answer I proved it with logic if you want you can refer to the regular class for that if you ready to spend half an hour for it otherwise not required okay move on to the next St check this selling and distribution expense of star selling and distribution expense of star includes 2 lakh 12,000 paid to Moon as brokerage fees for selling company this is an expense for Moon limited star has paid to moon no so for this entity it is an expense means for another entity brokage fees is in IND so this only we call it as what Mutual Owings can we show it or eliminate one place or two places both from income as well as expense so selling and distribution we have a separate category or other expens from other expens how much we should eliminate 22,500 come to other expense category selling and distribution expenses this Mutual Owings is 22,500 eliminated okay people this is elimination from expense only from expense or also from income brokerage fees is an expense from one entity is an income from other entity brokerage fees will come under revenue from operations or other income category so this again 2ak 12,500 you will reduce from income under other income category brokerage fees 2 lak 12,500 okay people there's also one more Mutual LS eliminated next what is the next one this is over next is General administrative expense of moon limited holding company includes 280,000 paid to Star as consultancy fees so for one entity consultancy fees is an expense for another for Star it is an income again this is what sir Mutual o you need to eliminate where will General administrative expense come under other expense category from other expense you have to reduce 280 where will this consultancy fees come under other income so reduce it from other income category both income and other expense you have to reduce 280 other non-operating income May reduce consultancy fees of 280 from other expense category May reduce General administrative fees includes consultancy fees they told no so reduced to we that is one more elimination next what see till now have I calculated anything no pure taking the data and dumping it into format that's all is consolidation at the end of the day star limited used some resources of uh moon and star paid 50,000 to Moon Star has paid to Moon as royalty so for royalty one entity is an expense for another entity is an income we have to reduce both from expense and income for expense it will come under other expense category for income it will come under other income category for there other expense and other income both you'll eliminate 50,000 under other non-operating income royalty of 50,000 eliminated under other income similarly under other expense category royalty of 50,000 eliminated okay sir next sir what else is there that's it no prepare Consolidated SP that turn all we are doing on December 2021 paper 15 marker now simple one everything is total can you manage the total take nodes to accounts final amount and dump it into main format of p p over that's all it is that's all is Consolidated SPL if it comes actually you should be happy because no calculation but definitely it is time consuming solving within 25 30 minutes again little bit of a challenge unless your writing speed is good so that you need to practice on your own I'll not come between you and and your speed there just one minute I'll quickly review if anything is spending huh I think now you already know what the chart book now I'll come back to the Chart Book 2 minutes may we will revise the chart book Consolidated balance sheet you know will share capital of subsidiary company and reserves in suppers or subsidiary company come in Consolidated balance sheet or it will not come only holding company will come manageable that's what I've written in point number one sir what if subsidiary company has preference share Capital what if subsidiary company has preference share cap add to the minority interest value you have minority interest working note no because who owns that preferen shair does holding company own the preferen shes in subsidiary company or Outsiders Outsiders only here in consolidation purpose we call it as minority interest so if subsidiary Company by chance has preferential Capital show it under minority interest I think we might have done one problem on this I don't remember but I remember discussing I think okay and you know that Minority interest should come as a separate category in Consolidated bance that is okay and mutual Owings and all you will show eliminate Mutual Owings and stock Reserve alone you need to eliminate that is one and this revaluation adjustment should we have to discuss or you got it already you got it already Okay that is fine okay this we have Target where you need to deduct where what you need to deduct have called you or test our memory so if you have revaluation gain where it will come don't check this chart try to recall in working note number four under post if it is a revaluation gain means you will add you will add take increase if it is revaluation loss means you will minus under pre- only right but due to this revaluation you may get some extra depreciation or you may also get reversal of depreciation that excess depreciation or reversal of depreciation will come under pre- category or post category post category if you're charging excess depreciation means minus if you're reversing excess depreciation means add that's what I've written in the chart book there okay sir next is what if holding company has sold Goods to subsidiary or subsidiary has sold Goods to holding company this only we call it as m ual Owings now from Consolidated balance sheet perspective we didn't any do any adjustment relating to this simple let's see holding as sold Goods to subsidiary or let's take this example only holding company has sold Goods costing 10,000 for 15,000 to subsidiary company what is the cost of the goods 10 holding sold it for 15 that means did holding company make any profit in this regard how much profit 5,000 so if one entity has sold selling price of one entity is cost price for another entity I mean subsidiary company has purchased his inventory for how much value 15,000 let's assume that 100% of the inventory is still laying unsold with subsidiary holding company sold Goods to subsidiary after that subsidiary has sold or all the goods lying that means closing uh subsidiary company showing all the goods as closing stock then subsidiary purchase this goods for 15,000 they're valuing this closing stock at now you are preparing consolidation in consolidation you're treating H limited S limited separate or you're treating them as one company from the group perspective is aost cost of this Goods really 15,000 or it is 10,000 from the group perspective the cost of this Goods is only 10 but subsidiary company showing this Goods at 15 I means what is that why is it extra 5,000 rupees of profit is included in the value of closing stock which only we refer to as stock Reserve we should show this or eliminate in Consolidated SPL where to eliminate you already know but closing stock comes only in pnl or it also comes in balance sheet balance sheet right so in balance sheet also you need to eliminate stock okay people but but but stop holding company sold Goods to subsidiary and holding company made how much unrealized profit 5,000 sir can you show this profit holding company has already accounted this profit because sales is already done is holding company showing this profit in their in their financial statement yes in Consolidated financial statement may can you show this profit or you cannot you need to eliminate you need to eliminate because it is in Consolidated financial statement are you treating them as two separate companies or one so if you show this profit then as good as you're saying I'm making profit from myself so can you show this or eliminate eliminate so the question is in which working note it will come because in Consolidated balance sheet there are one working notes or seven where it will come this yes this 5,000 rupees of stock Reserve you need to eliminate in the balance sheet you'll reduce it from your balance sheet you'll reduce it from the stock that's okay but in in working notes which working note it will be which working post fourth working note he say ah s seventh working correct answer is working note number seven sir who made the profit who made the profit sir holding has sold Goods to subsidiary means holding company made profit working note number four heading is what analysis of reserves in surplus of subsidiary company did subsidiary company make the profit here or holding company holding company profit you show in which working note last working note called Consolidated reserves and surplus that is the reason if you check this format now you'll appreciate in working note number seven stock Reserve we have eliminated here in that problem it was not there but it will come here okay people this will come here when holding company has sold Goods to subsidiary company possible yes yes suppose if it is other way around meaning subsidiary has sold Goods to holding company in that case who would have made profit subsidiary company subsidiary company analysis of profit which working note we prepare working note number four so subsidiary has sold Goods to parent holding company means it will come under working note number four right so under post acquisition profit we show your uh your stock Reserve under postacquisition profit may we eliminate stock Reserve if it is there yes that's what I've written in the chart book there hope you are able to appreciate that yes okay if holding has sold Goods to subsidiary means we also call that as a downstream sale holding company's Big Daddy subsidiary compan is Bacha father comes top B comes father is always at the top so so parent or holding company here a subsidiary company is here if holding as sold go to subsidiary means arrow is going down so we we call that as a downstream sale so sometimes instead of saying holding and sold Goods to subsidiary they may directly tell you Downstream sale Downstream sale simply means holding as sold Goods to subsidiary so in that case which working note may you will eliminate working note number seven if parent has sold parent is subsidiary is here if subsidiary has sold Goods to parent means arrow is going up so in that case may we call it as an upstream sale in that we will reduce it from working note number four S or four four under where post acquisition profits that's what be WR all right so this is already covered is already covered dividend you already know your experts pre-acquisition dividend you have to reduce from working note number three four six seven know that all right others Mutual Owings all the are okay so with this finally we put El to Consolidated financial statement as per as21 so go and have your Sumptuous breakfast and come we will have Sous big session after this ALS okay so take a break for half an hour come back and we shall resume thank you hello people so continuing our discussion further in this Marathon session so the next we'll be revising as23 this is also consolidation only but here as23 talks about consolidation for associates as21 talked about consolidation with respect to subsidiary company here we're talking about associate consolidation so if you have associate company what and all we need to Simply do first of all sir when does one company become an associate company when other company will become subsidiary company when you have control for you to call one company as an associate company you should have something called significant influence and significant influence you will get if you own 20% or more shares in a one company but less than 50% if you own 20% or more share in one company but less than 50% we don't have control over that company as an we only have significant influence for such companies we have to apply as23 and prepare Consolidated financial statements how we'll see over here okay that is one next thing is now let us say let's take this example a limited has 30% stake in B limited that means a limited controls B limited or only has significant influence so let's say they purchase this investment for 10 lakh Rupees to get this 30% stake a limited paid 10 LH rupes now a limited no sir should they also have to prepare CFS CFS means Consolidated financial statement so there are two financial statements one is SFS and another one is CFS SFS means what standal separate financial statement or Standalone financial statement a limited their own data if they use and prepare a financial statement we call it as SFS Standalone financial statement or separate financial statement if they take a limited data and also take B limited data and prepare C and prepare a financial statement that we call it as Consolidated financial statement how to prepare Consolidated financial statement as23 gives the guidance associate consolidation CFS guidelines is given by as23 in separate financial statement what to do sir a limited purchased investment in B limited no 30% stake they purchase means for a limited this is an investment correct and how much did they pay for this investment 10 LH sir investments in separate financial statements are valued as per accounting standard 13 and we know accounting standard 13 says that if it's a long-term investment then you'll value the investment at cost if it's a short-term investment then you will value at cost or market value whichever is lower like that that's what I've written over here in separate financial statement May valuation is done as per as3 and usually these will be long-term investment hence the valuation will be done at Cost but however if it is a short-term investment it will be cost on market price whichever is lower how Consolidated financial statement should be that guidance is given in as as23 as23 recommends some method called em method em meod Equity method how consolidation we prepare that is recommended by a method that we use one method called Equity method of consolidation okay people Equity method no very very very simple what is it simple Equity method says match investment value with associate performance this is one one line if you remember I think more or less everything is s match investment value with associate performance so initially you will value in Consolidated financial statement initially initially investments will valued at cost price initially you will value the investment at cost price here how much money a limited paid to get significant influence in B 10 so initially you'll value it at 10 lakh Rupees in this example subsequently subsequently means at year ending at respective year ending you value the investment as per Equity method and Equity method it says the valuation is based on associate performance if associate company makes profit if associate company makes profit tell me for an investor it is sck news or happy news if associate company makes profit then pendl balance of associate company will increase so how do you get net assets how do you get net assets one approach is asset minus liability and another approach shareholders funds so if associate company makes profit means res and surplus of associate company will increase that means the shareholders funds will increase indirectly net asset also increase sir we are a shareholder in one company means we get a share in net assets so if associate makes profit means our investment value will be same or investment value will increase investment value will increase so that's all we have to do here if after we acquired after we acquired if associate makes postacquisition profit then our investment value will increase if suppose associate makes post acquisition law loss if associate company makes a post acquisition loss means pnl balance will reduce reserves and surplus balance will reduce shareholders funds will reduce that means net asset also will reduce if net asset reduces means our value of investment will be more or less we are we are an investor investor will get a share in net assets so if associate company makes a loss means our investment balance will reduce like just to give an example here let's say associate company made post acquisition profit of 1 lakh associate company made a post acquisition profit of 1 lakh so if associate company makes post acquisition profit of 1 lakh means what happens to net assets of associate company it will also increase by 1 lakh sir as a shareholder a has acquired shares in B limited if net assets of B limited increases by 10 1 lakh rupees means entire one lak a gets or only their share sh what is A's share sir a only only owns how much percentage 30% that means what is our share the investor share is how much investor share will be 1 lakh 30% which is 30,00 okay fine we are the investor now we own only 30% so our share of investment will be or our share of this net asset will be 30,000 so investment balance indirectly will increase by 30,000 as simple as okay s simply you need to pass sir investment is an asset assets have what balance debit balance uh if you want to increase something which has debit balance what do you do debit it again so the journal entry will passes investment account debit to SPL account or pnl account 30,000 that's it if associate company makes loss means investment balance you have to reduce so in that case Jal entry will be Ulta P account debit to investment that's all okay sir that is what we mean by investment value subsequently should be matched with associate company performance similarly if associate company pays any dividend if associate company declares dividend when you declare the dividend what will happen to the pnl balance if associate company declares dividend their pnl balance will reduce if pnl balance reduces means net asset will reduce if net asset reduces means our share we get a share in that so investment balance be increased or reduced what if associate company pays dividend again investment B should be reduced by full amount or our share everything will be at our share okay sir that means indirectly are you telling investment will come in Consolidated financial statement sir yes in subsidiary consolidation May investment in subsidiary will not come in Consolidated financial statement instead of investment what will come subsidiary company all assets subsidiary company call liability Goodwill capital reserve minority interest all this will come okay because holding company has control over the subsidiary company hence subsidiary company all assets and liabilities we add investment we cancel and instead of that we show Goodwill or capital reserve here a limited can control B limited or they can only influence that means in this consolidation B limited assets and liability will we show in CFS or we will not show assets and liabilities of associate company is not not shown in CFS instead of assets and liability we will show what sir investment and how that investment should be valued is given by Equity method and how is our valuation done based on associate performance that's all it is so instead of associate assets and liability we only show investment in associate but that investment valuation is as per the equity method dictated by accounting standard 23 any questions for me so far all all okay till your cool yes sir okay this is what we need to apply H all right so what about Goodwill and capital reserve yes Goodwill and capital reserve you need to identify you don't have to recognize it separately this is for the sake of disclosure you need to calculate the Goodwill in the same manner but Goodwill is assumed to be included in the value of investment here how much money was paid to get significant influence 10 lakh it is assumed that the Goodwill or capital reserve is included in the value of this 10 lakh okay just for the sake of we just we need to calculate for the sake of disclosure purpose Goodwill is assumed to be included in the value of investment itself that is what I've written over here okay initially investment is recorded at Cost Goodwill and capitalism should be identified you need to calculate for the sake of disclosure but it is assumed to be included in the carrying amount of investment itself usually two types of problems are there which they prefer to ask from this particular topic theory part portion is okay for you everybody okay that's all I think is relevant this is the way we calculate I'll do one problem same thing we'll have to apply that is what I've written here if you don't have time to solve associate C question just review this format that should be good enough okay all right I'll first finish one problem and then come back to this particular pointer uh let's review this question and see or understand Consolidated or associate consolidation little better a acquires 45% in B with 45% we get control or si si great that means B limited is our associate company and a limited becomes your investor you can call okay sir what is the date on which you got significant influence 1 April 20 X1 the price paid is 15 LH you can call this as PC cost of investment whatever you want the following are the extract of B balance sheet of B limited on 1st April 20 X1 1st April 20 X1 is a date of control or date of Si date of Si on the date of significant influence subsidiary company had a share capital of 10 lakh they had a Security Premium of 1 lakh reserves and surplus of 5 lakh so why have they given you this data all this data comes where in balance sheet check all this data will be shown on under where shareholders funds what is shareholders funds another name Capital employe another name net assets that means on the date of significant influence have they given you the net assets yes because how do you calculate Goodwill you know Goodwill calculation process is same how do you calculate Goodwill compare PC with the total net assets or our share so for that we need net assets which they have given here okay so that's all so let's calculate that first and then read the things further after huh ah yes sir okay all right for a minute I got D all right doubt I thought no problem uh so let's calculate calculate the Goodwill where it went P it's not done oh here only it is done okay fine sir we'll review this first one is the calculation of good will for that we need two components PC and net assets PC is missing or given to get 45% significant influence we paid totally how much 15 that is the cost of investment the cost of investment you'll have to compare with net assets but keep in mind this cost of investment is for 100% or 45% so can we compare this 15 lakh with 100% of net assets or 45% of net assets 45% of net assets so let's calculate the net assets to calculate net assets we take shareholders funds approach how much is equity share Capital 10 lakh Security Premium is added yes all the reserves and surplus we add so add this 10 + 1 is 11 11 + five reserves and surplus 15 how much totally 16 lakh is the capital employed shareholders funds or net assets on the date of significant influence easy this is the total net assets can we compare this two numbers or 45% since we have acquired only 45% stay calculate 45% of net asset is how much 720 that means net asset means net worth of our investment so the worth of our investment is how much 7 lakh 20 but as an investor how much did we end up paying 15 lakh for a 720,000 worth of investment we ended up paying 15 lakh means as an investor we made a loss or we made profit made a loss how much loss what is the difference of these 780,000 loss means we call it as what good that's all this is calculation that mean is this a really new thing for us comfortable same thing in consolidation yes people so we have to identify Goodwill or capital reserve like this now now read the data further now how or maybe initial measurement also I will tell sir initially investment in associate is valued at what value initially investment in associate company is valued at the cost price whatever price you pay it is valued at that price how much price we paid 15 right so initially the investment should be shown at 15 LH but the way we presented slightly different how much is as an investor if you own 45% in one company means we get 45% share in that company share in what net assets what is the net our share of net assets in associate company 720,000 so this is what we are trying to find out investment initial balance okay first we will take share in net assets how much 720,000 but did we pay 720,000 or we paid 15 lakh 15 lakh that means investment should be initially shown at what value at 15 lakh but right now we are at what value 7.2 how do you go from 7.2 to 15 lakh you have to add something what is that add 780 that is nothing but add Goodwill so and then the cost of investment will become how much 15 that is what I said in the statement that 15 lakh is assumed to include the value of Goodwill in this 15 lakh 780,000 of Goodwill is already included but this is how we show it in our value valuation okay people take the net asset value add Goodwill then ultimately you'll get the cost of investment so on that day of significant influence our investment will be shown at 15 lakh rupees can I proceed yes sir okay sir after we acquired the share wasu good wasu means associate will make profit bad wasu means loss let's see what wasu is there b limited reported a net profit of 3 LH good was okay so associate company after we acquired the share associate company made a profit of 3 l so if associate company makes the profit means pnl balance of associate will increase by 3 lakh if pnl balance increase means reserves and surplus also will increase by 3 lakh which will cause our shareholders funds to increase by 3 LH that means indirectly our net asset also increased by right if net asset increases means for us as an investor it's a happy news yes we own how much percentage Tak in associate 45% associate net asset has increased by 3 lakh means entire share we will get or our share what is our share 45% multiply 135,000 that means our value of investment should be reduced by 135 or increased inre inre if associate company has made a profit means our investment balance will increase that's what we have said share of post acquisition profit 135,000 n people yes sir next one they also declare the dividend to 1 lakh if they declare the dividend what will happen to to their pendl balance he'll reduce if pnl balance reduces means shareholders funds net asset also will reduce by one net asset car reduction is happy news for us or sad news so because of this net asset is reduced by one lakh means what is investor share 1 lak 45% which is how much 45,000 so investment balance you have to increase by 45 or Reduce by 45 due to this dividend paid investment will reduce by 45 so that means from 15 lakh investment balance will increase by 135 and it'll Reduce by 45 so ultimately the closing balance of investment will become 159,000 this is the value of investment that you will show in your Consolidated financial statement at the end of the year associate company mind you assets and liability will not come in CFS rather what will come investment in associate will come and that investment valuation is done as per which method Equity method and as per Equity method the value is 15 lakh 90,000 that's all it is can I move forward that's what see I mean if in this format only I've just written it over here see first you'll take the share in net assets to this you add the value of Goodwill if it is Goodwill you'll add capitalism means you will minus then you'll get what sir cost of the investment you'll get the cost of the investment initially on the date of significant influence investment will be shown in this value all right there afterwards if associate company makes the profit means you add if associate makes post acquisition loss means you minus if they declare the dividend means you minus that's why what I've written in bracket over here that way you will get the carrying amount of the investment in associate at the year end as per the equity method that's all it is this is a format application of this is what we did in the the problem which we just now solved okay this is one kind of popular question that comes in this particular from this particular chapter usually two marker three marker at best if you are lucky maybe five Mark also who knows Take It Whatever mother body gives take it clear this is one next our investment when when should we discontinue Equity method all this are quick Theory no need to mug it up just quickly review in case they ask us a two Mar McQ question you can review s if an investment is held for sale if that investment I purchased Equity I purchased investment in associate but my intention is to sell off so if you have investment held for sale means then you have to discontinue Equity method okay why because we have a separate standard for all this you don't have it in your syllabus you learn it in CF final as indas 105 for now not required okay all right similarly when you lose a significant influence when you lost significant influence you have to discontinue Equity method okay so if significant influence is lost what to do not there in your syllabus IND is 23 cf9 so control lost IND is 110 cf9 okay a glimpse is put at CA inter level a lot more is there in CA final okay for now chill let's what is there we will review what is not there let's not worry about it it will come so far good good good good good okay next is sir I have one doubt sir what is that sir your investment in associate balance let's assume it is 2 lakh sir but associate company made 20 lakh loss sir and we have 25% stake in Associates associate company made how much post acquisition loss 20 lakh and we own how much percentage St in associate company 25% so 20 lakh 25% share is how much 5 LH that means our share of associate loss is how much but the investment balance is only in this case what meaning what if the loss post requisition loss exceeds initial carrying initially the cost of the investment was how much only 2 lakh there afterwards such a nice wasu you brought to associate company they made a bumper loss of 20 lakh and your share of loss is 5 lakh okay if you reduce 5 lakh investment balance will become from 2 lakh if you reduce if you reduce from 2 lakh if you reduce 5 lakh investment balance will become negative so should we do this is a question no what is 23 SES how much balance you have in your investment 2 lakh though you have post acquisition loss share of 5 lakh loss is restricted only to two and the current year you make the investment balance to be zero current year you make the investment balance to be zero don't show it negative make it as zero stop how much was our actual post acquisition loss share five but how much did we absorb 2 lakh how much we did not allocate 3 lakh can we leave data no no this year you can ignore next year wasu may improve let's assume that next year associate made bumper profit of 50 lakh they made a profit of 50 LH sir if associate company makes profit means their net asset will increase and we will get a share in that how much percentage take 25% I means what is our share 12 50,000 that means you'll increase the investment by 12 L 50,000 ah no last year how much loss was not absorbed in 5 lakh loss you allocated only 2 lakh how much was not absorbed three reduce that so our share of profit for the second year will only be taken as 950,000 this W steps so for how many years you can carry this forward sir no time limit this accounting is a running process it will go on happening okay this is another question if IC wants for two marks they can ask but otherwise these are all pretty pretty straightforward chapter H anything else no one more sir so I have one more doubt sir sir initially we had only 10% sir then we acquired 20% sir initially we had only 10% sir then we acquired another 20% sir in that case may that means are you getting significant influence in one shot or in stages you're getting it in stages in that case what to do sir okay we will learn it through this particular problem sir okay look at this particular scenario a acquire 10% stake in B with 10% will you get SI no to get SI minimum stake is how much sir 20% or more but less than 50% with a 10% % will you get SI no it is not SI okay on 1st April we purchase 10% great and further 15% we got we acquired a few months later that is October so 10% we already had now we purchased how much more 15 that means now we have how much as on 1 October totally we have how much with the 25% we get SI very much yes that means what is your date of control or rather what is your date of Si is Si date 1 April or 1 October first October 1st October is a date on which you got your si or significant influence all right now other information they have given okay what is that cost of investment for this 10% stake we totally paid 1 lakh and for 15% we paid another 1 lakh 45,000 net assets on 1st April is $ 850 and same net assets on 1st October has become 10 in this case what you have to do so you got As in one shot or in stages stages what as23 says over here is since you've got si in stages at each stage normally when you get significant influence should you have to calculate Goodwill should you have to calculate Goodwill or Capital iserve yes but will we account that Goodwill separately or includeed in the value of investment it is assumed that it's included in the cost of your investment itself but calculation is it required yes how do you calculate simply compare PC with the net assets or our share of net assets our share so if you have got significant influence in two stages at both the stages calculate Goodwill and then Summit up then summ it up maybe one stage can give you Goodwill another stage can give you Capital Reser total NC Which is higher like that you need to calculate or if you have not got it look at this year first 10% when did you acquire first April first April May when you acquire 10% how much money you paid one this is your PC to get Goodwill or capital reserve We compare PC with net assets on 1st April what was the net asset of what was the net asset of this company 8 lakh 50,000 sir we got 100% or only 10% 8 lakh 50,000 is 100% of net assets for 10% how much is it 85,000 that means the worth of our investment is net asset denotes net worth worth of our investment is 85 but we paid how much 1 lakh so it's a loss profit which scenario loss loss scenario only we call it as Goodwill so on 1 April it looks like we have a goodwi of 15,000 okay J now we got this si in one shot or another stage is there another when did we acquire another 15% 1st October do the same calculation on 15th October once or 1 October once again when you bought this 15% stake additionally how much money did you pay 1ak 145,000 that means your uh PC is 150,000 Okay g compare this with your net assets on 1st October what is the net assets of the company on 1st October what are the net assets 10 lakh and how much did you buy on 1st October 15% so 10 lakh is a total net assets of the company or I think they've written that okay I think they did Ulta no problem we will do it in the normal way okay all right what is our pc pc how much for this 15% stake how much did we pay 1 lakh 145,000 similarly what is a net assets on 1st October 1st October is when we acquired 1st October net asset is 10 lakh sir we'll get entire 100% stake in net assets or only our share this 145 we paid for 15% no so take 15% of 10 lakh how much is that 150,000 so worth of our investment is 150 but we paid how much 145 so Goodwill or capital reserve how much 5, so first stage may we got a Goodwill of 15 second acquisition got as a capital reserve of five net of these two first stage Goodwill of 15 second stage me capital reserve of five and you net of Which is higher Goodwill is only higher so that means finally you will show the Goodwill in your Consolidated I mean yeah will disclose it separately as 10,000 rupees this is what you need to do when you get si in stages there's another problem that may be tested clear clear clear clear clear okay then this is fine sir yeah yeah um yeah I think that's pretty much the concept that I could think of this is also clear this is also clear yeah that's it with respect to this particular standard sir thank you hello people next we are revising accounting standard 27 financial reporting of interest in joint wi so far we previously we saw subsidiary consolidation after that associate consolidation now joint ventures consolidation again FAL to topic okay good syllabus in CA final little F through in accounting standard okay very pretty okay anyway let not too much speak anyway time is not there huh now what is this joint venture sir it becomes a subsidiary when you have a control it becomes our associate when we have significant influence sir when does it become JV sir for it to become JV we look for something called Joint control joint control Whenever there is a joint control scenario then it becomes something called joint venture fine people so key element here is joint control so when do we get joint control simple let's say one company is there JV limited two company a limited has 50% in JV B limited also has 50% in J now you tell me can a limited control JV Limited sir to get control the shareholding percentage should be greater than 50 is it greater than 50 exactly 50 exactly 50 so can that means JV all the decision can a limited take or they also need B limited help so if a says yes to suppose J limited wants to expand a limited voted favor a limited said yes we will expand B limited told not required this is not the current year chill I am voting no I am voting no can this company go ahead with expansion or they cannot that means if they want to go ahead with expansion both A and B has to say yes in favorable it should be yes or no that means one entity or one person is controlling JV limited or it's under joint control joint control so if there is a joint control then only this particular as 27 will come into picture otherwise so join control means 50% 50% should be there sir not necessary so in in a company there may three investors all of them are holding 33 33 33 percentage so in that case The Entity is jointly controlled by three parties percentage could be whatever okay I have assumed two entities in that case may the percentage will usually be 50/50 but the key element for as27 is joint control one person should not control it the control should be with multiple parties one okay this is pretty F to topic I feel maybe two marker at best if they ask for more than two markers again you should be very very happy because question question and all are literally childish in this particular topic there's nothing literally we have solved a few questions in our regular class you every question is there in study material we have solved okay but just saying they're all pretty straightforward question my gut feel is I'm happy to be wrong here that so that's that those sort of questions may not turn up in examination because they're pretty straightforward ah if it comes your choice don't lose marks solve it fully and get full marks okay easy questions they are okay but since it has a little less relevance I'll be focusing on what I think is more relevant from this particular topic okay now what is more relevant I feel a little bit of theory oriented questions can come here first is there are three types of joint venture which we talk about in as 27 as far as as 27 go 27 goes jvr of three types jointly control operation jco jointly controlled assets jca jointly controlled entities jce e three forms jco o jca j c e JCB sir right it is not there okay this are the three types of joint venture I personally feel they will give you a scenario and ask you to identify whether it is a jco jca or JC E I feel probably that is a better suited question according to me but I'm happy to be wrong here if they ask numerical question I to score full marks because they are pretty straightforward one quick review you do the study B question you don't need any help for that okay I'll tell you what mean how what is that now three forms of joint venture so how to identify that's what we are about to study now first form of JV is jointly controlled operation what is jointly controlled operation is first maybe I'll call out the feature then we'll take a small example in case it is a jointly controlled operations no new entity will be formed first feature of jco is no separate entity is created for this joint venture business do you open a new company or no new company started no new company or entity is floated that is the first feature okay each person each person will use their own assets they will incur their own expense but whatever revenue and profits the business generate they will share this is the feature okay let's understand through a small example let us say two people are there Cindi mindi okay now people Marathon class is going on now Pap after 9:30 to your tummy will be doing after 1:30 also same Hal let's discuss only from The Breakfast single because you already had breakfast now okay now Cindy and mind are very smart people they realize anyway this guy to will drill he'll not give the break on time by the time he gives the break almost every student will be so much filled with Hunger that instead of one Dosa they will sa two or three dosas so cind decided that I am idly expert I will prepare idly and I also prepare sambar me decid okay I'm also not I also good in v and I'm equally good in Chutney I will prepare V and chutne okay so what Cindi and decided is they will prepare respective items after 9:30 once the class is over good good good they'll run below the academy they will stand and sell itly sambar to people students you people okay now now what is that that is an example of jco jco jointly controlled operation did Cindy and mindi open new company no all right who is preparing idly where which house in her house only as for I don't know but Cindy will probably prepare idly in her own place correct by using her own gas stove her own uro or whatever items you require correct no Cindy will buy all those materials required for idly and sambar and she will prepare her own idly M also will use her whatever ingredients is required and prepare idly and S so that is a second feature that's what this operation is trying to say what is the second first first features are no separate legal entity second one each venturers will use their own own assets for their business so now cind is using their own probably St gas and all right and they are incurring their own expenditure but but when they sell this idly water sambar to students they will get money that money one person will keep or they will share sh so Revenue will be shared among these two people so in what ratio as per the agreement maybe 5050 60 40 whatever is it okay so sales and sales and income generated from operations they will share such a JV is what we refer to as jointly controlled operations you you'll be able to identify the if they give similar they not give case and all just saying that if they give you a similar structure will you be able to identify that is one that is the first feature of or first form of JV called jointly controlled operation what is the second one jointly controll asset jointly controlled you prepare no problem give it to for free that's all yeah H what about Los ah everything same if they suffer loss means they will share that's all yeah correct Revenue loss profit share they will share in a particular ratio as for the agreement that I don't know agreement will call out can I move on yes okay next one is jointly controlled Assets Now jointly controlled name itself is saying jointly controlled assets first maybe we'll call out what's the def I mean features even in jointly controlled assets no separate entity will be formed new entity will not be form okay since the name itself is in jointly controlled asset that means if you have any asset one person will control it or everybody will control that is what is the next feature venturers will jointly control the assets okay now what is this let's take another example Lambo limited is an architect bumo limited is a construction company so if you want to construct a building means you need architect also you need material also so lambu is saying I'm expert in that that yeah that's their indication of saying we are experts in that but I think I should tell them to start the work later on I forgot okay all right or maybe they'll not listen to me okay L okay lumbo limited is a architect company they have expertise in constructing the building for construction we need materials sir bumo limited is saying I am supplying construction material since W in 20 30 years may I am in this construction industry so that means these two people made a plan they're saying anyway you have expertise in construction I have expertise in construction materials I will give all the materials to you you do all the construction all right and we will construct one Business Park Prestige park or it Park and all you must have heard no one business park or building they constructing after constructing they will let out they will rent out this building and share the rental l this is the agreement can we make such an arrangement yeah we can all right now you tell me sir is a new entity formed here what is their main business over here two entities have come together with what intention to construct a building called Business Park after construction will they sell it or they want to let it out and earn some income they want to let it out and get some rental income now you tell me who will control this business park lumo bumo or both both so both of them came together and generated an asset and both the parties have control or joint control over this asset they have a joint control over the asset such a feature or such a JV only we call it as jointly controlled assets where two or more venturers are coming together and have they have constructed one asset and who controls that constructed asset one party or all the parties that's what I've written here no separate entity will be formed and venturer jointly control the assets F now people and here each party will show their share of assets income and expense in their financial statement obviously bumo limited will give construction material for this building business park right so they will record their share of assets income expense in their financial statement other party share they will not show all right each party will show their own share of asset liability income expense in their respective financial statement such a feature only we call it as jointly controlled assets any doubt or move on onine awfully silent what you went for online everybody there no okay no mo on now eight also great next one is jointly controlled entities jointly controlled entities now a limited B limited came together and they formed a new entity called JV limited where a owns 50% in JV B also owns 50% in JV stop in the last two forms of joint venture was new entity formed or it was not formed not formed look at the heading of this it is a jointly controlled entity in jointly controlled entity new entity will not be formed or it will be formed it will be formed so the moment in the question if they say a new entity is formed it is a jco jca or jce JC it is a jointly controlled entity that's how to identify manageable if you have formed an entity means if you formed a company means who will buy assets if you're running a business means you'll have to buy some assets who will buy the asset since you have formed an entity The Entity only will purchase the asset The Entity only will incur the expenses The Entity only will generate the income right but that means what is these two parties get what will the shareholder in the company get share in the net assets or rather share in the profit right know so that's what we are trying to say here here since the new entity is formed the new entity only will purchase their own assets whatever is required they will incur their own expense they will settle their own liabilities the parties in this particular contract a limited and B limited they will get the profit dividend is what they'll get profit share is what they will get they will not get share in assets and liability rather they will get the share in the net profit that's all it is understood how people in fact first line only is giveway because in other two in the previous two forms of joint venture is there any new entity or no new entity the moment new entity comes automatically it is a jointly controlled entity so identification of which forms of JV may be a popular question from this particular standard okay all right people so how to do what do the accounting sir in venturers venturers here means a limited be limited we call it as Vance one second or maybe I'll go and talk to them [Music] [Music] [Music] thank you they agreed us sir they said it's okay their job also no fine apparently they'll try to keep it down let's see okay so are we good with this so till now fair enough so how do you do the accounting simple the venturers here a limited and B limited only we call it as co-venturers so in separate financial statement stop a limited has how much stake in JV limited a limited has 50% stake in a limited uh in JV limited so a limited will have to show this as an investment in separate Financial statement investment valuation is always done as per as 13 and as13 says if it is long-term investment you valuate at Cost short-term investment at cost or market value whichever is lower so Consolidated financial statement how you need to prepare you need to prepare CFS here that guidance is given in accounting standard 27 as27 says show propor use proportionate consolidation method use a proportionate consolidation method in proportionate consolidation method it's very simple a will show a limited in their Consolidated Financial stat they will show their share of asset liability income and expens and CFS suppose JV limited has an asset of 1 lakh they have a building worth 1 lakh so when a limited prepares CFS when a limited prepares CFS they will also show this building in their CFS at full value or their share what is their share 1 lakh or 50% is how much 50,000 so this building will be shown by a limited in their CFS at 50,000 that is what we mean by proportionate consolidation method in proportionate consolidation method each venturer will show their share of asset liability income and expenses in their Consolidated financial statement that's all we have to do done people that's all now this statement also or this standard also Damar thank you all right people next revision standard in our marathon series is accounting standard 10 that talks about property plan and equ PP okay now sir earlier we used to call it as fixed asset the name has been changed we don't call it as fixed asset anymore we call it as property planted equipment so if you have property property planted equipment does not mean missionary all the fixed assets has been now renamed as property plan and equipment so every fixed asset is known as PP what and all you should do when you should recognize PP at what value it should recognize PP where you should disclose all that kind guidance is given in accounting standard 10 okay first sir as 10 is not applicable for few things one it is not applicable for for biological assets so biological assets biological assets means plants and animals living plants and living animals we call it as biological assets for this biological assets we cannot apply as provision sir why sir because we have a separate standard called indas 41 which deals with agriculture you learn it in CA final not there in CA intermediate we have a separate standard for them it gets covered there okay but but but there is one exception except Bearer plan except bar plan so exception of exception is applicability meaning in as10 is not applicable for biological assets except Bearer plant that means for Bearer plant is as10 applicable yes for B where plant as10 is applicable for other biological asset is as10 applicable or not applicable not applicable so what is this where plan we'll talk about that in a bit so those are your exclusions and also some wasting assets like if you have coal mine gold mine and all we have explor these are known as exploration assets we have separate standard it gets covered there the next one is Sir what is property plan and Equipment sir if you want to call a component as a property plan and Equipment it has three definition features three all the three definition should be satisfied one it should be a tangible asset it should be a tangible asset second it should be held for use that usage should be either to produce Goods or renderer service or administrative purpose or rental purpose and the usage should be for more than one period or 12 months if if any property plan and Equipment satisfy all these three features then you can call that as a property PL and Equipment okay first one it should be a tangible asset meaning you should be able to tangible means what you should be able to touch your see feel and all so you should be able to see touch or feel that asset and and and it should be an asset asset means it should be within our control if you want to call something as an asset it should be within your control now we have 500 rupes gandi note in your wallet is it is it your asset is it your asset I'm not talking about PP or not is it your asset yes why because you can do whatever you want with it you can give it to me if you're crazy you can tear it or you can use it to buy some merchandise or whatever yes or no whatever you want to do you can do with that 500 rupees yes or no that means that is your asset if you want to call a component as an asset means it should be within your control sir are employees within company's control are human beings within anybody's control human beings biological means living plant ma we talking about human beings you and I I think we are little better than Pig and there yeah so human beings is it anybody's control no now I say sit we will study till 4:00 5:00 6:00 today what will you say h you sit we will go yes or no correct or no human beings are not within anybody's control so that means are human beings asset can Reliance show mkes Amani as an asset no can Ari be so K as an asset no because human beings are not within anybody's control okay so if you want to call it as a BP means it should be within our control human beings are not assets because they are not within our control that is one so that's your first definition second one that PP should be held for use you should use that PP for one of the four purposes either to produce some Goods or to render some service or administrative purpose or rental purpose like why does a Manufacturing Company buy Machinery to produce Goods why does aru Pro have all this assets TV laptop AC and all to render service correct third one administrative purpose sir you know that we also installed AC in other this is not the only place we have AC where our employees are sitting also AC is there at receptionist cabin also AC is there we take class there J is smiling don't tell all that die that tra Secrets today okay but actually it is that okay sir sir sir sir if you have installed AC in receptionist cabin will we conduct class in receptionist area no but is it necessary yes so that means those are all what assets administrative assets even if you are using any property plan and equipment for administrative purpose even those are considered as PP only that is your third purpose you can use that because majority of the assets will not give you that good boots or will not be used in rendering service they'll be used for what purpose administrative purpose even administrative assets are also property planted equipment itself this is one of the acceptable purpose the last purpose is it should be either used or or for rental purpose either you should rent it out that that PP you should rent out to somebody and earn some rental income for one of the four purposes you should be using that PP that's one then sir PP means it'll last in our business for less than one year or more than one year more than one year that is the next feature if you want to call it as PP means that PP should last in our business for more than one year if all these three criterias are satisfied means it becomes a property plant and equiv that means can you show this PP in balance sheet or sir no sir if you want to show this PP in balance sheet there are two recognition criteria there are three definitions plus there are two recognition criteria the recognition criteria is from the pp now why has Aro Pro purchased all this camera iPad and all to render a service that means are we getting any benefit from this asset yes that is what is the first recognition criteria from the property plan and Equipment there should be some future economic benefits for class purpose we used to call this as feed future economic benefits from that PP you should be able to get some benefit if you are not getting immediate benefit it is okay if you say we will get it in the benefits after one year acceptable after two years if you're are expecting the benefit acceptable some benefit from that PP entity should get that is what we mean by the first recognition criteria called f and second one is cost measurement meaning for that PP how much you have spent you should be able to clearly identify or measure it so as long as these five criteria are satisfied you can show that PP in balance sheet three definition criteria and two recognition criteria if they give you case study based questions doubtful you'll have to call out all this if they don't give it no problem usually numerical question turns up where all this garam masala is not required but if they give it you need to add your these sort of f okay move on next one or got what what is Mo on are Mo out more like but okay no problem I will ignore your feeling biological assets we already discussed what is that living plant and animal we call it as biological assets next the only thing we need to know is Bearer plant for Bearer plant is accounting standard 10 not applicable or is applicable as10 is applicable for beer plant so what is this barer plant if you remember our class we used to give mango tree example yes if you remember if you don't remember no problem same thing I'll tell once again mango season Any Which Way sir we have a mango tree a farmer has a mango tree from mango tree what do you get mango that is the first feature of a barer plant if you want to call it as a barer plant means that barer plant should give you an agricultural produce from that barer plant you should get not an industry product but an Agri produce mango is industry produce or Agri produce that is the first condition okay from that barer plant you should get some agricultural produce second so if a farmer has mango tree that mango tree will last for less than one year or more than one year than more than one year second condition is that it must bear the mangoes or it should bear the produce for more than 12 months from that mango the farmer should get mangoes for more than 12 months because if you want to call something as a PP it should last for less than one year or more than one year more than one year that is a second condition third one is Sir after that mango tree Bears mangoes what will the farmer do sell the mangoes will you also sell the tree to the timber industry after plucking the mango tree also chop chop chop and sell or Tre tree he will protect that is the third condition the tree itself you should not sell in the ordinary course of business along with mangoes you should not also sell the trees like farmer business every year he'll put seed mango seed get mango tree from mango tree he will collect mangoes once mangoes are collected he will cut mango tree also and sell the tree in that case may the mango tree is a PP or it's an inventory inventory because you are selling in the regular course of business that is what they're trying to say that tree itself should not be sold in the ordinary course of business if all the three conditions are satisfied means it becomes a bearer plan and for Bearer plan you will you will very much apply accounting standard 10 Provisions okay H all right next one next one is spare parts and standby equipment so if you have any spare parts what to do all right so normally when you have a machinary missionary will have many parts right so let's say one critical part is there mission we have imported from Japan that means that part also we have to import from Japan only but if you place the order today the Japanese vendor will supply the material after 2 months that means what will the company think if that part by chance get gets damaged then can you run that missionary or you have to wait for two months wait for two months do you think company will take that chance no what they'll do they will bet some spare parts and keep that correct or no so what should we do that spare part we bought Machinery also we bought spare part also missionary you show it as PP what about spare part what as10 says is check the recognition criteria what is recognition criteria SP bang cost measurement if recognition criteria is met PP definition and recognition criteria if it is met you can show that spare part as a PP otherwise you'll classify that part as an inventory in your balance sheet these are just classification standards done people okay quick review you do no need to mug up all this stuff because they will not ask you a direct question what is a treatment and all okay yeah I mean they you not be expected to write in words you may have to select all this may come as an McQ question as an option so as long as you are able to quickly read it review it and remember what is the right option that that much understanding is good enough if you remember everything that's awesome nothing wrong with that okay all right next one is Sir what if you replace any parts what if you replace any parts let's take a small example sir I purchased electric Caro the life of the car is 10 years the vendor told that car will come for 10 years totally I paid 15 lakh rupes for for that car but that vendor told battery will only come for 5 years battery will only come for car will last for how many years 10 years but that electric car one key component is battery but the vendor is saying battery will only come for 5 years after 5 years you need to replace it because battery life is only that much all other parts will come for 10 years okay so in this 15 lakh okay B towards battery have paid 5 lakh towards other parts have paid 10 lakh so totally have paid how much 15 lakh rupees easy now one second stop sir you'll calculate depreciation you'll calculate depreciation you will calculate depreciation for 10 years 5 years depreciation is charged based on the useful life correct other parts of the car can last for 10 years but battery will only last for 5 years that means how will you calculate will you depreciate entire 15 lakh over 5 years or entire 15 L over 10 years or you will separate sear separate this only we used to call it as perfect Raj is saying this only we used to call it as component Accounting in our regular class if you remember meaning if different parts of the same asset if they have different useful life here is the one asset what is the main asset car that car has two parts one is battery and other one is others is battery life and other parts life same or different different if different parts of the same assets if they have different life you need to calculate depreciation also separate you can pass one journal entry together for depreciation but calculation of depreciation should be done separately is it okay because battery will last for how many years 5 years that means battery will be depreciated only over 5 years other part depreciation will happen over 10 years this only we call it as component accounting yes s all right now I started doing the accounting sir 3 years over 3 years over tell me how much battery out of uh what is the depreciation out of charged on battery forget about other parts now concentrate on battery totally I paid initially how much for the car 15 lakh in that 15 lakh how much was for battery 5 lakh I am depreciating this five lakh over how many years 5 years how do you calculate depreciation tell me if they don't give you uh any uh if they don't mention the method if useful life is given means you which method you'll adopt straight line method because what is straight line method formula carrying amount of the asset minus residual value divided by useful okay that means old battery only old battery part I'm talking about originally the battery how much towards battery you had paid 5 what is the useful life of that old battery 5 years okay 5 lakh is a carrying amount of that battery residual value not given so we'll take it as zero useful life is how many years five years so if you do this you'll get one lakh one lakh is how many years of depreciation one year how many years have used that asset I've assumed that 3 years I've already used that car that means I would have depreciated this by how much 3 lakh rupes that means do you have any carrying amount of old battery remaining yes how much is that 2 lakh rupes now bad wasu car broke down third year ending my car broke down I took the car for checkup doctor the doctor told battery gone battery gone you'll have to replace initially the vendor had told battery will come for how many years five years but unfortunately maybe I used so wonderfully that battery died in 3 years okay that means I have to replace the new battery correct that is a concept testing replacement of parts I'm replacing the whole car or one part of the car one part of the car I'm replacing which is battery and for new battery let's say I paid 7 lakh rupees for new battery I have to pay 7 inflation initially when I bought battery old battery cost was only five now due to inflation environment the cost of the battery has become 7 now I have paid 7 lakh rupees for the new battery 7 lakh for the new battery what should I do this 7 lakh should I transfer to pendl as an expense or should I capitalize understood the question okay very simple in a accounting standard 10 check the recognition criteria check the recognition criteria what is the recognition criteria sir Feb and cost measurement Feb full form is what future economic benefits and cost measurement can you measure the cost of new battery reliably yes 7 lakh from this new battery will I get some benefit yes so if RC is failed here or RC is met if RC is met replacement part okay the new battery cost you'll not transfer to P you will add it to the carrying amount of pp okay you'll add you'll capitalize this basically okay zaru that is one part everybody clear with this hang on Sir is your old battery there physically in your car or old battery is removed car means you'll have two two batteries or only one old battery you removed and you substituted with the new battery sir physically in that car is old battery there or removed removed of that means books old battery carrying amount should be there or it should be eliminated eliminated that is the concept that they're trying to say here new part cost you capitalize new part cost you capitalize but the carrying amount of the old part if at all if it is remaining what you have to do you have to reduce that means what is the carrying amount of the old part in my example 2 lakh 2 lakh you need to minus so in this case my 2 lakh old battery cost you will minus new battery cost of 7 lak you will add this is what replacement f is if they say any inspection charges we have done one question inspection charges you do the same concept okay but however if it's a routine repairs and all that you have incur normal service charges that and all will go off to pnl account okay this is One More Concept next what is next to Sir initially PPS are shown in your balance sheet at what value sir doesn't matter which property plan and Equipment whether it is land or building or missionary whatever initially all property planed equipments are valued at cost price so what is cost price price cost for this purpose are broadly classified into three categories one is Purchase cost one is Purchase cost so when you buy a machinary sometimes and all you may have some taxes also so what should we do for taxes as10 says that if you have incurred any non-refundable taxes any non-refundable means will you get ITC credit or no ITC if you're not getting input tax credit that be calling it as non-refundable taxes right if you have if you have any paid any non-refundable taxes you can add okay so from the purchase cost if you have any non-refundable taxes add if you have got any trade discount or volume discount and all minus this way this is the first portion of the cost all this data will be given to you in the numerical question you need to remember what to consider what to ignore okay sir next one is DAC DC means directly attributable cost sir suppose I'm importing the Machinery from Japan but my factory is there in Bengaluru from Japan if it has to come to Bangalore means I have to incur many cost what in all cost I may have to incur transport cost if the missionary is Big will the vendor send as it is on part by part then I'll have to assemble it so all that only we call it as directly attributable cost installation charges delivery charges assembly charges whatever all that we call it as directly attributable cost so what as10 is as10 says is till the asset is management ready who who wants to use the asset company or management till the asset reaches ready to use condition whatever direct cost your incurring on that asset can be capitalized that only we call it as directly attributable cost example as I told over your installation delivery etc etc those are all your DXs even Dax can be added to the cost of the asset DAC installation charges and all will not go to SP rather it will be capitalized move on all right next one is the decommissioning and site restoration cost for class purpose we used to call this as DSR you remember I used to give a GE example Reliance car okay maybe same example I've written here once again we will you suppose sir if Gio wants to I mean if the Gio wants to operate in telecommunication sector they have to install the the Telecom Towers now Telecom Towers they'll keep it in Roa no they will install it in highrise buildings fourth floor 10 floor building may they will install one Telecom Tower yes now they approached one building owner and told on your building I would like to put up my telecom Tower and Gio told no problem I'll give you rent for it I'll give you rent for it building owner asked how many years 5 years building own asked after 5 years what will happen after 5 years I will airlift I will take off the Telecom tower building owner asked what happens to my building Reliance told there might be some damages there might be some damages what will the building owner tell was my building was normal you came and you did your samama installed your Telecom Tower because of that the building has got damaged now the building owner will ask the Reliance to bear that repair cost yes or no that repair cost only we call it as decommissioning and site restoration cost now they are restoring the building yes or no that only for our class purpose we call it as what sir DSR okay now no no no no no in this example May DSR cost Reliance will incur now or after 5 years after 5 Years sir we are doing the pp accounting after 5 years or no no one minute check if the relian says I will not incur the repair cost I will not incur the repair cost what will the building owner tell I will not give you the permission to use Telecom tower on my building yes or no I means to operate a telecom Tower to operate Telecom Tower do we need to incur this expenditure is this expenditure necessary to make the Telecom Tower ready to use for management to make the Telecom to ready to use is this DSR cost required yes that means this is also what this DSR cost also indirectly what it is D only it is it is what D only but why do we have this as a separate categories so normally when you buy a Machinery when will you incur installation charges after 5 years or immediately iMed usually and usually DXs are in D cost will come later or immediately immediately but in this example may you check DSR cost is coming now or after 5 years after 5 years that is the reason we have a separate category for this okay people all right but but but but hang on let's say repair cost is 10 lakh after 5 years Reliance feels to repair this building it will cost 10 lakh can we add DSR cost to the cost of pp first question to you can we add DSR cost to the cost of pp is this DSR cost required to make the pp ready to use yes that means can we add yes but are you incurring this DSR cost 10 lakh immediately or after 5 years after 5 years but are you doing the accounting after 5 years or no you are doing the accounting now but this 10 lakh is present value or future value future value that means can you capitalize 10 lakh no 10 lakh is the future value find out the present value of that find out the present value of that use a discount factor which will be given to you in the question and find out the present value let's assume that is 7 lakh that means you will add it to cost of pp only how much 10 lakh or 7 lakh 7 lakh rupees you will add it to the cost of pp but are you incurring 7 lakh or 10 lakh 10 lakh that means the difference between the 7 lakh and 10 lakh is time value of money interest charges this 3 lakh rupees you will book it in your pendl account as the interest charge okay zaru DSR is not that important as per as I have seen the paper at C intermediate level question can come not saying it can't come at CA final level this is one of the very very important concept A lot of questions are there it usually comes at CA final level a lot of high fund accountings are there but at your level at least this much to I feel you should know in fact I think I've shown you the full accounting also in my regular class if you just check how the accounting should be done from day one to last okay I've shown you the example but again if you remember it and review it that is okay in case you don't remember that is fine but at least this example May what we have said that much though I think minimum is required all of you are clear with this so far Paka Paka G okay before you go to sleep let's have a quick recap which is standard accounting standard 10 okay few St few assets are not considered as PP for this purpose what are those biological assets exploration assets like Co mine gold mine but biological assets breakup is what living plants and animals only we call it as biological assets for all biological assets as10 is not applicable for one in fact for all biological assets as10 is not applicable but for one biological assets as10 is applicable which is that be PL okay so if you want to call it as PP there are three recognition definitions what are the definition features one it should be a tangible asset second it should be held for use that usage should be either to produce Goods render a service or admin purpose or rental purpose and the usage should for more than one year right that is one then this is a definition but if you want to show PP in balance sheet there are two recognition criterias what are the two recognition criteria Feb and cost measurement Feb means because of that PP some future economic benefit should flow to the entity and cost of that PP you should be able to measure it reli okay next after that what did we discuss uh I think we discussed be planto okay Bearer plant means what sir Bearer plant is a plant which satisfies three features one from that plant you should get some agricultural produce and you should get the produce only for one year or more than one year you should bear the produce for more than 12 months or one year third one that that Bearer plant only you should sell in the ordinary course of business or you should not sell the bearer plant itself you should not sell it in the ordinary course of business because if you are selling Bearer plant in ordinary course of business then it is not PP it becomes inventory that is the reason all right then we saw spare parts if you have any spare parts in standby equipment check if recognition criteria satisfied you'll show it as PP otherwise you'll classified as invent all right then if you're replacing any parts what do you do check if RC is met if RC is met then new part cost you will capitalize what about old part carrying am you'll still show it or D recognize D recognize or cancel okay if it is there if it is not there well then good okay then we discussed initial measurement of pp initially all property plan and equipments are measured at Cost cost for this purpose are of three types Purchase cost DAC and DSR under Purchase cost cost you can add Purchase cost if you have any uh import Duty and other non-refundable taxes add if you have any volume discounts trade discounts or rebates or whatever minus then DAC DAC means what they are full form is a directly attributable cost they are those cost incurred to make the pp management ready till the asset becomes management ready whatever cost we are incurring we can capitalize but it should be related cost okay example is installation delivery charges Transportation charges blah blah blah blah blah then DSR cost DSR full form is decommissioning and site restoration cost in a way DSR cost also is like DC only but the difference is usually da cost will come in future or immediately DXs come immediately but DSR comes cost in DSR cost comes in future but are we doing the accounting of pp in future or no no hence can we add DSR cost yes but at full value or at present value find out the present value of DSR cost and added the difference between the present value and future value is time value of money interest charges that you'll transfer off to pendl account that's what we have done so far okay one or two more concepts are there then we will review some questions relating to this next is Sir previously we saw initial measurement previously initial meaning initially the day you purchase PP at what value it should be recorded we know that initially all PPS are recorded at Cost after that at the year ending company has a choice either they can go for cost model or if they want they can go for revaluation model subsequently subsequently means at the end of the year at the end of every year company has an option either to go for cost model or revaluation model okay sir you purchased the planted Machinery suppose for 10 lakh you depreciated in the first year by let's say 1 lakh what is the value of the asset N9 lakh so that mean this N9 lakh is the value of pp that you will show in your balance sheet yes or no correct if you are following this we say you are following cost if you are doing this if you're showing 9 lakh as the value of the asset and balance sheet we are seeing compan is following cost model in cost model you go on reducing the depreciation if there is impairment also you need to reduce that impairment we'll talk about in as28 May a little later on okay sir if that is being followed means we say company is following cost model or company also has a choice to go for revaluation model revaluation model means to show the asset at fair value to show the asset at market value if the company wants to show their property planed equipment and market value we say they're following revaluation model okay all right but there are some pointers you need to keep in mind again no need to mug up all this just have a quick review in case they decide to test as an McQ question doubtful but just anyway it is there so quickly we will review so that which is not that very important no I'll not spend too much time on that two two minutes May quickly we'll keep reviewing those are which are important I'll spend some time explaining as well as we'll take up some questions for that according to me yeah close the door first one is done h no space you want to take my seat okay next one is there is a small catch what is that catch is Sir if the company wants to go for revaluation first of all revaluation model means what to show the asset at market value or fair value one of the catches if company wants to go for revaluation model entire class of pp should be raled entire class of pp should be revalued so class means what class means group of assets which has similar characteristics those assets which are of similar characteristics usage and all we call it as single class so within the class partiality is not allowed like to give you an example let us say company has a two planted missionary planted missionary one planted missionary two first planted missionary is used in the day shift second missionary is used in the night shift same missionary okay for First Missionary company wants to follow revalue cost model second one they want to go for revaluation model acceptable or not acceptable not accept acceptable not acceptable this is not acceptable because these two are different class or same class same class means group of assets which have similar characteristics usage benefit so here these two are one class that means within the same class is partiality allowed or not allowed not either both you have to go for cost model or both you have to go for revaluation model one cost model one revaluation model not acceptable okay people all right let's take another example sir we company has an office building I think this question is there in our study material also then we have let's say a factory building a company has an office building corporate office which they have let's say in K mangala and they have a factory let's say in hosur all right for factory Building Company wants to go for cost model or rather for office building cost model for factory building revaluation model acceptable not acceptable AC acceptable not acceptable acceptable ah this is a mistake you should not do building building same no sir sir it is not building building it's not here like your flames you go on doing all that nonsense okay it is not building building sir class means a group of assets which have similar characteristics is office building a characteristic same as Factory building so office building you like go like this 15 floors 20 floors Factory building you go like that correct no Acres together you'll construct yes or no office building value Factory building value same in no right completely they are different that means these two are same class or different class different class if they are different class means you can do partiality you can do partiality meaning one you can go for cost one you can go for revaluation both you can go for cost both you can go for revaluation whatever company wants to do they can do within the same class partiality not allowed across different class these are same class or different class these are different class across different classes partiality allowed yes that is what we trying to say over here I hope this is okay all right sir how often should we show it at fair value let's say uh this iPad market value today is 1 lakh tomorrow also it'll be one lakh only or it'll change sir market value price will go on changing no right that means every day we have to go on checking market value and do accounting user no what standard says is check if your PP is very volatile it value changes frequently means at least annually you do the revaluation every year find out the fair value and at least once you do the revaluation model otherwise once in three to five years if you revalue that is good enough okay why this is is Sir if you ask me what is the value of iPad can I tell if you ask what is the value of missionary can I tell or I have to appoint some expert and that expert will put me chuna he will say value of the missionary is 10 lakh here is my 10 20,000 Bill settle yes or no that means sir every organization can they afford to do revaluation and spend money for that revaluation every time may not be possible that's the reason the standard says if asset is not volatile meaning its value does not change frequently means once in 3 to 5 years if you do an valuation that is good enough okay people all right now comes to accounting accounting may be a little important for our examination concentrate you know this you must have done it in your ca Foundation also it's the same concept more or less okay now we know this revaluation means to showing the asset at what revaluation model means to show the asset at fair value or market value signal I'll give you a break after the standard don't give signal now okay revaluation means you're showing the asset at market value okay sir suppose land is there land is there land original cost let's say is 50 lakh we bought this land for 50 lakh First Year may we did revaluation company feels they don't want to go for cost model they want to apply revaluation model in cost model may you will show the asset value at what value 50 LH because land May will you charge any depreciation no so if you follow cost model the value of the land that comes in your balance sheet is 50 land but the company wants to go for which model revaluation model revaluation model means can you show the asset at cost price or market value let's say the market value of this land has become 55 lakh at the end of the year it has become 55 lakh sad face happy face so you bought the asset for 50 lakh at the end of first year its value has become 55 lakh that means this is a case of revaluation loss or revaluation gain first time you do revaluation and you got how much gain 5 lakh rupees what is the entry will pass you know all this tell me you first time you did revaluation and you got a gain of 5 lakh rupees what do you have to do can you show the land at 50 lakh now or from 50 you have to make it 55 land from 50 you have to make it to 55 so land balance you have to reduce or increase land is an asset assets have debit balance how do you increase it debit so that means you'll write PP account debit or land account debit how much 5 that particular gain will you transfer it to SPL no you park it in one specific Reserve called revaluation reserve for class purpose I'm calling it as RR this is the entry you pass okay people so all your revaluation gain gets parked in one Reserve called revaluation Reserve easy yes sir okay let's continue the discussion further sir second year also you did revaluation because land is a volatile asset land is a volatile asset its value frequently changes second year you did revaluation look at bad was to you got a loss of 8 lakh it's second year it's not a revaluation gain it's a case of revaluation loss revaluation loss or maybe I'll tell you here let's say second year the market value of the asset has become 45 lakh from 55 it has become 45 lakh so increase or decrease orre decrease of how much first year it was an increase of 5 lakh second year in fact 1 minute 47 lakh rather my bad let's make it as 47 lakh that means it is decreased by 8 lakh tell me what you'll do sir currently the land at the end of first year land is shown at what value in your books 55 can you show 55 at the end of second year now or 47 from 55 you have to bring it down to 47 how much you have to reduce land you have to reduce by 8 lakh land is an asset assets have debit balance to reduce what you'll do credit so you will credit the pp or land by 8 L it's a loss it's a loss loss you'll transfer to SPL or PN will transfer no so first time when you did revaluation you got gain how much gain you got 5 lakh that gain did you transfer it to pnl or revaluation revaluation so subsequently if you get a loss first adjust the loss with RR first adjust the loss with RR still if there is any loss means transfer it to SPL okay here second time when you did revaluation how much loss are you getting 8 lakh out of 8 lakh loss how much you'll adjust with RR 5 lakh that means entry you will passes RR account debit 5 lakh balance loss is still how much 3 lakh that you'll transfer to SPL and you'll credit the land or PP by 8 lakh rupees this is the entry you will pass for first time reev valuation gain and second time revaluation loss any doubt okay next one let's take the Ulta scenario first time you did revaluation and you got first time only loss the very first time you did revaluation and you got a loss of how much 7 okay sir if it's a revaluation loss means asset balance you have to increase or reduce reduce how do you reduce the asset by crediting the asset by 7 okay it's a loss do we have RR or no RR no RR that means first first time when you do revaluation only if you get a loss that loss will be straight away transferred to the end so this is the entry first time if you do revaluation and if you get a loss that loss will be straight away transferred to p and lo okay people now continuing this example further second year you did revaluation first year you got loss of 7 lakh next year when you did revaluation you got a gain of 9 lakh assumption first year it was a loss of seven second year it's a revaluation gain of 9 lakh if it's a revaluation gain of 9 lakh what entry will pass revaluation gain means asset balance you'll reduce or increase means you'll write land or PP account debit 9 LH it's a gain means will you transfer it to RR is it a first time gain or subsequent gain subsequent so first time when you got a loss loss where did you transfer P how much extent 7 LH adjust this adjust this I means 7 lakh gain you'll book it in SPL because first year you booked the loss no that loss reversal will happen next year by booking a gain of 7 lakh in P balance gain only you will transfer it to revaluation Reserve yes people that is your accounting again they may ask I don't know if they ask write the entries again one or two marks entry I mean these sort of questions can turn up can I move on to the next concept okay next concept is purchasing the pp on a deferred credit basis deferred credit means sir I bought the pp today I purchased a Machinery today but I will make the payment after 2 years I'll make the payment after 2 years vendor told no problem give me 12 lakh rupees I purchase the Machinery but I will make the payment after when 2 years and how much payment I will make after 2 years 12 lhup just out of curiosity I asked the vendor if I make immediate payment how much can I buy this missioner for vendor told 10 lakh if you make immediate payment I will sell this missionary for 10 lakh but you I am saying I'll make the payment after two years that's the reason vendor is charging vendor is charging how much from us 12 lakh rupes in to now the question to you is now I have I purchased the pp means I have to record that PP in my books that PP will be recorded at 12 lakhs or 10 lakhs that PP will be recorded at 12 lakhs or 10 lakhs got the scenario everybody okay 10 or 12 10 lakh Rupees is the value of pp this only as T is that you should always record the pp at cash price equivalent at cash price equivalent meaning use your common sensor is the value of pp I am paying 12 lakh rupees entirely for PP or for interest also so since I'm delaying the payment by 2 years instead of paying 10 lakh I am paying 12 lakhs that means how much extra I am giving that 2 lakh extra whatever I'm paying is it for PP or it's for the delay delay delay means it's for PP or it's interest charges so that's the reason as10 also says the same thing now you recognize PP at 10 lakh you recognize PP at 10 lakh but how much payment are you making 12 lakh the difference between this 10 and 12 is your time value of money interest charges which you transfer it to p and that's all it is okay sir yes sir all right sir next one sir what is next one huh this one next scenario is exchange sir one good thing about PP is PP properly this as10 if you understand properly accounting standard 26 is more or less covered because many concepts of accounting standard 10 and as26 are overlapping if you know it properly here I can say that we have already done it there okay and another good thing is dto copy paste and CA fin as10 in as16 same just that you'll get some good questions at cfin level concept whatever is there in as10 datto copy paste in CF so this will stay with you okay just as10 will become IND 16 name change standard name change but there also we call it as property plan and Equipment okay okay so one advantage for you uh if you know it here one topic of CA final also indirectly covered that means you'll skip this topic yeah come come to the next scenario next scenario is called exchange called exchange sir when I buy a missionary for 10 lakh what will we do if you buy a missionary worth 10 lakh means how will we settle that 10 lakh usually by giving check or by giving cash but I made a weird arrangement I purchased plant and Machinery by giving away car by giving away car I told the vendor take my car give my give your Machinery all right this scenario only we call it as what sir exchange am I paying cash here or I'm exchanging uh PPS One PP I acquired by giving away another property planted equipment in this case may what we have to do all right this scenario only first of all we call it as exchange so as a thumb rule whenever exchange transaction comes we always have to use fair value whenever exchange transaction has come we have to always use First tell the rules then we'll apply it in a small casee so whenever exchange transaction happens you have to always use a fair Val fair value is not used fair value means market value fair value is not required under two circumstance fair value is not required under two circumstance one if the transaction lacks commercial substance if the transaction lacks commercial substance or fair value is not determinable you cannot find out fair value if you cannot find out fair value or if the transaction lacks commercial substance then fair value is not used okay what is this let's understand probably if the definition is little bar let's go and uh revolve around the case so let's say I am y limited I give away car I give away car and what did I purchase planted Machinery so which is coming into my organization Machinery which is going out car let us say fair value of planted missionary is 12 lakh fair value of car is 11 lakh and currently I'm showing car is my asset no currently car is shown in my books at a carrying amount or Book value of 10 okay now I purchase this machinary by giving cash or it's an exchange transaction exchange transaction remind me the first tool whenever exchange transaction happens you have to always use fair value you have to always use fair but under two circumstance fair value is not used what are those two circumstance one when you cannot find out fair value here you cannot find out fair value or fair value is available that means second circumstance applies or it is ruled out this is ruled out another circumstance where you will not use Fair Valu is when the transaction lacks commercial substance if it's a sophisticated word very simple we say transaction lacks commercial substance when cash flow does not change when cash flow does not change that means whether you use car whether a company uses car or whether a company uses Machinery they will get same benefit they will get same benefit if that is the case means we call transaction lacks commercial substance once more got it what does it once again tell you tell if by whether you use this asset or whether you use that asset will the cash flow for entity change or it will be same if the cash flow does not change means we say transaction does not have commercial substance or the transaction lacks commercial substance okay people now come back to this example sir using car and using missionary is Same by using car and by using planted missionary you will get same benefit or different different benefits that means in this particular case transaction lacks commercial substance or transaction has commercial substance we do have a commercial substance yes no because cash flow will be same or it will change if cash flow is expected to change means compulsorily fair value if cash flow changes means compulsorily got it everybody if you don't want to use the word it's fine but simple meaning are you able to relate it to so if cash flow change es due to this transaction compulsorily we have to use fair value now the next question is which fair value we have to record let's take a step back tell me the entry for this forget the value just tell me the entry car is going out missionary is coming in both are real real account rules is debit what comes in credit what goes out so which is coming in so Machinery is coming in so you will debit car is going out so you will credit so car is our asset currently our asset car was shown at what value in our books 10 lakh is this car there or gone if this car is there means can I show it or I have to cancel it so if I'm showing the books at in my car in my books if I'm showing car at 10 lakh means cancellation also will be done at 10 lakh so car I will credit at 10 lakh is my statement right okay the only question is machiner you'll debit at what value machinary you will debit at what value transa cash flow due to this transaction did not change or changed cash flow due to this transaction did not change or changed if transaction changed means missionary whatever asset is coming in know will always be compulsorily debited at whatever asset is coming in compulsorily we will debit what sir fair value okay now the question is we have one assets of fair value or two assets fair value both assets fair value is there which one will you use because this assets fair value is 12 this one is 11 which one to use as10 says you can use whatever you can find out more clearly whichever asset fair value you can find out more clearly you can use but practically as well as for examination I had told you always use fair value of the asset given up whatever asset you have given up use that in this particular scenario May what asset we gave up what did we give up car what is car fair value 11 lakh that means missionary will be debited 11 lakh if car fair value by chance if it is not given by chance if it is not given then use missionary far understood people why this is I in fact I used to tell this you know your your house information better or your neighbors that depends sir who's the neighbor and all yes that totally depends on that but just saying we always know our assets fair value better yes no in this particular setup May which is our asset cars our asset hence we first priority we always give it for fair value of the asset given up because that is our asset so if this is missing then we will take the fair value of the other and record manageable now missionary you have debited at 11 car you have at 10 journal entry matching or there is a difference how much difference one that difference is a gain or loss due to exchange it could be a case of gain or it could be a case of loss which will be transferred where P so if you're crediting pel means it's a case of loss or it's a case of gain it's a case of gain if a balancing figure is coming on the debit side means you'll write same Pendle account debit balancing figure in this case may it will be a loss here it's a loss or a gain scenario gain scenario this is all it is about exchange once more or okay Paka okay now no no no no no one second let's take this example little further sir companies there they Exchange Land they Exchange Land Two lands were there both are neighboring lands both are neighboring lands I own land a another company owns land B we did an exchange and both are used for agricultural purpose only and all their Dimensions or nature or usage everything is same now we did an EXT exchange so why sir we are crazy that is not your problem okay you you tell in this particular case cash flow due to this exchange will change or it will not change not change why because both assets are in the same area their Dimension is same their usage is also same that means cash flow due to this exchange will change or not change if cash flow due to this transaction does not change means we say transaction transaction lacks commercial substance transaction Lacks commerci in this case is fair value required or not required not required so let's say like this let's say the carrying amount we gave away land a and we purchased what land B carrying amount of land a is 10 lakh fair value is 20 lakh this assets fair value is also 20 lakh tell me what is the entry we acquired land B by giving away land a so entry first you tell me land B is coming in so land B account debit land a credit because it is going out yes which is our asset which we gave up land a was our asset which we gave up that means is land a should be shown in our books or cancel currently land a shown in our books at what value 10 lakh that means land a you will credit at what value 10 lakh cash flow changed or no change if there is no cash flow change means fair value should not be used if you're not using fair value what we'll use Book value you have credited this asset at what value 10 lakh so you will debit this asset also at 10 lakh that means any gain or Les loss G or no gain or loss if you are using Book value means gain or loss will not arise a two marker May a good question like this can frame can be free and people most probably if they ask they will ask you this particular scenario they will give you a scenario and say how much gain is transferred to pnl account basically this particular component they may ask all right so like that anyway how I wants to ask the question their headache I'll not go into that but overall scenario is clear for everybody P Paka Paka g h don't sleep G okay next next one is depreciation your favorite concept left right center from your 11th grade you been doing de depr de de yes no okay sir as per as 10 you will charge depreciation only if two conditions are satisfied you will not charge depreciation on every asset you will charge depreciation only if two conditions are satisfied one da should be positive useful life should be limited only if da is positive and useful life is limited you charge depreciation nothing we understood sir no problem sir straight line method numerator you tell me straight line method formula is there that formula numerator you tell me not the denominator only numerator carrying it's not no no no I've corrected that it is not original cost I proved it to you all right it is not or though the formula says original cost actually it is carrying amount minus resid value approved it I hope every of you remember at least those of you attended my class pa uh so carrying amount minus residual value suppose carrying amount is 10 lakh residual value is 1 lakh so minus this you do carrying amount minus residual value if you do how much are you going to get 9 L this only we call it as da this only we call it as da so that is the first criteria for you to charge depreciation this da should be positive all right let's say useful life is 9 years let's say useful life is 9 years what you'll do this N9 lakh of Da only you will depreciate over how many years so that means for you to charge depreciation useful life should be unlimited or limited limited 10 years 15 years 40 years whatever but but land land has limited life or unlimited since land has unlimited useful life will we charge depreciation on land no because life is not known for you to charge depreciation you should clearly know for how many years will we charge the depreciation hence these are the two parameters we look to charge depreciation okay people all right now check one minute one question is there quickly let's see how much your attention you people are paying a nice you have had you sleeping probably uh um property costing is 10 lakh all these are study material question it is there in our class notes also it is question number 10 in our class notes if you're referring property is costing 10 lakh it was brought in 20 X1 its physical life is 50 years however company considers that it will sell the property after 20 years stop sir life unlimited or limited limited but but but but what is life 15 or 20 now sir physical life means totally that asset can be used for 50 years but the company wants to use it only for 20 years sir who is doing the accounting of depreciation company that means you will take total life or company useful life useful life is always from the company's perspective from the company's perspective company wants to use it only for 20 years means useful life will only be taken as 20 years useful life is limited now carrying amount is how much 10 lakh because initially you bought it for 10 lakh now check residual value in 20 years time after 20 years residual value is first case may it is 10 lakh first case may it is 10 lakh calculate da for me how do you calculate da carrying amount 10 lakh minus residual value 10 lakh so how much is Da zero sir if da is zero means will you charge depreciation or no depreciation in the first case since da is zero you'll not charge any depreciation okay people second case you bought the asset for 10 lakh residual value is how much 9 LH what is Da carrying amount 10 lakh minus residual value 9 L that means da is how much 1 lakh so is Da positive yes that means will you charge depreciation yes over how many years 20 years that means how much is every year depreciation this one lakh da will be depreciated over 20 years that means every year how much depreciation one lakh divided by 20 which is 5,000 rupes those are the two main rules we look for depreciation I hope this is okay for everyone now come back to the question I mean one concept H this is done this is done okay da how to calculate a return return here okay sir depreciation starts from the day we use the asset or when the day asset is ready to use to use sir only for income tax act we charge we take put to use as for as accounts is concerned the moment asset is ready to use depreciation will start i' given you iPhone example if you remember if you don't remember go in the leave I me this much if you remember that's good for examination next one so which depreciation method we should use because we have one method or multiple methods we have straight line method we have wdv method we have units of production like this which method to use standard says do whatever the hell you want you do whatever you want but but but but but whatever depreciation method you choose should reflect the pattern of economic benefits it should reflect the pattern of economic benefits how how much benefit you are getting from that asset how much benefit you are getting from that asset in that benefit ratio you charge depreciation is what they're trying to say okay now suppose I have purchased a missinary from that missinary I will produce One lakh units every year for 10 years every year how many units will I produce from that missionary one lakh is it changing or same that means the benefit I'm getting from that missionary is fluctuating or same which method gives the same depreciation every year straight line method so if you are getting same benefits every year from that asset you will go for which method straight line suppose the benefit is going on reducing first year I got one lakh units next I got 80 next I got 70 like this if benefit is going on reducing which method depreciation goes on reducing wdv so in this case you will go for wdv method suppose one year benefit is one 1 lakh next year it is 1 lak 120,000 next year it becomes 70,000 that means it is showing any Trend or very fluctuating one year more one year Less in this case may you can go for units of production units of production meaning in this particular ratio me you can charge depreciation so basically you can choose whatever method for depreciation but the method you choose should reflect the pattern of economic benefits as long as that is being reflected it is okay so what if pattern of benefit changes if pattern of economic benefit changes means can you change depreciation method except you can change depreciation method also that's what we see if pattern of benefit changes means depreciation method also can be changed meaning from straight line you can go to wdv from wdv you can go for units of production whatever all right so can you charge depreciation in sales ratio depreciation can you charge it in sales ratio sir I have purchased wonderful iPad now okay all of you please buy my classes now all of you know tell your friends okay all your friends you tell I have purchased a beauti iPad brand new technology iPad okay please ask them to buy my classes will they buy no sir if they buy the classes it's a revenue for me revenue is influenced by iPad or other factors sir you will buy my classes provided I teach properly if my price is if my price is fine everybody is charging 10,000 I charged 1 lakh rupees will they buy no that means revenue is influenced by PP or other factors also revenue is influenced by the price of the product quality of the product competitor product economic conditions etc etc hence depreciation based on Revenue method is not acceptable it is not allowed as per as10 okay sir all right again tell me sir straight line method what is a formula to calculate depreciation carrying amount minus residual value divided by it's actually remaining useful but no problem useful we'll take it okay now now this residual value is a Paka number or it's an estimate estimate can estimates change yeah and useful life also Paka number or again it's an estimate estimate so what the standard says is every year you check every year you check is the old estimate still holding good or it has changed so every year annually you need to review useful life and residual value and any change in residual value or useful life These are policies or these are estimates estimates so any change in them is accounted as a change in accounting estimates accounting changes estimate changes are always accounted prospectively policy changes are accounted retrospectively estimate changes are always accounted prospectively prospectively means from today onwards if estimate changes means from today only the depreciation will change suppose after 3 years estimates changed old estimates is not holding good estimates changed so for first three years whatever depreciation I have charged should I revise it or not required not required so from today onwards I will revise my depreciation that only we call it as prospective change policy change means you have to do it retro retro means from the beginning all right so that is one all right now sir what if I purchase land and Building Together land has unlimited useful life building has limited useful that means on building will you charge depreciation yes on land will you charge depreciation no that means though you have purchased together as one agreement you for accounting purpose you need to separate land you need to account separately building you need to separately and charge depreciation on them separately yes people all right this is the concept okay next last concept is Sir if any PP has taken retirement what to do retirement means physically there mentally absent perfect example yes or no right such things only we call it as Retirement of pp meaning PP is physically there but are we using it or not using if your physically asset is there if you have stopped using that asset we call it as PP has got retired such PP retired from active use should be valued at carrying amount or NRV whichever is lower let's say the carrying amount of that asset is 8 lakh but today if I sell that asset it'll only fetch me how much 5 lakh so you will value such property plan and equipment at carrying amount of 8 lakh or NRV of 5 lakh whichever is lower that means you will value this PP at what value 5 lakh rupees but currently it is shown at what value 8 lakh from 8 lakh you'll bring it down to three that means there is a loss this loss of three lakh will be transferred off to P that's it okay s now all the concepts disclosure is not important okay this is the concept okay now can we take over some questions and review ah okay on this one you tell people uh entity a purchased an asset on 1st January 20 X1 for how much value 1 lakh and asset had an estimated useful life of 10 years residual value is Zer okay great on 1st January 20 X5 stop sir you bought the asset when 20 X1 now you are on which date 20 X5 how many years has passed sir if they give you the data from 1st January always assume that we are following calendar year year will begin on January and end on December so how many years have passed 20 X1 over 20 X2 over X3 over X4 over we are on first January 2x 5 that means 4 years is already over if four years is already over means we would have depreciated that asset let's calculate depreciation originally you bought the asset for 1 L how many years over 4 years so let's calculate depreciation one lakh is a carrying amount of the asset initially residual value is given to be zero initially when you bought the asset life was how many years 10 years so divided by 10 you do that means every year depreciation how much 1 lakh how many years have you used asset for I means total depreciation in fact 10,000 is a depreciation for one year for 4 year it will become 40,000 okay sir yes sir at the end of fourth year or at the beginning of year five what is the carrying amount of the asset 60,000 correct now some Vu problem happened check what happened on 1st January 20 X5 meaning at the beginning of fifth year the director's review okay estimated life sir life is pakka or estimates estimate an estimate should hold good or it can change it CH sir initially when you bought the asset how much was life 10 in that 10 how many years already over four that means remaining life should be how much 6 years ideally remaining life should be 6 years okay now what are the directors saying the directors review the estimated life and decide that asset will probably be used only for four years so will the asset last for 6 years or it has become four that means this life is same or changed so change in life is an accounting policy change or an accounting estimate change accounting estimate change so whatever I've depreciation I've charged for the first four years should I revise or not required not required but from now onwards can I charge depreciation of 10,000 because here depreciation before this change how much was a depreciation every year 10,000 will it be still 10,000 now or it will change it'll change so from fifth year onwards you'll have to since life has changed your depreciation also will change recalculate how do you calculate depreciation under straight line method not original cost it is carrying amount minus residual value not divided by total life divided by remaining what is the carrying amount of the asset now 60,000 what is the residual value still zero divid by remaining life is 6 years H so if you do 6 years if you take six years then you'll get the same depreciation 10,000 correct is a remaining life 6 years or it is four years now four years so divided by the remaining life which is four years if you do from fifth year onwards the depreciation will become 15 from 10 the depreciation became 15,000 that's what they asked okay right next this over this over this over how many more sir one or two more quickly I'll do just for my satisfaction you don't need any you are sir this question is they will give you various cost you need to tell me which all cost you'll capitalize which all cost you'll transfer it to PN okay all right now cost of plant sir Purchase cost can you add it to the cost of pp Purchase cost can you add okay or tell me the concept once again if you want initially all PPS are recorded at Cost cost for this purpose are categorized into three what are those three categories Purchase cost if you have any non-refundable taxes and import Duty add if there is any rebates and trade discounts minus okay then D then DSR DSR at full value or present value present value Okay purchase cost can we add yes delivery charges is DAC can we add yes site preparation suppose you want to install a plant but the land is Humpty Dumpty it is like this so what you have to do you'll have to level the line so you to incur some leveling charges that and all we call it as site preparation so unless you prepare the site unless you level up the land can you install that missionary there or you cannot and unless you install the missionary can you use the asset no I means is this cost necessary to bring the asset to ready to use condition I means is it D yes can you add yes consultant advise use for acquisition of plant we have taken some Consultants helps to buy one plant can we add this obviously sir if it's a sophisticated machinery we will not be expert in that who expert consultant if consultant says yes you can buy then we will buy if consultant says don't buy will we buy or we will not will not that means is this necessary to bring the asset to PP to ready to use condition yes can you add it yes interest charges paid to supplier for deferred credit deferred credit means are we making the payment now or are we delaying the payment for delay you're making a payment extra payment you making extra payment you'll capitalize or transfer to p so this one capitalize or don't capitalize do not capitalize okay huh sorry we never forget beautiful receptionist example I only forgot okay estimated dismantling cost dismantling cost is nothing but your DSR cost so how much is your DSR cost all 6 lakh can you add it yes provided this 6 lakh is presented if 6 lakh is future value means can you add no they have not given the data so we are assuming that this is present value so can we add this yes operating losses before commercial production operating losses before commercial production so these and all cannot be added like an example so we have invested in all this assets correct so we invested on all this asset thinking so many students will come first Bach five students came that means first year bumper profit go go yes or sir to break even to recover all my cost I have to have at least 100 students 100 students should come and attend our class and also pay fees more important okay but how many turned up five students looking at our face cut only 5K what are you okay that means first year may we made a loss we made a loss this loss can we capitalize sir sir what does IND or rather IND what does c a final drop I okay sir what does accounting standard 10 tell till the time till the time asset reaches ready to use condition you can go on adding once the asset becomes ready to use can you capitalize or you should not so to conduct the classes I am already using my asset that means my asset is yet to reach usable condition or it is already become ready to use it has already become ready to use that mean this loss and all can I capitalize or it goes off to PN that's what we mean by operating losses before commercial production can we capitalize or cannot capitalize cannot capitalize these are all we call it as cost exclusion in fact I've written that also in chart maybe we didn't review that I'll show you that these are some cost exclusion few cost straight away goes off to SPN one is your general administrative overhead receptionist receptionist salary for aru pro receptionist salary can we added to the cost of laptop is that relevant to this laptop or absolutely irrelevant so General administrative overhead selling and distrib ation overheads your any relocation cost suppose I shifted my Academy from this place I shifted to an another Academy don't spread rumors we are not just an example sir to shift an academy from one place to another I'll have to incur some shifting cost that shifting cost can I add it to my laptop or TV and all because why my my my iPad and all is yet to reach ready to use or it is already ready to use already ready to use so hence that relocation cost reorganization cost and all should be transferred to PN and and any marketing cost and any marketing you call Shah ruk Khan for River cutting doesn't matter so all that opening ceremony cost to marketing cost to any promotional expenditure is there means transfer to P because if you do any promotion suppose we open new Academy and called Shah ruk Khan cut the ribbon and we paid let's say one CR rupes I don't know how we got one rupes but anyways let's assume that we have one rupees we paid to shahu Khan and told cut the ribbon because we are opening Now new branch in mesar no we told come cut all right he came and he cut also and he cut our bank balance also by one rupees all right now this one rupes shuk promotion expenditure for us it's a promotion expenditure can I add it to the cost of pp my building Malay building whatever I can add I cannot add why sir yes by shauk Khan coming and cutting the ribbon definitely there will be a benefit but that will benefit a particular asset or it will benefit whole business it will benefit not just one asset it will benefit the whole business I means this one CR cost is it related to a specific PP or it it's related to whole business whole business hence any promotional expenditure no it is not related to one asset it is rather related to whole business hence all this trans cost will St transfer it to P account and do not capitalize okay people one more question is there I've done that in the last marathon if you want you can review that last marathon this is one good question actually it was asked in MTP you can probably review that question basically this one only okay but this is the right answer for this particular question now I think we don't have that much time to cover it it'll take another 15 minutes but it's okay any we have done it you can refer that if you want it okay um last marathon come I don't know the question number it's an MTP question MTP March 24 question if you want you can review this one more question as for your revision later on okay sir so with this accounting standard revision is also dumb Jamar thank you yes people welcome back after that short break so continuing our marathon discussion further next we will be revising accounting standard 26 you had missed class at as10 ending due to technical issues could you pleas which topic tell after as10 covering no as26 today we'll be covering as26 and as4 one more okay those are the topics we'll be covering anyway if you missed also the same videos will be uploaded in YouTube after 3 4 days we'll merge everything and we'll upload you can watch it there also this information you should have told first only sir we not come only yeah anyways that's okay come back to the topic now so the next topic is accounting standard 26 in tangible assets okay many concepts of as10 and as26 are overlapping okay first one sir if you want to call an intangible asset like intangible assets some examples you give copyrights patent software etc etc so if you want to call a particular component as an intangible asset it has to satisfy four criterias definition criteria one it should be identifiable two it should be a non-monetary asset third one without physical substance fourth one you should use that intangible asset either to produce Goods or under a service or administrative purpose or rental purpose so if all these are satisfied then a particular component you can call it as an intangible asset so one by one we'll dive in first it should be identifiable so when can you say an intangible asset is identifiable if if you want to say a particular intangible ass it is identifiable means you should be able to separate it and sell it now I have a software I don't want to sell my whole business I want to sell software alone can I do it yes that means is software identifiable yes because I'm able to separate and only sell the software alone so it is identified Goodwill is an intangible asset Goodwill doesn't satisfy identifiability criteria Goodwill alone can be sell I I'll sell you want to buy 10 lakh Rupees Goodwill just 10 lak Rupees AR has Goodwill any any takers no sir okay at least 1,000 rupees no that also no why sir Goodwill can you separately sell it no you will be able to generate the Goodwill or you will account Goodwill only when you sell the whole business so Goodwill car accounting is not done as per accounting standard 26 Goodwill car accounting is as per accounting standard 40 okay because Goodwill fails this identifiability criteria if you want to sell the Goodwill you have to sell the whole business you can't separately sell Goodwill that's the reason okay second criteria is non-monetary asset non-monetary means where whose asset value fluctuates if you want to call it as intangible asset means that value of the asset should fluctuate suppose I have a software I purchased it for 25 lakhs after 6 months its value will be 25 only or would have changed it would have changed maybe it has become more or maybe it has become less so if the value is fluctuating either on the higher side or for that matter Lower Side we call that as a nonmonetary monetary asset means whose value is fixed non-monetary means value is not fixed or rather value fluctuate that is a second feature of intangible asset third one without physical substance without physical substance intangible asset means that will not have any physical substance or in fact what they're trying to say here is don't literally interpret this without physical substance here means the value of the physical substance is immaterial like when you purchase a software you may get that software file installation file in a pen drive that software C file you got it inside pend Drive pen drive can you see a I means pend Drive does not have physical substance or has physical substance now I paid 25 lakh rupees 25 lakh rupees may I got pen drive also I got software also but this 25 lakh rupees I paid mainly for what pen drive element El or software element that means the value of this pend Drive element is material or immaterial insignificant that's what this physical substance says okay without physical substance means the value of that physical substance is very immaterial or insignificant Okay g all right so in this particular example me whenever whenever you buy a particular asset if that asset has both tangible as well as intangible element pen drive is what tangible element and software is what element intangible element so when a particular contract has both tangible as well as intangible element you need to check which is the dominant element which is the dominant element in this particular contract pen drive is dominant or software is dominant software is dominant so in this case entire 25 lakh will be recorded as intangible asset why because the intangible asset component is dominant okay sir suppose if the dominant element is tangible means like you purchased a laptop you purchased a laptop laptop also has some software inbuilt software VLC Windows software and all you'll have suppose you paid 1 lakh rupees and you purchased a laptop that laptop came with some pre-installed software so that means this particular asset has both tangible item as well as intangible laptop portion is tangible software portion is intangible but you tell me now you when you paid 1 lakh rupees 1 lakh rupees primarily you paid for the software or you paid for the laptop so in this particular contract May which is the dominant element the dominant element is laptop top that means the whole one lakh will be accounted as property plan and equipment and accounting standard 10 you don't have to separate check the dominant element if the dominant element is software means whole component will be recorded as intangible asset if the dominant element is a tangible item means whole component will be recorded as PP and accounting standard 10 will apply that's what I've written in this particular par manageable that is a third criteria of without physical substance fourth one is same as PP what is that in ible asset you should use for what either to produce some Goods or render a service or administrative purpose or rental purpose one of the four purposes intangible asset should be used for so if you are all these criterias are satisfied means then a particular component you can call it as intangible asset but that intangible asset if you want to recognize or show it in balance sheet means there are two recognition criteria which is same as PP tell me what are the recognition criteria Feb and cost measure okay sir so that means this par is over can I move on to the next one next one is Sir intangible asset is acquired through exchange exchange is provision is same as as10 but you tell me and make me happy this is where you should speak and I can listen telepathy B you actually speak and I'll actually listen what is it if you have acquired any intangible asset by giving away another intangible asset one in tangible asset you have purchased by giving away some other intangible asset or some other PP doesn't matter okay so in this case made it is an exchange so what did we say as an exchange whenever exchange transaction has happened as a thumb rule we have to use fair value but fair value is not required under two circumstance one when the transaction lacks commercial substance or you cannot find out the if one of these two criteria is there means then you'll not use the fair value if you're not using fair value means what will you use Book value cash when you use fair value there is always a chance to book some gain or loss when you use carrying amount no gain or loss Will arise we worked out one question that is the same provision here also same ditto I've written it here then we will move on to the next so cost sir initially all intangible assets initially all intangible assets are measured like PP at Cost cost for this purpose also broadly classified into two categories what are those you know this tell me one is Purchase cost Purchase cost if you have any uh import Duty and other non- refundable taxes add if you have any rebates and trade discounts minus then da then DC DAC means there are those cost incurred to make the intangible asset ready to use till the time intangible asset becomes management ready to use whatever related cost you're incurring you can add like if it is software software some installation charges could be there if it is a patent some registration charges could be there or you could have some customization charges all those becomes your D all those becomes your D for intangible asset will there be any DSR DSR is a repair cost sir will there be any DSR cost for intangible asset no that hence that is cut off all right other than that everything is same as PP only cost exclusion is also same thing all right any what is a cost exclusion we learned it in PP as10 what in all cost you will exclude exclusion means cost exclusion means these cost will be capitalized or transferred to pnl all the cost will go off to pnl what and all are those cost can you give me some examples there General administrative overheads selling and distribution overheads any losses before commercial production any promotional expenditure marketing any promotional expenditure also goes off to PN one more thing if you want to say and relocation reorganization also and the training cost given to staff to operate theet let's say a new software I purchased okay uh that software no sir I gave some training to my employee to use the software okay new GST software I purchased how to use that GST software I gave the training to my employee and I inquired a training cost of 10,000 the training cost can I add it to the cost of this GST software the training cost of 10,000 which I have paid to train my employees can I add it to the cost of my software no no why not sir by giving training to the employee who is getting ready by giving training employ employee is becoming ready to use the asset asset was already ready to use if a trained employee starts using GST software should you have to wait or he can use it right away asset is already ready to use by giving training to the employee you are making employee ready to use asset is already ready to use what is a cut off condition once the asset is reached ready to use condition can you henceforth can you capitalize or no more capitalization hence user training cost also will be transferred off to P okay all this in fact I told you pilot example I think if you remember H anyways no problem all right next one is Sir what if you have got this intangible asset as a government grant you have got intangible asset with the help of government let's say government gave you software worth 25 lakh rupees so much courtesy niess s Maya government has towards you they give it at free of cost sir a software worth 25 lakh rupees they give it to your organization at free okay that means did we pay any money or full Wy full wasy in this case what we have to do because did we pay any money no so in this case what as26 is now did we buy this or we got it through government this only we call it as intangible asset acquired through government grant we'll study this in intangible asset as2 also just seeing so first check did you receive intangible asset at free of cost yes so in this case what you do is you record intangible asset at nominal value the nominal value could be 1 rupe 10 rupee whatever this is just for the sake of disclosure purpose you show that intangible asset in your books at maybe 1 rupee 100 rupee or whatever no amortization at all just show it for the sake of disclosure you'll do that when when the intangible asset is received at free of cost what is the market value of that software 25 L here you received it at free let's take the other scenario now suda government is not so much daru they told 25 lakh rupees worth of software I will give it to you at only 5 lakh rupees so that means are you receiving it at free of cost or concessional value and how much concessional value you are paying 5 so you paid 5 lakh so in this case may you record intangible asset at concessional Value so in this case my entry will passes intangible or software account debit 5 L to bank account 5 that's all it is that's what I've written here carry on yes next one internally generated intangible asset we have not purchased intangible asset internally we have developed an intangible asset so internally generated intangible assets are broadly classified into Goodwill and others Goodwill and others so tell me sir internally generated Goodwill can you recognize or it should not be recognized not sir internally generated Goodwill and remember in your golden days we used to calculate Goodwill under average profit method super profit method annuity method blah blah blah some nonsense method and all you calculated all that Goodwill only we call it as internally generated Goodwill because we purchased that or we used our internal profits we used profit as our base and we calculated Goodwill yes or no that means as 26 is first of all Goodwill is it identifiable is a Goodwill identifiable because for it to be an intangible asset there are definition one definition is it should be identifiable when can you say an intangible asset is identifiable you should be able to separate it and sell it this internally generated Goodwill can you separate in sell no did it come as part of Amal no I mean should we recognize it or it should not recognize it is not Goodwill as per S14 also it is failing identifiability criteria also hence this internally generated Goodwill is not recognized that's the reason in merger method may we don't recognize Goodwill because it is what sort of Goodwill it is internally generated Goodwill okay sir all right other than Goodwill if you have any other internally generated intangible assets they are further subcategorized into research phase and development phase now covid example I used to give you right so when covid came many people were doing covid vaccine research every company was successful or only few that means when you do a research you'll be 100% successful or you may not be so hence as26 says for research phase May if you're spending any expenditure at research phase May if any companies spending any expenditure all that expenditure straight away you transfer to T because is there any G guarantee that you will get intangible asset no if research is successful then you'll file for patent yes or no then it becomes intangible asset correct so since you till you file that patent research is not successful yes or no that's the reason standard simply says all research phas expenditure don't capitalize it as intangible asset straight away transfer it to P because at research phase you cannot demonstrate two things whether intangible asset exists or not you cannot prove if at all you say intangible asset is there how much benefit you'll get from that intangible asset also you cannot reliably estimate so hence entire research phase expenditure in one shot may it will go to SP don't go sent on the amount they will say 100 CR rupees company spent in research in current year company want to amortise this or defer this over 5 years what will you say entire 100 CR to Pendle immediately no deferment immediately to SP whether it is 100 CR 1 CR or 10 lakh doesn't matter entire research phase expenditure we'll go to SPL immediately in that year itself okay zaru that is one sir if research is successful what you'll do you will develop the product using IF covid research is successful then you'll start developing covid vaccine so if the research is successful next phase that will start is your development phase so even development Also may take one or two years correct no if it is a fancy asset like covid vaccine and all development only took 2 three years because you have to Pro Supply the vaccine just to one one one country or world to the whole world if you have to supply a vaccine means to develop That vaccine only it may take two to three years so development phase expenditure also can run for more than one year in that case what to do AOS 26 says development phase expenditure you can capitalize provided certain conditions are satisfied we remembered it as what TFC tfrc if tfrc is satisfied you can capitalize development phase expenditure t for technical feasibility I for intention to complete a for ability to use or sell f for future economic benefits R for resources financial and other resources C for cost measurement if all these conditions are satisfied capitalized development phase expenditure okay if you have forgotten so t for technical feasibility so to develop the product you need some technical expertise yes or no like to develop covid vaccine you need the help of scientist and all check whether such technically is it possible for you to develop it that's the first condition second one is I I for intention to complete sometimes to development phase expenditure only may run for years together J J many people start after that they will say not required let's give up you you you know not you not you okay some some some some some some third party they will start and Beach me they will give up that should not be the case if you start this development means you should have the intention to fully complete check that that is your I a for ability to use or sell sir developing the product is one game marketing that product is another different game altogether so check do you have the ability to use that intangible asset or sell that intangible asset because marketing expertise is also required that is your a f for Feb future economic benefits how much Feb you are getting due to this development phase expenditure you should be able to reliably estimate R for resources so to develop you need a lot of money no so financial and other resources if you have you need to check that is your r c for cost measurement if all these are satisfied means then the development phase expenditure will be capitalized if any of these condition fail means development phase expenditure capitalized p thate p okay I used to say remember this particular provision is like tirupati hundi once you put money into hundi can you collect back no same fun once an expenditure is transferred to pendl in one year in last year you transferred research phase expenditure to Pendle next year if tfrc is satisfied can you reverse previous year expenditure and capitalize it as an intangible asset second year no that's what expense once transferred to pnl cannot be reversed and recognized as intangible asset in the later years once gone means Gone Gone go it belongs to go not you yes people that is your provision so everything we need to remember sir if you can remember if you remember same thing you will save my energy as26 here is IND 38 and CA final I will say ditto ditto ditto and move on good for me for you also probably good for you right we can directly dive into problems instead of Provisions because same okay problems you'll get it little more sophisticated but otherwise everything is dto that means every same as IND no you are same lot many are different you are in which stage now C let's worry only about that finally we will say then why are you talking extra cholesterol for me I will speak you restrict ah next is amortization sir one good thing for me ah I was waiting to say this same as accounting standard 10 so I now you will tell not me I will not tell you will tell tell me depreciation if you want to charge me there are two rules what are the two rules hey for you to depreciate ass said da should be positive useful life should be limited same thing here also da should be positive useful life should be okay how do you get da carrying amount minus okay s all right so which depreciation method or which amortization method I should use based on the you can use whatever method but the method should reflect the pattern of economic benefits if you're getting same benefit from the intangible asset you use straight line method if benefit is is going on reducing you can use wdv method if benefit is fluctuating you can use benefit ratio and do it that is also acceptable okay saru all right next now sir as26 assumes that the presumptive life of intangible asset is 10 years this is a presumptive life meaning as26 assumes that intangible assets life does not exceed 10 years maximum life is 10 years so this is hard and fast ruler now as26 says that this is a presumptive life if a company is able to prove that they have an intangible asset with life of more than 10 years they can take it but if you want to take a life of more than 10 years you need to justify with reasons on what basis are you concluding company should justify on what basis are you saying the life of intangible asset is greater than 10 years remember this just in case they ask yes people this is also same amortization method can you change from straight line can you go to wdb yes if pattern of economic benefit changes means amortization method also you can change residual value will it change yeah residual value useful life and all is an estimate can those estimates change yes if any estimate changes means you always do the accounting prospectively same all the are dto dto dto okay sir next one is resid value so for majority of intangible asset resid value will be zero all right okay but for few intangible assets you can have residual value what is that resid value one if any third party guarantee is there the Third third party guarantee value itself you can take it as residual value like let's say a limited or let's say B limited they have an intangible asset let's say software one party Mr a told after 3 years I will buy your software for one lakh a Mr a told B limited that I will buy your software after 3 years for how much value one lakh that one lakh only can be taken as residual value for depreciating this asset B limited can take this one lakh itself as residual value why a third party guarantee is available a has given a guarantee to B that they will buy the asset for 1 lakh rupees so that third party guarantee value you can take if it is available so if third party guarantee is not there means work here check if intangible asset has any active Market sir if you want to sell your mobile phone now where will you sell I will sell it to my friend sir huh leave that your friendship you leave aside tell me normally where will you sell that X or cashify like this you have many platforms right that particular platform is your active Market active Market means a market where there is a large number of buyers and sellers okay so that particular active Market if it is there means go to that active Market find out the value suppose have if I have to sell my iPad now I'll go to OLX and check suppose mine is a three-year-old iPad so I will go to ox and check what is three year old iPad what are other people selling suppose let's say all other people they are selling their threeyear laptop at let's say 15,000 or 10,000 that means that 10,000 only becomes what sir residual value because you found it out from what Market active Market if active Market is there means you can go to that active market and find out the residual value if active Market is not there residual third party guarantee not there means residual value will become zero as simple as that but major majorly all this data will not be given to you in the question so if they don't give any data we always assume that the residual value is zero itself sir when will you derecognize intangible asset this D recognition provision of PP and intangible assets are same sir first of all tell me what is a recognition criteria of PP and intangible asset Feb and cost measurement sir as long as you have Feb you will show PP and intangible if Feb stops means can you show that asset or D recognize D recognized that is one thing if Feb on intangible asset or PP if it stops means the asset should be derecognized D means cancellation all right that is one or if you sell the asset what you'll do after selling the asset also you'll show that asset in your books no if intangible asset is disposed off means that case also you'll have to derecognize and due to D recognition you may get some gain or loss that gain or loss will be transferred of to p and okay that's all disclosure is not that very important this is the provision with respect to a 26 some questions can we take it up okay first year tfrc satisfied second year if it is not satisfied can directly transfer the capitalized expens to the first year tfrc satisfied means you'll capitalize let's say it is 10 lakh Rupees you will show it as intangible assets under development if second year may if this criteria fails means okay whatever then whatever 10 lakh you already Capital straight away you transfer it to P see finally I tell you there we right we call it as SPL anyways little bit of angor because five months may have been in that field now so it's been all that terms only is coming so you got it so entire whatever amount you have capitalize straight away you transfer it to P in one sh if it is failed next year okay any other questions only question we have right now is when Will you wind up tell that wind up this question the next standard and next standard question and then going home only I thought I'll go to my place you where whereever you you go okay all right come to this question this though this is an RTP question though it is put under amalgamation question this is more towards as26 concept so we it's a combo question actually so we will review this n they are following transaction great okay Nar limited acquired running business of tsam so they said acquired did they say 70% % 80% no if they say acquired it is 100% acquisition 100% control for how much money was paid to get control 108,000 this only we call it as PC okay and the date of control is what sir 15th May on the date of control only we have to find Goodwill or capital reserve how do you get Goodwill or capital reserve compare PC with net assets normal amalgamation so we'll take PC with net assets now here we have take proportionate share of net assets or 100% since we have acquired 100% control we will take 100% of net assets only the fair value we don't have to do it the fair value of subsidiary company that is Sunil net asset was 56,000 so net asset fair value is 516 but we paid how much 10 lakh 80,000 so purchasing company made a profit or loss net asset is a net worth of the company the worth of our investment is 516 but we paid PC of 1080 how much Goodwill 5 5ak 64,000 is a loss which we call it as good okay one more provision I think I I forgot to mention this in as14 sir the Goodwill that you get it on as14 no the Goodwill this is Goodwill as per as26 or as14 this is a Goodwill that you have derived as per as14 the Goodwill that you get as per as4 is amortised over a period of 5 years as14 says that this particular Goodwill should be amorti for 5 years so why 5 years rule I didn't frame I don't know okay they told you have to amortize it over 5 years so you'll have to amortize it okay people in final may you come I'll tell something else because in say something else and that is more appropriate this is actually falto anyways leave FAL to means it doesn't make more sense that approach is more better why to unnecessary break our head so got it everyone so far so Goodwill that you get as per as14 is amortized over a period of 5 years so how much Goodwill did you get 564 okay first year amortization is how much in fact so first year we should not amortize for whole years year is beginning on April sir we got the control only on 15th May sir but one second hang on check this Nar limited one company know they have some policy what policy Nar limited follows a policy to amortize all intangible assets on straight line basis over the maximum period accounted for over Maximum period permitted by as taking full year amortization in the year of acquisition that means in the day you get intangible asset should we have to find out the period or period not required because the company has taken a policy to amortize for the whole year so even though we got Goodwill on 15th May should we have to calculate from 15th May to 31st March or not required we'll amortize it for the whole year okay that means first year may what will be the amortization Good Will is 5 64,000 you'll amortize it over 5 years this 5 years data is given in the question or as14 rule as4u 564 you amortize over 5 Years first year amortization how much 11 to 800 that means at the end end of first year what is Goodwill closing balance from 564 if you amortize 11 to 800 means the closing balance of Goodwill is 4 lakh 51 done people like this they have given three different types of intangible assets where we need to find out its value can we do it okay G narish limited had taken a franchise rights on July to operate a restaurant from sunp limited franchise rights they've taken by paying how much un obviously franchise rights and intangible asset now if you have Domino franchise rights can you sell it yeah you can sell it right so should you have to sell your whole business or you can sell this franchise rights alone franchise rights alone you can sell so is it identifiable yes is it a non-monetary asset non monetary means this franchise rights value will change will it change yes third one without physical substance franchise rights you will get the get the franchise rights or a piece of paper that paper does not have the contents in the paper has the value So Physical substances immaterial fourth one it must be used that intangible asset should be used in the production of goods or rendering service or adment purpose or rental purpose here after purchasing franchise rights what you'll do if you purchase one hotel franchise rights after purchasing what you'll do you'll run the hotel and provide no sir service you food items you'll provide no that's what it is yes and if you're running a hotel means will you get any benefit because if you want to show intangible asset in balance sheet there are two recognition CR criteria also what is RC Feb and cost measurement will there be Feb usually yes how much money you paid for this franchise so all the criteria is satisfied so can you show this franchise rights as an intangible asset in your books yes so how much is the value of that franchise open franchise rights opening balance is how much 180 so this franchise rights will expire after how many years means you'll amortize this over how many years six years so what is first year amortization should we have to take the period or first year full depreciation in first year full amortization as given in the question so 180 is amortized over 6 years as given in the question so first year amortization how much after amortization closing balance of this intangible asset is 150,000 that's it okay are yes sir okay sir sir along with that you also have to pay Annual fees of 10% of Revenue there are two ways of payment here one immediately you have to pay how much 1 lakh 180,000 then whatever sales you generate 10% of the sales also you have to give it as royalty all right this is one time or recurring recurring since this particular Annual fees and all you cannot capitalize this intangible assets TR you transfer it to SPL account this is more like your recurring expenditure that's a reason standard recommends that this you transfer it off to SPN okay first year revenue is 60,000 that means first year how much you'll you'll have to pay royalty whatever is your sale 10% of the revenue revenue is 60,000 means 10% of that is how much 6,000 6,000 the 6,000 will be transferred off to pnl account not capitalized as intangible asset they only asked intangible assets data if you want you can this also you can write it as a separate pointer great next 20th August Nares incurred a cost of 240,000 to register a patent so registration charges for patent is what Dak Dak yes or no because if you want to use the patent means patent should be registered in your name yes no and for registering in your name should you pay any registration charges yes that means all that becomes what sir D can you add DAC to the cost of intangible asset yes how much is that 240,000 this patent will last for how many years 8 years I mean this 240 will be amortized over how many years years so 240 divided by 8 if you do what is first year amortization 30,000 though you purchase this patent on 20th August should we take the period into consideration or full year amortization as for the question first year you have to charge F year amortization so after amortizing the closing balance of this patent will become 210 okay people that's all sir so now what you have to do is you'll have to prepare a pnl extract and balance sheet extract in P andl what and all will go P relating to all this asset what and all will go amortization amortization will on will go to p c the closing balance of the intangible assets will come in Balance so all this data nicely you take it and put it into format that's all they're asking five marks you can do swaha if you show it properly that they have shown you here then sir yes yes yes yes yes yes yes sir yes sir yes next question question number eight all right pin limited this is question number eight in our class notes pinaki is engaged in research answer I already got it ah no problem if you don't want to tell I only tell don't throw please pin is engaged in research research phase expenditure capitalized or pendl it has incured 10 lakh for research and they can give whatever goalie I already made up my mind this 10 lakh is research cost straight away it will go to okay sir all right next for first my months they did research it seems their problem development of the process began on 1st September after 5 months on 1st September my development started development phase expenditure can you capitalize yes blindly or tfrc tfrc satisfied check what they say from 1st September to 31st March 2014 you did the development and how much you incurred for development cost 8 8 lakh 8 lakh was incurred for development phase expenditure which meets the recognition criteria which meets recognition criteria means tirc failed or satisfied satisfied that means this 8 lakh it go to P or capitalize okay sir is this intangible asset already ready to use or it is under development already ready to use or under development under development sir you remember one minute balance sheet format you tell liability B assets you tell heading is non-current assets under non-current assets first you write assets under assets non-current assets under non-current assets property plan and Equipment intangible asset stop stop stop this particular 8 lakh can I show it as intangible asset after intangible asset there is one more category called intangible it's under development it's our notes also I've shown it to you it's there if you open preparation of financial statement May you'll have format there I've shown it so if any intangible assets is still getting ready don't show it as intangible asset show it under intangible assets under de so what if building is getting ready there is a category called Capital work in progress you show it there once you show it as PP it means that PP is ready to use once you show a particular component as intangible asset it means that intangible asset is ready to use here it is ready to use or still under development means here you will show what sir carrying amount of intangible assets under development there is a separate category for this you will show that under non-current assets only there is a category called intangible assets under development show this so how much development phase expenditure you incurred 8 lakh rupees can you capitalize this since tirc is satisfied you can capitalize okay saru all right moving along now from first April 2014 the company has implemented a new process design and it is likely that it will result result in after tax savings of 2 LH because of this development phase expenditure you are getting how much savings or how much benefit every year 2 lakh okay for how many years more years for five years you'll get a benefit of 2 lakh what is the total benefit one year the benefit is two two lakh for five years the benefit will be 10 lakhs okay s all right the cost of capital is 10% that's a discount Factor the present value of annuality factor of rupee 1 for 5 years at 10% is 3.79 08 determine the treatment of research and development phase actually this is not an as26 question it is as26 plus as28 combo question as28 probably I'll cover it tomorrow and see now as28 do you remember what is as28 impairment of asset impairment of asset will only come under one and only one circumstance what is that if carrying amount is greater than recoverable amount then only you will book something called impairment loss sir if you have an asset there are two ways to recover money from that asset what are those either you can recover money by selling or you can recover the money by using correct is this intangible asset already ready or under development sir under development intangible asset can you sell are no I mean selling price is zero okay so recoverable amount basically if you want recoverable amount here know recoverable amount is higher of two things it is fair value less cost to sell or you can call it as NSP okay net selling price or value in use whichever is higher okay we found out the recoverable amount through this fair value less cost to sell or you can also call it as net selling price or value in use whichever is higher or in simple Layman language May there are only two ways through which you can recover from an asset one by selling another one by using by selling how much money can you recover from this intangible asset first of all can you sell this intangible asset or it is still under development under development so that means the selling price is zero but by using how much money you'll generate but by using how much benefit you'll get every year 2 lakh for how many years 5 years that means the total benefit is how much 10 lakh sir this is today's value of benefit or this is a value of benefit after 5 years means this 10 lakh is present value or future value you are doing the empowerment check in future or today today that means we want present future value or present value present value for that only they've given discount Factor how do you find out a present value take the future value and multiply by the discount factor in fact I told you if the benefit is if the cash flow is same every year should we have to take five years calculation or can we do PVF method simply take what is the benefit every year 2 lakh what is 5 years annuality Factor 3.79 08 you do if you multiply what is that sir this is a future value if you multiply annuality Factor you will get the present value of that benefit multiply and tell me how much is that 7 58 160 correct by selling you'll not recover anything because it is still under development but by using how much present value of benefit will you get future benefit is 10 lakh the present value of that benefit is 7 lakh 58 168 okay that means recoverable amount is how much 758 160 any doubt till here no sir you are showing the asset in your books at what value 8 lakh you can recover Max to Max how much 758 you showing the at 8 lakh but you can recover only 758 means are you not overstating your asset you're showing it at 8 but maximum you can recover is only 758 that means how much are you overshooting or overstating your asset how much extra are you showing their asset by what is the difference between these two 41840 that difference only you will book it as impairment loss that's the reason we said impairment loss will only come in one scenario where carrying amount is greater than recoverable here carrying amount is 8 lakh recoverable amount is only 758 so we have a difference of 41840 that 41840 we'll book it as impairment loss yes sir so what is the journal entry for depreciation depreciation to PP and the depreciation you will transfer it to impairment loss also same entry tell me the entry for impairment loss impairment loss account debit to asset what is the name of that asset intangible assets under development how much impair loss 41 840 okay and that empowerment loss you'll transfer it off to SP usually it will go to SPL but there are some extra factors which we will study in as28 okay all right so that's the entry the moment you book empowerment loss what did you credit here asset asset has debit balance when you credit it what will happen to its balance reduce what was asset balance initially 8 L how much empowerment loss you booked 41840 that means asset value will reduce by 41840 so what is the revised carrying amount of the asset 7 lakh 58 after you book empowerment loss carrying amount of the asset will always reach recoverable amount okay so that means the Revis carrying amount of the intangible assets under development will become 758 16 till here it is as26 concept after this all these are as 28 concept okay usually they will test multiple standards they would like to combine and frame the question so these combo questions could be a little important as far as the exam goes can I move on to the next one yes work last one we will do for this particular standard ah sir what amortization method we should choose for intangible asset any specific guideline given or based on benefit not benefit based on the pattern of benefit we specifically call that as based on pattern of economic benefits okay keep that in mind and read this question a company has acquired a patent of how much 160 LH period is 5 years product cycle is also 5 years ah just because life is 5 years don't do you'll amortize equally over 5 years is amortization every time on straight line method or based on benefit B based on benefit okay if benefit ratio is not given if benefit ratio is not given then we assume that every year benefit is same and then we do it under straight L but always read the question fully and then go for it the company capitalize this cost yeah because they purchased this patent so criteria is satisfied so they capitalize this as intangible asset and started amortizing the asset at 16 lakh per year based on the benefit so they only told first year what is amortization charges 16 lakh and this 16 lakh was derived randomly or based on the benefit ratio based on the pattern of economic benefits first year amortization rather every year amortization was determined to be 16 lakh maybe one year two year it'll be same there there afterwards it'll make change I don't know now check after two years after 2 years stop 2 years already over when you bought the intangible asset what was the original cost 160 lakh how much how many years have already passed 2 years that means two years amortization would have already accounted first year amortization how much 16 second year amortization how much 16 lakh that means what is a carrying amount of intangible asset in 160 lakh rupees 32 lakh amortization is already done first year 16 second year 16 so to totally 32 lakh amotization is already done so what is the carrying amount remaining 128 lakh okay sir after 2 years maybe some rahu K sheni came something will happen check after 2 years so initially what was the patent life five years how many years over two years two so the remaining life should be 3 years take tell what they're saying after 2 years it was found that the product cycle may continue for another 5 years not total 5 years they're saying another 5 years I mean this patent will will come to an end after 3 years or it will continue for five more years it will continue more five more years so if this that means here what has changed initially the life was 5 years 2 years is already over so the remaining life should be remaining life should have been 3 years from three it became 5 years life change has happened life change is a policy change or estimate change estimate estimate change okay if estimate changes means your original amount ization will hold good or it has to be revised to Beed but for amortization there is only one basis what is that one basis based on pattern of economic benefits benefit ratio may you amorti correct see they would have told uh product Li cycle may continue for another 5 years okay fine the net cash flow from the product for these five years are expected to be 50 lakh 30 lakh 60 lakh 70 and 40 lakh so from this intangible asset you're getting cash flow means what is this cash flow benefits sir that means if cash flow for 5 years remaining is given means you automatically know benefit ratio correct no intangible asset should be amortized based on benefit ratio from intangible asset if you are able to generate this much cash flow means that cash flow itself is your benefit in this particular ratio what is the ratio 50 lakh is to 30 lakh is to 60 lak is to 70 lakh is to 40 lakh in this particular ratio whatever remain remaining carrying amount of intangible asset is there should be amortized what are the remaining carrying amount 128 lakhs tell me what is this is third year first two years is already over this is year three year four year five year six year 7 one of you tell me what is third year car amortization what is third year amortization 128 lakh should be amortized in this particular ratio 50 30 50 + 30 is 80 80 + 60 is 140 140 + 70 210 210 + 40 IS 250 total is 250 calculate sir what is amortization for the carrying amount is 128 lakh you have to amortize in this ratio so first year third year amortization will be 50 lakh divided by 250 lakh so how much sir 26,000 260,000 that's what they've say here now you have to calculate for the remaining yes can you do it a simple don't do all this and all you straight away do it in your normal method like this correct now first they have done 50 divided by 250 lakh and then they have got this then they multiplied with this in why all that f normal ratio amorti okay third year till five more years may you will get the amortization by the end of the 7th year your total amortization would have been 128 lakh carrying amount was also how much 128 lakh this how the remaining carrying amount will get amortized any problem no okay sir with this as 26 rision is completed thank you for your time and patience yes people welcome back after that short break sir when did you give sir I I took for myself you didn't get that's your problem okay sir continuing our discussion further we will be revising accounting standard four very chintu pinu standard only three concepts only three concept first of all tell the standard name sir standard name is contingencies and events occurring after the balance sheet date okay people all right good thing again as4 IND same dat so this standard covered here next level also this standard covered ah feeling nicer okay super first learn this you already learned it let's revise this okay sir this particular standard no covers only those particular transaction which comes after current years ended let's say current year has ended on 31st March 2025 all right so this particular standard covers only those events which comes after 31st March 2025 if the event is occurring in current year means you don't need the standard you need the standard only for those events which occurs after the balance sheet date only for that we'll have to do some accounting or some disclosure which is what as4 is trying to Target yes okay let's see what it is so as far as as4 is concerned as4 first says find out whether a particular event or particular event is an event for as purpose first to find whether it is an event for as 4 purpose if you want to call a particular uh transaction or particular event as an event for as4 purpose means there is a definition what is events definition is simple events are those events both favorable as well as unfavorable that occur between a certain window that occur between a certain window that window is balance sheet date and the date on which financial statements are approved by the board of directors once the current year ends auditor will come and audit drama will happen after audit drama happens financial statements may get revised due to audit adjustment after audit C drama is over financial statements will be fully prepared directors will approve that financial statement they'll put a CH and say financial statements approved all right let's say financial statements of the current year got approved on 1st July balance sheet is ending of current year on which date or rather current year is ending on which date 31st March 2025 Financial State statements of the current year got approved by board of directors on which date 1 July any event that occurs between this particular window is an event for as4 purpose something which occurs between the balance sheet date and financial statement approval date that only we call it as event for as4 purpose so suppose an event occurred on let's say 2nd August 2025 is it an event if something happens on 2 2nd July only if an event happened on 2nd July 2025 is it an event for as4 purpose or it is not event for as4 purpose it will not be considered as an event event cut off date in this example is 1st July after 1st July if something is happening means that is out of scope of as4 that is one that's how you identify whether it is an event or not so this event may not be just happy face it can also be a sad face both favorable as well as unfavorable are considered as events for this purpose but as long as they are occurring between a particular window what is that window balance sheet date and the date on which financial statements are approved by the board of directors in case of company in case of Soul prator who approves financial statement soul proor in case of partner Partners that's what you need to substitute okay so because accounting standard is not applicable only for company it is also applicable for soul Proprietors also yes we have seen all this I hope you remember as long as they're doing some commercial activity Accounting Standards will get triggered okay coming back once you figure out that this is an event event broadly you need to classify it into adjusting event or non-adjusting event events are further classified into adjusting and non-adjusting so what is the intention of this sir if it is an adjusting event if it is an adjusting event has the event occurred in the current year or next year has the event occurred in the current year or next year or let's give you a small example sir current year let's say is 1st April 2024 to 31st March 25 okay one fire occurred and occurred and our Factory got destroyed the fire cut date was 1st May 2025 due to fire my factory Daga Daga and the loss is 10 lakh Factory got destroyed and the loss is how much 10 lakh Rupees and the financial statement for the current year has got approved by 1 July 2025 okay my balance sheet my current year year ending date is what 31st July 202 financial statement of the current year got approved by 1st July first 31st March is the balance sheet date 1 July is the financial statement approval date anything that occurs between this date only we call it as even correct now fire occurred and destroyed my Factory on which date 1 July or rather 1 May is 1 May fitting within this window yes that means is this an event yes is this an event for as4 purpose yes it is an event now this event we have to just categorize it as an adjusting event or non event okay if it is adjusting event means very simple if it is I'm not saying this is an adjusting event I'm just saying the explanation if it is an if an event is an adjusting event when did this loss occur when did this loss occur current year or next year our current year is ending on 31st March this loss came only on 1 May 1 May means current year or next year if it is adjusting event means though the event has occurred in the next year you will account it in the current year though the event has occurred in the next year you will account it in the current this is the treatment for adjusting event however if it is a non-adjusting event if it is a non-adjusting event then current Year may you don't have to book any loss you only give a disclosure you only give a disclosure you account that loss in the next year like that non-adjusting events accounting happens in the next year only in the current year you give the disclosure okay people once more I got it so adjusting event means what though the event has occurred next year you do the accounting for it in the current year whatever accounting right all right if it is non-adjusting event will you account in the current year no you will only give a disclosure in the current year accounting will be done in the next year that's the implication or effect the next question is so how to find out whether it is adjusting event or non-adjusting event sir if you want to call event as an adjusting event means the condition should be existing on the balance sheet date the condition should be existing on the balance sheet date meaning on here in this particular example May if you want to treat this particular event as an adjusting event on 31st March or before only you should have an idea that event is going to come in future on 31st March or before only if you have an idea that this event is going to come in future such an event we call it as adjusting event now take this particular example fire example fire came on 1st May on 31st March 2 months before only you knew my factory is going to get burnt in fire one and a half months before only no that means this is an example of what adjusting event or a non-adjusting this is an example of non adjusting event got it people so non-adjusting event means will you account to this Factory a loss of 10 lakh in the current year or you only disclose give a description okay if condition was existing on the balance sheet date then it becomes a adjusting event meaning if you had an idea on balance sheet date or before only you had an idea that event is going to come in future then it is an adjusting event if it is like our classes full surprise full bouncer then it will become what sir non-adjusting this fire was a condition existed on balance sheet date or came as a full surprise came as a full surprise I mean this fire is an example of what event non adjusting event okay sir ah yes yes we'll talk about that yeah thank you VI but I'll call about that later on hang on good that you remember awesome next one is so give an example of adjusting event okay sir I have sold Goods to one of my data okay I have to recover the money from him on 1st January only same current year is ending on 31st March 2025 the due date was what first January 2025 only I'm going on asking the money that person is not paying only he's saying today tomorrow today tomorrow like that he's going on hopping he's not giving I know that he's losing customers he's losing customers he's he's making losses and all I came to know many employees are quitting his organization I know all right that's the reason I already made a provision of 20% in the current year itself on 31st March I already made how much provision for doubtful Debs on the data 20% current year balance sheet date only I already made the provision for doubtful debts okay sir now current year ended on 31st March 2025 immediately few days later on 15th June that datar has filed for bankruptcy he became bankrupt and he has become bankrupt and I feel I'll not recover any money I feel 100% tripti TOS going there now you tell me this is a non-adjusting event and financial statements of the current year has got approved by first 31st July current year is ending on 31st March financial statements got approved on 1st July an event datar has become bankrupt that particular event is it fitting within this window yes that means is this an event yes this is what event non-adjusting event or adjusting this came as a total surprise to us or we condition was already there on balance sheet condition was already there that's the reason I made a pro provision that means this is an example of what event adjusting event if it is adjusting event how much provision I have made in the current year I made a provision of 20% is my loss only 20% or it is 100% that means I have to increase my provision from 20% to I have to increase by 80 and the total provision I have to book in the current year is 100% that's so if it is adjusting event you'll have to do the accounting in the current year itself that's okay G all right these are the basic rules of as4 identify whether it is an event or and event is an adjusting event or non-adjusting event next few things is if going concern assumption is no more valid if going concern assumption is no more valid then all event will become adjusting event all event will become adjusting event go back to that fire example sir my current year ended on which date 31st March 2025 when did the fire occur 1st May financial statement got approved on 1 July is it an event yes sir because my fire got my factory got destroyed by fire I feel I can't continue my business anymore I had only one Factory that was a major Factory and I have not even taken insurance so loss 10 lakh Rupees loss for me is a substantial amount I feel I'll not be able to start my business again that means is my business going concern or going concern has stopped going concern assumption says what sir what does going concern say we we assume that the entity will go on for a foreseeable future it neither has the necessary nor the intention to shut down yes so here due to this fire can I continue my business or gone gone sir if if I have no intention to continue my business means do I have next year or I may not have next year that means you will book the loss next year or current year so going if entity is no more a going concern means everything you do the accounting in the current year so everything will become what sir adjusting event this is one of the exceptions to that adjusting non-adjusting W rule okay sir all right so how will we know whether going concern is are valid or not they will mention to you in the question otherwise you can give a subjective answer like if this particular case study comes in examination then you can give a subjective answer if going concern assumption is valid if going concern assumption is valid then this fire will be treated as non unjus and then you'll also write one more answer if the entity is no more a going concern then this will be treated as a adjusting like that you can give a subjective answer usually they don't give you a a I mean case study question from this what they usually do is they'll give you four or five scenarios all you need to identify is whether it is an adjusting event or non-adjusting event sometimes they also ask for justification but majority of the cases they only ask for identification so summary separate case study one case study where you have to add masalas and all such questions are rare not that it can't come pretty rare okay this is one exception second one is error all errors are adjusting okay like here let's say current year is ending on 31st March or maybe I'll write the full year what is current year P 1 April 2024 to 31st March 2025 sir when error was there when error was there you detected the error on 1st July 2025 you found out there is an error on which date first June and my financial statements have got approved on 1 August 2025 okay sir now ideally if you interpret this is what event error cut detection is what some accounting was not done some expense was not booked whatever error could be whatever you detected the error when 1 June all right now you tell me this error should be treated as non adjusting event or adjusting event this is where you need to be a little careful and use your common sense all right sir you have detected the error on first June but error was already there in current year financial statement No your internal control system is so weak that you are not able to identify you identified a few months later but error was already existing that is one so that means this eror is non-adjusting event or adjusting event another Common Sense approach is so forget about as4 if someone told your financial statement has an error that error financial statement only you will publish or try to correct it sir approval date is 1 August error identification has already happened on 1 June only so will you keep error whilea financial statements or correct it correct when you'll correct next year or current yearr so that means current year only or accounting means what sort of an event is this so all errors are adjusting event but but for that error should be detected before approval of financial statement suppose this error cut detection date is let's say 3rd August 2025 can you do something about it or nothing can be done once financial statements are approved it is closed so if error cut detection comes after financial statement approval then you can't do anything okay then it will not be an event only for this purpose all errors are adjusting event provided it is detected before the approval of current year financial statements that's what I've written here answer okay one more uh common question from this particular topic usually they gives they will say company wants to do a business purchase company wants to do a business purchase so business purchase is a small activity or a big activity negotiations started in the current year finalization happened in the next year NE negotiation started in the current year okay and finalization happened in the next year that means total surprise or condition was there condition was there but but but hang on these are all sir little Biga F now when you do a excuse me when you get control in subsidiary company all subsidiary company assets you will take it over at Book value or fair value fa right and if subsidiary will have one or two assets or thousands of assets so thousands of assets can you find out immediately no so hence you'll have to use a little extra provision here how to easily identify these transactions identify at what stage you are there if if they say in the current year we were only in the negotiation stage current year only in the negotiation stage we only sent proposal etc etc then you will treat it as a non-adjusting event when it got finalized it got finalized in the current year or next year next year that means you do the as14 accounting you do it in the next year because current year may there was only a negotiation because all these are little sophisticated accounting so some extra relaxation is given over here so you're not applying the normal rule okay people so if they say only negotiation stage is there in the current year means and finalization happened in next year means you will treat this as a non-adjusting event and you'll do the accounting current year or only give a disclosure only give a disclosure suppose they say it got finalized in the current year some small pending documents like registration of documents and all happened in next year we finalized when current here all right but registration let's say like they will say we want to buy an asset we want to buy a land okay everything is finalized what PR etc etc okay let us say in the current year only on 31st March 2025 only may we have negotiated or we have agreed we have agreed and we have finalized at what price we will buy the land etc etc everything is decided but land car registration happened on let us say 1st May 2025 that land car registration happened on 1st May 2025 and our current year of financial statement is approved on 1st July 2025 okay first of all is it an event is it an event current year is ending on 31st March 2025 financial statement approval date is 1st July registration of land when it happened 1 May is it falling within this window yes is it an event yes adjusting or non-adjusting so since you already finalized it in the current year since you already finalized it in the current year that means you will account it in the current year itself so small pending things like registration and all if it's pending and done in the next year it is fine so if it is fin analyzed in the current year means you will treat it as a adjusting event itself this is examiner a little bit of a favorite question from this topic a lot of questions relating to this concept is repeated one or two also quickly we will do yes people that's all is a concept of as4 can we review quick questions now okay all these are one one ler answers Surya limited has the financial year April to March they have given following information a suit suit means a case a case has been filed against company advertisement maybe we gave some wrong advertisement it hurts somebody's feelings so they filed a case against us how much compensation 5 compensation they have demanded and when did they file the case against us if the April sir they are following April to March calendar uh year that means the year is ending on 31st March 2023 since they're talking about 2023 here so that means the current year is ending on 31st March 2023 when was the case filed 5th April they have not given when the financial statements are approved so when financial statement approval date is not given always assume it as as an event always assume it as a event and then say whether it is an adjusting or a non-adjusting event in fact that's what they're asking you to find out they're not asking you to find out whether it is an event they're asking you to find out whether it is an adjusting or a non-adjusting so for it to be adjusting or non-adjusting first it has to be what an event so it is already an event that event you have to find out whether it is adjusting or non-adjusting now year is ending on 31st March on 31st March only we had an idea that somebody is going to file a case against us or surprise surprise event means or non-adjusting it's a non-adjusting because condition was not existing on the balance sheet date okay company sends a proposal not finalized company sending a proposal to sell an immovable property immovable property could be or missionary whatever line for how much value 45 so finalized or only proposals sent proposal that means proposal means it's in the negotiation stage so in the current year may finalized or negotiation stage negotiation we finally the book value of the property is 30 lakh that's okay the deed was registered on 15th April 15th April current year or next year next year sir current year may it's finalized or only proposal if you are in The Proposal stage or if you're in negotiation stage means this is an adjusting or a non-adjusting it becomes a non-adjusting event okay great next one now this one quickly tell me the answer for this Alpha limited company year is n 1920 that means year will begin on 1st April 2019 and it will end on 31st March 2020 financial statements of the current year has got approved by the board by 15th July following data has been given a suit against company's advertisement same thing a case has been filed on 20th April just now we study case File is what event non-adjusting event repetitive okay check this the terms and conditions of acquisition of a business of another another company now we are selling we are buying an asset or we buying someone's business only we are buying someone's business only and the terms and conditions had been decided by March March comes in the current year current year may we are in the negotiation stage or it's the finalized already finalized already but the financial resources where arranged in April and amount invested was 50 lakh to give PC we need money no and money we arranged in April but we in the current year were we in negotiation or proposal stage or finalization stage finalization stage means non-adjusting or adjusting EV adj becomes an adjusting event great next theft of 5 lakh rupees theft error or fraud or whatever we know this all error frauds are all error frauds are adjusting event provided they are detected before the approval of current year financial statement so there was a theft to by cashier on 31st March only 31st March only has stolen but when did we detect 16th July we detected but our current year approval has happened on 15th July that means what sir this in fact it's not it's an event or not an event at all not an event suppose they say find out whether it is event or non-adjusting event adjusting or non-adjusting event the answer is given as non-adjusting event but ideally the answer should have been what it is not an event at all because it is falling within the window or going Beyond going Beyond answer suggested answer may they have given it as non-adjusting event I feel you should write it as it is not an event at all I leave it to you you are best judgment whatever you want to do okay all right next company started negotiation finalized or negotiation we started negotiation to sell the property in March but the deed was registered in April so finalized or we still in the negotiation stage I means it will be treated as adjusting or non-adjusting non-adjusting okay fire same it's anything this is anyway same repetitive question okay maybe I think this is also repetitive only yeah an agreement or maybe 2 minutes I'll read off and a current year is ending on 31st March 2013 an agreement to sell the land was entered in March negotiation or agreement only entered the current year only agreement you have entered okay the deed however the agreement was registered however in the 15th April the registration happened in the next year so what is this it becomes an adjusting event because finalization only has happened in the current year next negotiation I think I don't have to read anything further sir if you are in the negotiation stage in the current year means automatically it becomes non adjusting EV okay awesome I tell you that's it with respect to accounting standard four thank you hello people welcome to the new day so we are are continuing our discussion in the marathon Series so we'll be taking up the next standard that is accounting standard 28 that talks about impairment of assets so the standard name is impairment of assets liabilities are not impaired only assets are impaired so all assets are impaired no current assets are not impaired current current assets like cash datar inventory your defer tax assets all right all these are not impaired that means which assets are impaired sir only tangible and intangible assets property planning equipment and intangible assets are subject to something called impairment all right this is one second sir impairment test or impairment loss comes only under one circumstance what is that one circumstance if carrying amount if it is greater than recoverable amount then only you will get something called impairment loss only if this equation plays out carrying amount greater than recoverable amount then only you'll get impairment loss otherwise impairment loss will not come now carrying amount is the book value that easily you'll get it from books what about recoverable amount the name itself is saying recoverable amount if you have an asset means there are only two ways through which you can recover from that asset what are the two ways one you can use the asset and recover and get some benefit or you can sell the assets and recover some benefit yes so recoverable amount is higher of two things one by using how much benefit you'll get or by selling how much benefit you'll get compare the two and higher of the two will be taken as s recoverable amount okay all right let's take a simple example let's say let's say one missionary carrying amount is 1 lakh carrying amount is 1 lakh recoverable amount is only 80,000 you found out recoverable amount and you got it to be 80,000 is carrying amount greater than recoverable amount here yes by how much 20,000 that means in this particular example May will you book any impairment loss yes you will book an impowerment loss of how much 20,000 okay all right this is one sir you told recoverable amount is higher of two things one by using or by selling selling means it's a market price will market price be same every day or it will fluctuate fluctuate that means how often should we find recoverable amount every day we should find recoverable amount or once a month once a quarter once a year when as28 says that you need to do this impairment check or rather you need to find recoverable amount only if impairment indicator comes into picture only if impairment indicator is there do this impairment check otherwise impairment check is not required all right what could be that impairment indicator impairment indicators are of two types either it could be an external indicator or an internal indicator external indicator means suppose I bought the asset for one lakh after I purchased after one week the market value of that asset became 80,000 that means what happens to the market value of the asset it has fallen so decrease in the market value of the asset is an external impairment indicator okay zaru all right sir I purchased the asset government put a ban on that asset now can I use that asset or it's an empowerment indicator it's an empowerment indicator because this is a favorable law for me or unfavorable if any unfavorable technology changes or unlaw Law changes that is an again external impairment indicator or it could be an internal impowerment indicator also like I have damaged my iPad now can I use the iPad properly or I'll have to use it lesser lesser so damage cost to the asset is an internal impairment indicator sir earlier I used to use the iPad for 10 hours now I'm using it only for 4 hours that means what is everything going properly or I've changed my usage pattern from 10 hours if I'm using now only for 4 hours means will I get same benefit or lesser benefit so change in the usage pattern of an asset is also an internal empowerment indicator so these are not exhaustive these are just some examples if these sort of indicator comes means then you'll have to do the impairment check to do the impairment check we have to find find something called recoverable if these indicators does not come means is impairment check required not required that is one all right all right next is Sir where will this impairment loss go in this example how much impairment loss is there sir 20,000 sir impairment loss journal entry is same as depreciation what is depreciation entry depreciation to asset account so if missionary is getting impaired by 20,000 means what journal entry will pass empowerment loss account debit to PP account whatever that PP is getting impaired if PP is getting impaired means you'll write PP account if intangible asset is getting impaired means you'll write intangible asset okay s all right where will this empowerment laws go to usually all law goes is where goes where P account but but but but if this particular missionary here I took the example of missionary know if this missionary was revalued earlier and if this missionary has RR RR means revaluation Reserve see if that particular asset which has got impaired now if that asset was revalued earlier and if revaluation Reserve exist then instead of transferring empowerment loss to pnl we adjust impairment loss with RR okay suppose this missionary was revalued earlier and RR balance is 50 ,000 RR balance is 15,000 how much is empowerment loss 20,000 sir 20,000 empowerment loss can you adjust with RR balance of 15 do we have enough balance in RR or only 15 that means out of 20,000 impairment loss 15,000 will be adjusted with RR balance 5,000 impairment law will be adjusted with SPL like that so if RR is there first try to adjust with RR if RR is not there means adjust it with SPL account that's all it is okay s huh uh C final p p SPL means statement of P statement of profit or loss okay my bad that zone is still not going only maybe I have to take one inter bch to go off that because four months I took final right that that particular terminology only is coming pendel people SPL simply means statement of profit or loss that's what we use in CA final but here we anyway we call it as pel okay zaru thanks much yeah all right moving along next one is Sir recoverable amount we'll spend a little more time on the recoverable amount how do you get recoverable amount higher of two things what are those two things one by using how much money you'll get or by selling how much you get instead of selling they use the term net selling price instead of saying how much money you'll get by selling we use a terminology as net selling price so recoverable amount is higher of net selling price and value in use net selling price means by selling the asset how much money net net may you will get okay so net selling price is given by the equation name it is saying net selling price I mean should we take selling price or deduct selling cost also take the selling price and reduce the selling expenses if you have anything by doing that you'll get something called net selling price okay so the first priority for net selling price is always The Binding sale agreement sir binding sale agreement all right meaning uh let's say I see the word abishek over here all right let's say I have made an agreement with abhishake that I will sell my missioner for 1 lakh after 2 months I will sell the missionary for Abhishek for am mucha 1 lakh rupees so that means have I already made that agreement so that means that agreement value itself becomes your net selling price so first priority for your NSP is always The Binding sale agreement value if it is there if suppose I don't have any such agreement then I'll try to find out the market value or NSP using active Market I try to find out NSP using active Market if I sell my Machinery in the market how much price will I get I'll try to find out that an active Market you already know active Market means what a market where there are large number of buyers and sellers all right if the active Market is also not there binding agreement is the first priority second priority too you'll try to find out NSP from active Market if that is Al this is also not there entity has to estimate NSP based on their best information available okay these are the priority for NSP all these are not that very important for exam quickly we will run through none people all right next one is other component what is other component value in use this means what by using the asset how much benefit you will get that only we are using a fancy term called value in use okay sir so if I use the machiner I will get the benefit suppose my machiner empowerment indicator has come okay by using the Machinery I will get the benefit today only so I'm planning to use the machinery for 5 years that means I will get the benefit immediately or over a period of 5 years over a period of 5 years okay suppose I'll get a benefit of 2 lakh rupees every year for how many years 5 years that means what is my total benefit 10 lakh can I take 10 lakh Rupees as value in use sir I doing the empowerment check today is this 10 lakh Rupees benefit today or it's future value I'm getting this benefit over a period of how many years 5 years yes or no that means can I take this as value in use no I need to find out the present value of 10 lakh suppose you get that to be 7 lakh rupees fair enough that present value will be taken as value in use Okay g all right that's what I've written here okay value in use is nothing but present value of future cash flows plus present value of residual value after using it for 5 years what will I do with that mission after using this missioner for 5 years what will I do I will sell it out I'll get some residual value or SC scrap value that also you should take for Value in use while calculation so value in use is nothing but present value of benefits that you'll get plus present value of residual value two things present value of benefits plus what sir present value of residual value these two things if you add automatically you will get value in use okay people all right that's all this is fun all done can I move on to the next I've written many many theories over here they're not that much relevant for exam so I'll move forward to the next thing okay sir all right let's do a thing let's apply this in one of the problem first you you tell me this one it make me happy here okay or maybe give me a recap first which standard as28 as28 talks about impairment of asset every day should you have to do impairment check no only when impairment indicator comes indicator could be either an external indicator or an internal indicator if indicator comes you have to find something what does that find something recoverable amount how do you get recoverable amount higher of two things what are those two things net selling price and value in use you have to find and take the higher of the two first priority for net selling price is the sale agreement if you have that sale agreement value only becomes your NSP if that is missing try to find out NSP from active Market if active Market is also not there means entity has to estimate based on their best information available that is your NSP next is value in use value in use means by using the asset how much benefit you will get you will get the benefit immediately or over a period of time that means all the benefit are expressed on present value terms or future value terms future value we have to find out present value or if you wanted a value in use equation value in use is given by present value of benefit plus present value of residual value take that and you'll get value in use compare and take the higher of the two okay people then you have the recoverable amount compare carrying amount with compare carrying amount with recover amount if carrying amount is greater than recoverable amount means you will get impairment loss where will that impairment loss go to First you'll try to adjust with RR any RR or that asset r that asset R if that asset has RR first adjust it with RR if that asset does not have RR transfer it off to not SPL PN okay now all right that's all now apply this in this particular question X limited purchased a PP four years ago how many years ago four years ago sir in these sort of problem they will not give you carrying amount they will give you original cost all right we want original cost or we want carrying amount on the day you are doing empowerment check we need to find carrying amount as well as we need to find recoverable amount so four years ago you had purchased asset for 150 lakh that means this 150 lakh is what original cost okay sir four years is already over means you would have depreciated asset for 4 years so what is a depreciation rate given in the question 10% what method straight line method that means one year depreciation is how much much sir 150 lakh 10% is how much 15 lakh how many years is over four years so what is the total depreciation for 4 years 60 lakh got it you bought the asset for 150 lakh you have depreciated by 60 means what is the carrying amount of the asset at the end of fourth year or beginning of fifth year the value of the carrying amount of the asset is 90 lakh till you're good come back to the question at the end of fourth year it has revalued the asset not impairment to it has revalued revaluation is as 28 concept or accounting standard 10 concept revaluation model is accounting stand 10 concept yes so you revalued the asset and what was the revalued amount 75 lakh stop so if you follow if you are if you if they saying that asset is revalued means it's cost model followed or revaluation model followed revaluation model revaluation model says what revaluation model means what to show the asset at Book value or market value market value what is the revalued amount 75 that means going forward you have to show the asset at what 75 lakh but but the current carrying amount of the asset is how much 90 carrying amount is 90 lakh but revalued amount is how much 75 lakh so it's a sad phase happy phase what phase sad you are showing the asset at 90 but its market value is only 75 that means this is a case of revaluation loss first time you did revaluation because nowhere they've given previous information first time you did revaluation and you got a revaluation loss first time revaluation loss where it will go P account so this revaluation loss will go to pendl to the extent of 15 lakh rupees okay you're showing the asset at 90 market value is only 75 so these two c difference is 15 lakh rupees which goes off to P okay people after you do the revaluation we carrying amount be still 90 or it will get revised carrying amount will get revised and it will become what value market value so the revised carrying amount will become 75 till you okay come back to the question next what are they saying okay it has written off the revalue valtion loss to P that they don't have to tell we know this yeah we have done all that fine okay however on the date of revaluation market price is how much 67 5 lakh rupees okay that I mean now they have given probably empowerment check okay this is a little bit of controversial question it's okay no problem because here they're saying 75 here they're saying 67.5 but okay let's forgive the question let's not question the question anyway we have done revaluation okay now they are probably wanting to test the impairment concept to do impairment concept we need a recoverable amount how do you get recoverable amount higher of NSP and value news for NSP we need market value no that they have given here okay so now the market price is 67.5 lakh and expected disposal cost is how much three lakh so we want sale we want market price or net selling price net selling price net selling price is what how do you get net selling price selling value minus selling cost that means your net NSP is how much 64.5 any doubt okay next what will be the treatment in respect to impairment loss on the basis of fair value whatever they've given they basically asking you impairment loss treatment value in use they only given to be 60 lakh NSP is how much sir 64.5 lakh value in use is directly given in the question how much 60 lakh what will be the recover amount lower of the two or higher of the two higher of the two is the recoverable amount what is higher of the two 64.5 so recoverable amount now is 64.5 but the carrying amount of the asset is 75 after revaluation carrying amount of the asset has become 75 okay sir so carrying amount is 75 recoverable amount is 64.5 so is carrying amount greater than recoverable amount yes that means will impairment loss come yes to what extent find out these two difference these two difference is 10 lakh 50,000 that is the impairment loss okay people okay yes this impairment loss where it will go one second hang on was this asset revalued yes but RR was there or revaluation loss is there revaluation loss that means this particular asset does it have RR no if RR revaluation Reserve if it is not there what will you do with this impairment loss you'll transfer it off to P account that's why theyve asked it as treatment find out impairment loss and write one sentence this impairment loss of 10 and a half lakh will be transferred to P that's all is this question all about okay Z can I move on to the next question all right next one one or two questions are there quickly we'll review next Ergo Industries limited gives you the following estimates of cash flows uh this question includes as10 also you could say that as10 no as28 combo question yeah you can read it like that much okay so they have given estimates of cash flow pertaining to one property plan and equipment on 31st December 20 X1 keep the dates in mind discount rate they given so why is discount rate required so value in use is what total benefit or present value of benefit present value to find out present value obviously we need a discount factor which is given as 15% so by using the asset we we are on which date currently underline the date okay we are currently on which date 31st December 20x 1 maybe compan is following calendar here year maybe first year starts on 1st January and ends on 31st December we are in 20 X1 they have given you the cash flow from X1 or X2 onwards that means all these are current year cash flows or future cash flows all these are future cash flows is what they've given to you in the problem okay people all right future cash flows means it is expressed on present value terms or future value terms so these are all your future cash flows all the numbers are in cash or all the numbers rather are in lacks great so these are all your benefits but these are all your future benefit correct all right this is one next residual value is also th000 correct now how do you get value news tell me how do you get value news value news is nothing but present value of all this future benefit plus present value of residual value those two addition if you do you'll automatically get get value in use that's the requirement of the question here okay check if you want you need to find out on 31st December what is a carrying amount you need to find Value in use you need to find recoverable amount you need to find empowerment loss you need to find Revis carrying amount instead of saying all this empowerment L because to find empowerment law we need carrying amount also recoverable recoverable amount also to find recoverable amount anyway we need NP value Chum goal they have given so much ah let's find it out first the carrying amount okay sir this PP was purchased on 1st January 20xx X okay how much 40,000 laks useful life of the asset when you bought it was how many years 8 years NSP they only given luckily 20,000 all right sir we are in 2x1 but this asset was purchased on 20xx we don't know what is that XX let's see they've given here check two the year 20xx is immediate preceding year of 20 x0 sir we are current in which year 20 X1 so previous year will be what 20 x0 what are they saying 20xx is preceding year before 20 x0 that means one year before previous year only that only they're calling it as 20x X okay so far people that means you have purchased the asset in this year now we are at the end of current year so how many years has already passed from here to here if you count how many years is already passed two years are one year here two years here you're doing impairment check on the end of the year we are not doing empowerment check on 1st January 20 X1 we are doing it on 31st December 20 X1 they told that's the reason dates are important so we are at the end of which year now we are at third year ending so that means three years is already passed correct no people so find out the carrying amount when you bought the asset the value of the asset was how much original cost was how much 40,000 lakhs so how many years depreciation you need to charge three years how do you charge depreciation if is wdv Method they will mention if nothing is mentioned if useful life is given it is always straight line method so under straight line method what is depreciation value carrying amount which is 48,000 minus residual value which is 1,000 divided by useful life which is 8 years so 40,000 minus 1 divided by 8 if you do you'll get one year depreciation you want one years three years so multiply by three how much your calculator is showing 14625 is a total depreciation for 3 years you bought the asset for 40 it's depreciated by 14625 means what is the carrying amount of the asset at the end of third year 25 375 first requirement done okay this is over next we need to find out value in use how do you get value in use these are all your benefit we need to find out the present value of that benefit plus we also need to take residual value simple present value calculation all these are benefits copy 4,000 6,000 6,000 8,000 and 4,000 4 6 6 8 and 4 okay that's all or also resid value residual value so residual value you will get it immediately or at the end of useful life end of useful life right 3 years is already over 3 years is already over that means when you bought the asset how much was the useful life of the asset 8 years 3 years is already over that means you will get the benefit for how many more years five more years hence five years of future cash flow they have given okay sir now at the end of 20 X6 all right after 5 years you will only get this benefit or you also recover residual value residual value so how much is the residual value 1,000 so 1,000 you'll get in the along in the same year so in the if you want you can instead of showing these two separately you can combine these two and make it as 5,000 because last year you will get last year benefit also and you'll also get the residual value also instead of four you can make it for last year as 5,000 and calculate as together absolutely okay done people now the discount factor to find out present value we take future cash flow and multiply it by the discount Factor how do you get discount Factor 1 / 1 + I whole power n okay so what is the discount Factor given in this question 15% so 1 divided by 1.15 you do in your calculator and go on pressing equals to button 1 divided by 1.15 if you do first year discount factor is 0.870 anybody has a confusion in discount Factor no go on pressing equals to button you'll get the discount Factor okay last year you'll get two benefits so same discount Factor done G so multiply these two you'll get the present value of the benefit if you add all the present value you'll automatically get 19225 that is nothing but what sir value in use any confusion in this all okay so that's a answer online also cool no that's the answer to the second requirement carrying amount over value news over next what did they ask sir recoverable amount how do you get recoverable amount value news or NSP whichever is higher value in news is 19 19025 NSP net selling price they only given in the question to be 20,000 so 19025 and 20,000 Which is higher 20,000 that means the recoverable amount is 20,000 sir they have rounded it off we have done accurately in class that's okay no problem then you can write if there is a round off things is coming in you don't have to round off you can take the actual number okay for now I'll not worry about that it's not necessary to round off all right if question says round off you can round off otherwise if whatever decimal you are getting you can mention the same decimals up to four decimals if you want you can take ideally that's what they say sometimes many students also take two decimals also all right so so far good all right now check sir what is the carrying amount of the asset we found on the date of impairment check so first of all is there impairment loss here is there any impairment check to be done here yes why so the moment they ask you to find out recoverable amount every day will you find recoverable amount or only when indicator comes only when indicator comes you'll find recoverable amount and then you check if there is any impairment loss or Not Here empowerment losses there are yes carrying amount is 25 375 recoverable amount is only 20,000 so you are showing the asset currently at 25,000 25375 lakh but you can recover only 20,000 that means your asset is overstated by how much what is the difference between these two 5,375 that only will be booked as what sir impairment loss okay sir since they have not given any RR information this impairment loss you can transfer it to SPL or they've not asked any anything you can transfer this to pnl only okay or if you want you can comment that or ignore that it's fine done people what is the journal entry for empowerment loss impairment loss account debit to which asset is this have they given they've not told us they've just told PP is it h they've just told PP so we'll just write impairment loss account debit to PP how much empowerment loss you booked 5375 sir pnl has what balance pnl or rather PP account has what balance property plan and Equipment has what balance debit balance if you credit its balance will redu so after empowerment loss carrying amount of pp will be same or it will get revised revised it'll increase or it'll reduce reduce so from 25 the current carrying amount 25 375 it'll Reduce by 5375 so the revised carrying amount will become how much 20,000 that's basically your recoverable amount so after empowerment loss carrying amount will always become recoverable amount if you're booking empowerment loss done sir okay that's what they asked as a requirement revised carrying amount all these are done then they also asked depreciation they also asked depreciation sir current year depreciation we have already charged no yeah because we are doing empowerment check at the beginning of the year or end of the year end of the year that means depreciation is already accounted why why are they asking depreciation check we are in 20 x one are they asking you X1 depreciation no they are asking you depreciation for next next year onwards what will be the depreciation now due to impairment loss carrying amount is same or it got revised if carrying amount changes means will depr same depreciation will continue or depreciation also will get revised depreciation also will get revised tell me how much is depreciation for 20 X2 onwards you'll take what carrying amount minus residual value divided by life or remaining life remaining life sir after empowerment loss what is the Revis carrying amount 20,000 resid value May any change is there or same same how much is that 1,000 divided by remaining life yes people okay so when you bought the asset how much was the life 8 years how many years is already over 3 years is already over so that means what is the remaining Life 5 years so calculate this you'll get it how much is this 19,000 divided by 5 if you do you'll get 3,800 lakh that is your depreciation from next year onwards you'll go on charging this much as depreciation hope this is okay right all right move on to the next one okay G okay let's review this question sir usually impairment is a standard that has come recently in our syllabus it was not there earlier now in the last one they've added so I feel for the first three four attempts they would probably stick to some basic questions some complex questions are also there right now all those are tested at CF final level in IND 36 they're not tested here all right but anyways uh mostly I'm expecting all this easy easy questions only to turn up then we will see for the time being this is good enough is what I feel okay look review this question an asset does not meet the requirement of environmental loss which has been recently enacted we are using a particular asset maybe a missionary building or whatever all right as per the government laws can we use that asset it is banned banned because the recent environmental loss it does not meet the asset does not meet the requirement of environmental loss maybe if you are using a particular Machinery that is causing a lot of pollution or it is releasing a lot of waste and as for the environmental law of a particular country that is acceptable or not acceptable that means can we use this any asset anymore or it is banned B now you tell me this is a what sir impairment indicator internal or external external external if uh this is a favorable law change or unfavorable law change law has changed unfavorable to us that's the reason this is an impairment indicator yes people okay that means henceforth can we use this asset or it is baned so what is value in news if you can't use the asset will you get any benefit or no benefit means automatically value news is how much zero okay Z all right next one no the asset is carried in the balance sheet at the end of the year at 6 lakh currently the carrying amount of the asset is how much 6 lakh rupees since empowerment indicator has come should we find recoverable amount yes yes to find recoverable amount we need value in use and we need NSP value in use is zero because we cannot use the asset what about at least can we sell the asset sir if it is banned means will anybody sell that asset I mean will anybody I want to sell will anybody buy it no check what they're saying the estimated cost cost of destroying the asset is 70,000 so we can't sell it we have to destroy it okay that means can you sell it selling price is how much zero but selling expens is 70,000 that means NSP is positive or negative 70,000 selling price you can't sell so selling price is zero but to dispose of this asset to destroy this asset you have to incur a destruction cost of how much 70,000 that becomes your selling price that means your your NSP is negative 70,000 how do you get recoverable amount lower of the two or higher of the two higher Sirus 70,000 and 0 Which is higher 0 is obviously higher no basic mathematics yes so recoverable amount is how much sir zero carrying amount is 6 lakh recoverable amount is zero is carrying amount greater than recoverable amount yes that means will you book any impairment loss yes you will book impairment loss of 6 lakh rupees no information so impairment loss goes off to PM am no RR information hence empowerment loss goes off to P huh any questions or carry on easy so far all of us are on the same page work here next question from the following details from the following details find out impairment loss treatment of impairment loss and current year depreciation okay they asked current year depreciation so usually usually not mandatorily usually we do the empowerment check at the end of the year not mandatory because we have to do empowerment check when when indicated comes indicator should compulsorily come at the end of the year government put a ban on our asset they should put the ban only at the end of the year or even starting of the Year also indicator can come whenever whenever I mean it can come whenever it wants but usually in majority of the problem indicator will be coming at the end of the year but here they're asking current year car depreciation that means indicator has come at the end of the year or starting of the year starting of the year because if the indicator has come at the end of the year means current year depreciation we have to find or it's already accounted it's already accounted since they are asking you to find empowerment loss and after empowerment loss they asking you to find out depreciation after empowerment loss carrying amount will be same or it'll get revised if carrying amount gets revised means depreciation also will get revised since they're asking current year depreciation the Assumption here is the empowerment indicator has come at the year beginning not at the year ending okay s all right now let's see what we can find out or how to solve this particular question cost of the asset whenever they say cost it means original cost what is the original cost of this asset 56 lakhs useful life when you bought the asset life was 10 years salvage value luckily zero current carrying amount great current carrying amount is how much 273 sir for impairment impowerment loss cut check we need current carrying amount only correct on the date of impairment check we need the carrying amount that only we call it as current carrying amount so we have to find that or clearly given carrying amount on the date of empowerment is given to be 27.3 useful life remaining is how much 3 years okay such nice problem recoverable amount also they only calculated 12 oh such a upward revaluation upward upward upward revaluation done last year upward revaluation means revaluation loss or revaluation gain revaluation gain means you will have RR how much RR for this asset 14 if RR is there means empowerment loss you'll transfer first with pnl or adjust with RR adust with RR to the extent of balance available in R balance impairment laws you'll adjust with or transfer it to P okay first find whether there is any impairment loss here for that we need carrying amount what is the carrying amount 27.3 we need recoverable amount how much is recoverable amount given 12 lakh is carrying amount greater than recoverable amount yes by how much 15.3 that means in this problem you will book impowerment loss to the extent of 15.3 lakhs okay sir now this 15.3 lakh of impairment loss Will you transfer to pnl account no since this particular asset has RR how much RR it has 14 lakh out of impairment loss of 153,000 14 lakh will be adjusted with revaluation Reserve or revaluation Surplus or simply you can call it as RR for class short forms no not not don't use short forms in exam here it's okay so 14 lack of empowerment loss you'll adjust it with revaluation Reserve still any empowerment loss balance is there yes out of 15.3 14 you adjusting with RR means balance is how much 1.3 lakh that will be adjusted with p and if you want you can express it in words usually I mean this is a trend people usually when this sort of question comes right and when they ask you to answer no study material always gives the answers in wordings they will give the answer in words like impairment loss is 153,000 next you'll write that as a point next you'll write out of this impairment loss of 15 lakh 3,000 14 lakh will be adjusted with RR next Point 130,000 will be adjusted with p like that ICA writes the answer they don't express the answers in journal entries usually they express the answers in pointers suggestion to you is if possible try to answer in words only okay if that doesn't click if you feel that approach is not working for you present it in journal entry it is fine but if you want to stick to ICI presentation ICI always gives it in pointers only if the question says pass journal entry then only ICI answer will have journal entries otherwise every answer will be given in wordings I also prefer word ings because to answer in words you need to think journal entry is automatic for us it's like eating sleeping brushing okay journal entry we know it comes out of practice but when you have to answer the same things in statement you need to think when you think our conceptual Clarity will increase so that way it is better I feel but anyways choice is yours what you want to do now if you want the entry what is the journal entry for empowerment losser empowerment loss account debit to PP account first 15.3 lakh then this impairment loss where it will be transferred first it will be adjusted with RR so RR account debit how much 14 then balance will be adjusted through pnl 1.3 then to empowerment loss 15.3 LH okay sir now after you book the impairment loss Will carrying amount be same or you'll get revised carrying amount was 27.3 you credited PP by 15.3 so from 27.3 minus 15.3 if you do revise carrying amount will become how much obviously it will become 12 lakh because 12 lakh itself is a recoverable amount no that's reason okay so the revised carrying amount of the asset after empowerment loss is how much 12 lakh did they ask you current year depreciation yes that means empowerment check when it has happened year ending or year beginning year beginning in this particular problem so now let's calculate depreciation how do you calculate depreciation sir carrying amount which we got it which is 12 lakh minus residual value given it to be zero then divided by total life or remaining life remaining life missing or given remaining life is given to be 3 years so 12 lakh is the carrying amount minus residual value 0 divided by life three if you do you'll get the depreciation how much 4 lakh would be the depreciation going forward I mean from current year onwards the depreciation will be 4 lakh rupees that's all with respect to these questions I feel these sort of questions are enough for examination all right can I just go back now all right so one or two small concepts are there which we will quickly review them may not be that important for examination I don't no but anyways let's see sir what if you get the benefit in foreign currency sir I'm using an asset from that asset I am generating a product and that product I'm exporting that product I am exporting that means I'm selling that product in India or I'm exporting let's say I'm selling it to us that means I building not in Indian rupees I'm sending my sales bill in dollars I mean this asset is a generating benefit yes but in Indian rupees or in dollars dollars if they give you benefit in dollars what to do simple calculation forget about dollars forget about dollars value and use calculation you how do you calculate value and use tell me you'll take future cash flows you'll take future cash flows and multiply that by what discount Factor if they give you five years of future cash flows take all the five years of future cash flows and multiply by the discount Factor you will get what present value of the cash flows yes no all all these values are in rupees or in dollars dollars that means value this addition of all this only we call it as value in use this value in news now will be in rupees or it'll be in dollars let's say it is $1000 let's assume that it is $1,000 now can the book impowerment loss in dollars or Indian rupees let's say you are doing the empowerment check on 31st March 2027 on this particular day we are doing the empowerment check assumption date will be given to you in the question on this particular day check the dollar rate check the dollar r on this particular date let's say $1 is equal to 70 rupes $1 on 31st March 2027 $1 is equal to how much Rupees 70 rupees how many dollars we have th000 so if $1 is equal to 70 rupees means ,000 will be equal to how much so we have to what divide a multiplyer multiply so multiply by 70 how much you going to get 70,000 R so value in use now will you get it in dollars or it got converted into Rupees now it got converted into Rupees easy now this is all you'll have to do here okay people if they give if they give such questions I've written pointers here just say all that I've written it here as D cool cool cool sir how many years cash flow you will take sir sir as28 says for finding out value news we take future cash flows as28 says ideally you should take future cash flows not Beyond 5 years not Beyond 5 years as28 assumption is from a particular asset you'll get a benefit only for a maximum period of 5 years you'll only get a benefit for a maximum period of 5 years Years sir but company is saying they want to use the asset for 15 years how many years 15 years sir if company wants to use the asset for 15 years means they will get benefit for how many years 15 years but standard is saying take the benefit only for 5 years in this case what to do as28 says ideal scenario you should take future cash flows only to the extent of 5 years if you want to take any cash flows Beyond 5 years you need to justify you need to justify you need to give it reason on what basis are you telling you are getting a benefit Beyond 5 years all this may be relevant for your McQ question not for a bigger question okay a quick review you do so that you know if they give you an McQ question you should select the right option five years like that done done done done done okay sir next concept small concept may not be that important for exam so quickly whatever is necessary quickly I'll review this sir how do you get value in news again present value of future benefit plus present present value of residual value okay now I'll ask you a question what is the benefit of this iPad for Aro Pro no I want in value how much see to find out value in use we need benefit future benefit in amounts so what is the benefit of this iPad alone for aru pro can we find out cannot find out sir the benefit for Aro Pro is we'll be able to conduct classes and we will get m money correct we will get money only by using iPad or all the assets all the assets that means is single asset giving us the benefit or group of asset is giving the benefit a single there are many assets which don't give you individual benefits there are many assets which don't give individual benefits like this AC this camera and all only when we use it together we'll be able to conduct classes and we'll get the benefit but individually how much is ACA benefit if someone ask will we be able to tell no because they don't generate indep dependent benefits so if you don't know an asset car benefit how will you find out that asset car value in use if you can't find Value in use how will you find recoverable amount if you can't find recoverable amount how will you find empowerment loss so hence to mitigate this or to sort out this concept they introduce something called cgu cgu means cash generating unit cgu means okay we understand that individual asset is not giving benefit but can a group of asset give the generate benefit yeah means now if individual asset is not generating benefits means do the empowerment check not at individual level but at group level you do the empowerment check at group level that group only we call it as what sir cash generating unit now you tell me what do I need for empowerment check do I need carrying amount of asset or I want carrying amount of group since we are doing the empowerment check at group level now I will find what sir carrying amount of cgu and I also try to find what recoverable amount of cgu if carrying amount of this group that is cgu if it is greater than recoverable amount of cgu then only we will get impairment loss this impairment loss is related to one asset or it's related to the group it's related to the group like that so if you can't do the empowerment check at individual level then do it at group level that group only we call it as what sir cash generating unit so far okay yes yes yes yes yes so all this we have studied sir yes no sir you able to remember and recall a s uh okay uh that's the reason we keep telling during the class Revis Revis Revis otherwise you'll not remember what is thought now you wonder cgu now ICU and all we know what is the cgu yeah revision is important now anyway now let me talk about that now anyway we are we have long passed that stage now so leave that particular okay sir whenever at cgu level no okay 2 minutes we don't have any questions for that we'll do a little bit of five 10 minutes quick theoretical discussion so in case any question gets framed you know what to do all right so let's say a company has a particular asset called Goodwill a company let's say aru Pro we purchase another Academy we purchased another Academy so when you make a business purchase either you'll get a Goodwill or capital reserve let's say we got a Goodwill of 10 lakh Rupees meaning we paid extra to buy another Academy how much extra we paid 10 lakh that extra only we are showing it as what sir Goodwill now you tell me can I find empowerment loss of Goodwill does Goodwill generate independent benefits I am showing Goodwill in my books carrying amount of Goodwill in my books is how much 10 lakh can it generate independent benefits no that means Goodwill empowerment check should always be done at which level cash generating unit level or group level because Goodwill will never generate independent benefits okay people all right so hence what you have to do is whenever Goodwill is there whenever Goodwill is there you'll have to allocate this to the group you have to allocate to the group sir should you have only one group or you can have multiple groups multiple groups like for aru pro one group could be ca ca can ca division generate benefits can c can aru Pro tell how much benefit we are getting from CA division yes can you tell how much benefit we are getting from CS division yes can we tell how much benefit we are getting from Acca yes that means all these are what sir all these are cgu this is your cgu one this is your cgu 2 this is your cgu 3 okay sir I means how many group we have one group or three groups so if you have a Goodwill of 10 lakh Rupees what you'll do can Goodwill generate independent benefits no since Goodwill gen cannot generate independent benefits we always have to test the impairment of Goodwill at group level that group only we call it as cash generating unit in my example how many groups are there three that means this Goodwill will be allocated to one group or it will be allocated to all the three groups it'll be allocated to all the three groups so if you have Goodwill first you allocate to all the three groups so in what ratio in this particular carrying amount ratio they will give you CG 1 2 3 carrying amounts in that carrying amount ratio Goodwill will be allocated okay sir any problem same thing with respect to corporate asset same thing with respect to corporate assets all right corporate assets means let's say we own this building we don't but just say let's say we own this building it's a three Flo building let's assume okay in the first in the ground floor may we are conducting CA class first floor may we are conducting uh first ground floor May CA class first floor CS second floor May Acca class all right now sir building value is let's say 10 CR rupes building value is 10 CR rupes sir can this building am I using this building separately or I'm using this building for these three purposes these three purposes that means this particular building what I have to do this building I'll have to allocate I like to have to allocate to how many cgus three cgus CA division CS Division and Acca division in what ratio in their carrying in the CG carrying amount ratio I will allocate this particular building okay people that's all you have to do so same good duel and corporate assets usually they don't generate independent benefits that is the reason we always do their empowerment check at group level that group only we call it as what cash generating unit so far okay any problem people all right sir here there are two test just remember this I feel the MC question may come may not be at uh practical question may not I might be wrong also I don't know all right CA final may we have such question so far we don't see any such question and see a intermediate on that confidence I'm seeing and I see a proves as wrong many times okay so just don't go by my words and later scold me and give G to my whole kandan but he told I skipped it came for 10 marks so my at going and all that in fact in regular class I've explained you all this with example with numbers though it was not there we I think I remember taking one example and showing you the accounting of all this so I have done my part I'll will not take the blame now it's marathons so I will not be able to have the time to re give you recap of everything hence we are doing a theoretical discussion of that okay now what is this we'll have to do is first go back one step what is this concept tell me once again cgu cgu means cash generating un why do we have concept of cgu because there are many assets which don't generate independent benefits that means you'll not be able to find out recoverable amount of individual asset that's the reason we do the empowerment check at group level and group only we call it as cgu all right that is one now Goodwill does it generate independent benefits no corporate assets do they this is your corporate asset B building okay because we are using this building for all the purposes no so now this particular corporate asset will it generate independent benefits no that means what you'll have to do this Goodwill and corporate assets we have to allocate it to the cgus if you have one cgu means then allocate allocate the entire amount to one cgu if you have three Cash generating unit means this Goodwill or corporate assets will be allocated to all the C all the three cgus in what ratio in carrying amount ratio okay people is the first step done all right now what you'll do is fine since you doing the empowerment check at cgu level what you will find carrying amount of cgu you'll find let's assume after allocating Goodwill after allocating Goodwill and corporate assets let's say the carrying amount of cgu is 10 lakh let's say we have only one cgu for Simplicity purpose and its carrying amount is how much sir 10 lakh Rupees now we'll also find out the recoverable amount of cgu all this data will be given to you in the question let's say it's only 8 lakh it's only 8 lakh so tell me sir is this particular group impaired or not do we have any impairment loss here carrying amount is 10 recoverable amount is eight do we have an impairment loss yes how much this is impairment loss of one asset or for the group gr this group impairment loss is how much 2 lakh rupes okay sir group means it'll have one assets or many Assets Group means it'll have many assets that means this particular impairment loss you'll have to allocate to the Assets in the of the cgu okay what as28 says 1 minute hang on let us say this particular group has a Goodwill of let's say 50,000 we have allocated how much Goodwill to the cgu ,000 rupes assumption okay now is Goodwill really an asset or balancing figure is Goodwill really an asset or as14 balancing figure that balancing figure you'll compare PC with net asset if PC is greater than net assets that balancing figure we are counted as Goodwill otherwise if PC is lesser than net assets balancing figure we accounted as capital reserve so is Goodwill really an asset no it is just a balancing figure now you tell me sir the balancing figure and all should be show in our asset should be show in our balance sheet no no so what as28 says is if you get cgu impowerment loss maximum possible listen to my sentence carefully maximum empowerment loss first you'll adjust with Goodwill maximum possible empowerment loss you will give it to Goodwill how much is the empowerment loss here 2 lakh how much is a Goodwill balance available 50,000 I means out of 2 lakh 50,000 empowerment loss will be adjusted with what Goodwill why 50 because Goodwill balance is only 50,000 how much of Goodwill balance is that to that Max maximum extent you allocate empowerment loss to Goodwill because Goodwill is not really an asset it's a balancing F so when opportunity comes knock off that balancing F that's a reason okay sir now still any impowerment losses there yes how much balance is still there 150,000 this you give it to the other assets of cgu this you give it to the other assets of cgu let's say we have property planning equipment and we also have intangible assets let's say before allocating impairment loss PP carrying amount is 5 LH intangible assets carrying amount let us say is 10 lakh it is 10 lakh that means how much empowerment loss you all have to allocate 150,000 this 150,000 you all have to allocate to both PP and intangible Assets in what ratio in their carrying amount ratio so find tell me sir how much is the impairment loss you'll adjust with PP this 150,000 you'll adjust it in this ratio so it'll be what 150,000 into 5 lakh divided by 15 lakh how much is this quickly tell huh don't want to calculate 1/3 so 50,000 no yeah 2/3 so this is what 150,000 into 10 lakh divided by 15 lakh if you do you'll get 1 lakh this is how Group C cgu impowerment loss will get allocated manageable we don't have any questions and IA study material on this but just saying if they frame it you'll have to do it like this rules are there so questions can be framed and I will frame every attempt in questions this attempt this could be the question I don't know if it comes I will say I've done my part okay yes once more or clear clear tell me what you understood let's see not that important but just to be on the safer side we are covering this okay so don't freak out as I said no sir then getting zero one marks any da will okay know something so that if some new question comes one or two some pointers we should write and we should do one or two marks cuah that is okay because that always helps that's the difference between getting 149 and 150 this one Mark you never know could be okay tell me again how do you find out if you're doing empowerment check at cgu level what will you do find out take the carrying amount of cgu compare it with recoverable amount of cgu then accordingly you will get impairment loss of the cgu that impairment loss first Maximum empowerment loss first you'll allocate to what sir first Maximum empowerment loss you'll allocate to Goodwill then you'll allocate to other Assets in what ratio in their carrying amount ratio that's what I've written as two pointers over here done people this is one can you keep this in mind okay I think this is good enough sir can you reverse impairment loss also can you reverse impairment loss can you charge impairment loss can you book impairment loss yes when when indicator comes when indicator comes you will book impairment laws when that indicator itself is reversed means can you reverse impairment loss yes acceptable when indicator comes you'll book impowerment loss when that indicator gets reversed now suppose government told you cannot use the machinary for next 5 years government put a ban on using our asset or let's say we have a license we have a license we we are in a coal mining business we are mining coal our license was cancelled our license was canceled that is a favorable or unfavorable change unfavorable that means it's an impairment indicator after 2 years government gave our license back government gave our license back that means this is unfavorable or favorable favorable when unfavorable indicator comes you'll book impowerment loss when that indicator itself gets reversed can you reverse empowerment loss yes it is acceptable reverse charging empowerment laws and reversing empowerment LW both are acceptable fine all that poins have written and explained it to you that's all right so far good enough people I think it may not be that much relevant for examination so we'll not dwell too much into that syllabus for the time being yes people I think this is good enough for our as28 empowerment discussion okay sir some more pointers are there I feel they may not be that relevant hence I'm not going in detail with this okay sir all right people thank you well hello people continuing our discussion further in Marathon series the next standard we'll be taking is accounting standard two which talks about valuation of inventory so inventory means what stocks sir yeah what are the types of stocks we see usually raw material work in progress and finished goods so basically inventories are those goods which are held for sale in the ordinary course of business why do we hold finished goods stock to sell or inventories are those goods which are in held in the process of produ of sale they are in the process of production of such sale means are they completed or in the process in the process that only we call it as work in progress okay because they're not fully completed they are in the Midway or they raw material to be consumed in the production process will we will we sell the will The Entity sell the raw material or they will consume the raw material they will use the raw material and they will produce finished goods so usually inventories are of three types raw material work in progress and finished goods okay so you know this already how is inventory valued all those you know tell inventories are valued at cost or NRV whichever is lower cost or NRV whichever is lower this particular valuation basis you should not apply for one entity that is if you are a producer if you are for producers inventory of agricultural produce Forest produce mineral ORS their inventory are directly will be valued at net realizable value for all other entities you will value the inventory at cost or NRV whichever is lower for producers inventory of like a farmer Farmer will buy the vegetables or he will grow his own vegetables so for a farmer is a what is a farmer he's a buyer or he's producer producer so if a farmer has inventory of mangoes or apples or vegetables and all they will value their inventory directly at net realizable value not at cost or NRV whichever is lower directly at net realizable value for all other companies they will value their inventory at cost or NRV whichever is lower now the next question so what is cost for this purpose you know this already same as10 tell me the cost costs of as10 were broadly classified into three what are those Purchase cost directly attributable cost DSM right here also the same thing first one is Purchase cost can purchase cost be treated as a cost for inventory purpose yes if you have any import Duty and non refundable taxes what you'll do add if there is any rebates and trade discounts you will minus say as as1 no change there the next one is conversion cost next one is the conversion name itself is saying conversion cost conversion cost when who will incur Trader or manufacturer manufacturer will incur conversion cost conversion cost means to convert raw material into finished goods what cost we have incurred so conversion cost are broadly classified into four categories anybody remembers what those conversion cost are broadly classified into direct materials directly labor variable production overheads and fixed production overheads these are the breakup of the conversion cost if they give you direct material direct labor and variable production over it you'll absorb this in inventory on an actual basis suppose we spent 1 lakh Rupees to produce finished goods towards material 1 L can you add it to the cost of finished goods yes suppose we spent 50,000 Rupees to Pro to make the finished goods can you add 50,000 to the cost of finished goods yes so direct material direct labor and variable production overheads are added to the inventory on an actual basis how much of cost is given straight away you will add that whereas fixed production overheads are absorbed on one basis make me happy what is this basis fixed production overheads are absorbed based on normal capacity or actual capacity whichever is higher fixed production overheads are absorbed based on normal or actual capacity whichever is higher we will apply it in the problem just quickly reviewing the concepts first these are your conversion cost C dram right third one is daak third one is daak instead of saying daak here is is to say is any other cost incurred to bring the inventory to the present location and condition any other cost if you have incurred to bring the inventory to present location and condition such cost can be ordered like suppose I'm buying the raw materials from uh Chennai my factory is in Bengaluru from Chennai if it has to come to Bengaluru means I have to incur Transportation cost that means to bring the inventory to my location is that cost required yes so there's nothing but your Dack till the inventory reaches sellable condition till the inventory reaches sellable condition whatever related cost you have incurred you can be added to the cost of inventory so these are all your what sir your transportation cost loading charges unloading charges assembly charges etc etc all those costs will come under this particular category as2 simply says these are what sir any other cost incurred to bring the inventory to present location and condition or simply you can treat the meaning as dck itself okay that's all this is so these are certain costs or these are the cost for inventory valuation purpose what are those cost again Purchase cost under Purchase cost if you have any non-refundable taxes and import duties and all add if they have any rebates and trade discounts minus then conversion cost conversion cost of four categories are direct material direct labor variable production over ites fixed production over it direct material direct labor and variable production overes are absorbed on an actual basis meaning how much of you have incurred all that cost straight away will be added to the cost of inventory but however fixed production overheads are absorbed based on normal capacity or actual capacity whichever is higher I've explained the logic of all this in the class hope you remember the calculator example I had given you okay anyways now I'll not have time so I'll not go into all that whatever is exam relevant we'll be focusing more towards St for now all right next is Purchase cost over conversion cost over what is one more cost any other cost incurred to bring the inventory to the present location which is my factory and present condition condition here refers to sell condition till the inventory reaches sellable condition whatever related cost you incurring you can go on adding that is one next is NRV so how do you get NRV tell me again NRV NRV full form is what net realizable NRV is nothing but estimated name it saying net realizable value when will you realize money when you sell it so NRV is given by estimated selling price minus sir it is net realizable value not realizable value it is net realizable because to sell also sometimes you'll have selling expense so NRV is given by estimated selling price minus estimated selling cost minus further completion cost if any this further completion cost is it necessary for finished goods sir finished goods is it yet to be completed or fully completed work in progress is it fully completed or not yet completed so this further completion cost is only relevant for work in progress it is not relevant for raw material or finished goods it's only relevant for work in progress if they ask you to find out NRV of WIP then you also need to consider this further completion cost okay otherwise raw material and finished goods this last component is not required done people all right so if the cost of the inventory is 100 if the NRV is 80 tell me you will value the inventory at what value cost or cost of 100 or NRV of 80 whichever is lower which is lower 80 so that means you will value the inventory at NRV of 80 rupees done people here there is is a small problem what problem we know inventories are to be valued at cost or NRV whichever is lower how do you get NRV tell me once again estimated selling price minus estimated selling cost minus further completion cost correct so raw materials does a manufacturer sell a manufacturer what does he sell finish Goods yes does a manufacturer ever sell raw material or he never sells raw material he never sells raw material you know inventory should be valued at NRV and to get NRV we want estimated selling price raw materials are never sold if raw materials are never sold means what is the selling price of raw material we don't know means how should we value the inventory so there was a problem that they have fixed what as2 says is manufacturer will use raw material for what purpose raw material uh manufacturer will use raw material for what purpose to manufacture finished goods so hence a raw material valuation is always linked to finished goods since we don't have the selling price of raw material so to Value inventory of raw material as2 has given a guidance that link raw material valuation to finished goods check how is finished goods valued based on that you can value raw material if finished goods is valued at cost means raw material will get straight away valued at Cost itself if finished goods at cost means raw material also at cost if by chance finished goods if they are valued at net realizable value means then the raw material also will get valued at net realizable value only but what is NRV of raw material sir so raw material you may not sell but if raw material is over means what you'll do if raw material is over means you'll stop the production or you'll order more means raw material go on replacing no so replacement cost of raw material can be taken as NRV for the valuation purpose so finished goods is valued at NRV means raw material also will be valued at NRV and NRV of raw material is what sir directly replacement cost as all this is fun okay people all right let's see how well you have understood let's apply it in one of the question quickly tell me this this all are I think this is an RTP questions I think previously let's see Mr mul gives the following information relating to the inventory as on 31st March 2019 his Factory produces product X using ra material a so raw material name is raw material a and finished product name is what product X so keep this in mind company this Mula company they have 600 units of raw material a they purchased it what price 120 that mean this is the cost and replacement cost of raw material is given to be 90 so replacement cost can we take it as NRV of raw material yes they also have 500 units of partly finished goods partly finished goods means what raw material finished goods or work in progress work in progress how many units they have they have given all this data at the end end of the year that means this 60000 500 and all is what closing stock right closing stock in value or closing stock in units losing stock in units they've given great so 500 units of partly finished goods that is your WIP in the process of producing X and how much cost have you already incurred on this wiip 260 these units can be finished only in the next year because we are at the end of the year and this units are not fully completed they will get completed in the next year by incurring an additional cost of this is what further completion cost okay we have 1,500 units of finished product X cost we have spent how much totally for the finished goods 320 and expected selling price of the finished goods that is product X is 300 R per unit and you have to do the valuation okay so let's do the valuation so raw material valuation straight away you will do or first you will value finished goods raw material valuation is always linked to finished goods how finished goods is valued on the same basis raw material also will get value so first let's do finished goods valuation how many units of finished goods we have 1,500 okay and we know the valuation basis finished goods are valuated at what cost or nrb whichever is lower what is the cost of the this finished goods how much cost have you incurred 320 copied that yes okay next we need NRV how do you get NRV sir NRV is expected selling price which is 300 minus expected selling cost have they given any selling expenses in this data we read the data did we get any selling expense no if they don't give mean selling expense is how much selling selling expense is how much 300 okay 300 is a sales value selling expenses zero minus further completion cost sir finished goods is already complete will there be any further completion cost of finished goods or zero that means what is the net realizable value of the finished goods net realizable value of the finished goods is 300 okay stop check the comparison now cost of the finished goods is how much 320 NRV of the finished goods is how much 300 that means you will values is inventory at what basis 320 or 300 whichever is lower which is lower 300 that means this particular 300 finished goods is Val got valued at cost or it's got valued at NRV finished goods has got valued at NRV yes people if finished goods is valued at NRV means automatically I know the conclusion what is the conclusion raw material will get valued at replacement cost yes people okay first we'll finish off this sir one unit of finished goods will get valued at what price 300 how many units we have 1,500 so multiply these two how much is it 450,000 that is the closing stock value of the finished goods so now can we value raw material raw material how many units we have 600 we have 600 units of raw material great how much is the cost of raw material how much did you purchase this raw material for 120 what is the replacement cost 90 so cost is 120 given replacement cost is 90 0 given in the question okay so should we have to do this comparison no no is raw material valued on a comparison basis or based on finished goods finished goods how did the finished goods get valued at NRV that means automatically raw material will get valued at replacement cost what is the replacement cost 90 one unit of raw material will get valued at 90 how many units we have 600 so multiply 600 into 90 how much is that 54,000 any doubt offline online till here all cool Paka yes all these are easy problems I hope you should not make any mistakes in these online also still there no people okay next the last valuation is WP so how many units of wiip we have as closing stock 500 copy that so how much cost you have already incurred on this wiip already 260 so cost incurred from this wiip is 260 so let's find out the NRV of WIP so how do you get NRV of WIP tell me once again estimated selling price sir how much will you sell this product for eventually when this work work in progress gets completed eventually when this work in progress becomes complete you'll sell the finished product at what price 300 that means estimated selling price is how much is fins H yeah correct correct you will you have any selling price of finished goods or wiip selling price will be there will now I have half half lectures can I sell to the students I have 30 topics only four topics have completed I'll tell four topics you buy it at 100 rupees will anybody buy no will work in progress have selling price no right you will sell the product only after it is completed so you will take the selling price of WIP as the same what is finished goods selling price 300 same thing you will take minus estimated selling expense how much is estimated selling expense zero but but but but one more component will come for WIP which is what it is nv's estimated selling price minus estimated selling cost minus further completion cost if any is this wiip fully complete or we are yet to complete yet to complete so how much more additional cost we have to incur this to complete this product 60 this will be complete okay now so like this so that means indirectly to say how much will you sell the finished products for 300 how much more you have to incur the cost 60 indirectly 240 rupees becomes your NRP of WIP that's how it is suain so this particular further completion cost will only come for which component wiip hope this is clear WIP will not have any sing price you will take selling price of which product finished goods only but you'll also reduce the further completion cost for WIP so how much is NV of the WIP sir 240 cost is how much 260 NRV is how much 240 that means you'll value this wiip at what value cost or NRV whichever is lower which is lower among this two NRV only of 240 so that means each WIP will get valued one unit of WIP will get valued at 240 and how many units we have 500 so multiply how much you going to get 1 lakh 120,000 is the value or the closing stock value of WIP so adding everything you'll get the total value of the closing stock that should come in your balance sheet that is 6 lakh 24,000 I'll give you a quick one minute review that ask me if you have any doubts hope not going fast all of you are there on the same page clear no okay all okay now need some more time no okay maybe one more question we will take in this regard just to have a little more clarity of this so where is that maybe we'll value this okay check this again same raw material car and finish Goods valuation one more basis a limited one company is there can we switch on the maybe AC becoming a little it's on is it oh why am I feeling the heat then okay then fine it's okay no problem no we'll adjust no a limited is engaged in the manufacturer of chemical y all right so they are manufacturing chemical y this chemical Y is what for us finished goods but to manufacture this chemical y we need a raw material X okay so we have finished goods as well as we have raw material so far okay sir will raw material have any separate valuation or it is linked to finished goods raw material valuation is linked to finished goods again if finished goods is valued at Cost Raw raw material also will be valued at cost if finished goods is valued at net realizable value means the raw material also will get valued at NRV only what is NRV of raw material replacement cost keep that in mind the company provides you the following information for the year ended great raw material information they've given rupees per unit cost price of raw material is how much 380 unloading charges sir can you add unloading charges yes what does the standard say any cost incurred to bring the inventory to the present location and condition then the inventory becomes sellable condition can you go on adding all the related cost yes unloading charges means to get the raw material inside your factory or paying some laborers so unless you pay them will the goods come inside your factory no I means is it necessary yes so can you add this yes you can add fright in Fright Inver means Transportation cost can you add Transportation cost yes you can add fine adding these how much is the total sir 440 that is your cost of raw material and they also given replacement cost of raw material 300 so far okay cost also known replacement cost also now this is the data for raw material next they have given the data for the finished goods for finished goods see what and all they've given raw material consumed how much 440 yes no to produce finished goods do you need raw material yes so raw material cost can you add it to the cost of finished goods yes what is the total cost of raw material we already got it here 440 can you add that to the cost of finished fin Goods yes because to produce finished goods we need cost of raw material also add it then labor cost can we added all this we used to call it as what sir conversion cost go back to the concept again conversion cost what is the concept direct material direct labor variable production overheads are absorbed on actual basis how much is the actual cost of raw material 440 can you add that to cost of finished goods yes how much is the actual labor cost 120 can you add that yes you can add variable overheads is 20 0 rupes 80 rupees per unit all they've given not at total level they've given it at unit level can you add variable production over it yes on what basis actual basis done people one more thing also you can add what is that fixed production over it fixed production overheads and actual basis or there is a particular way of calculating what is that way of calculating fixed overheads are absorbed based on normal capacity or actual capacity whichever is high okay fixed production over it they' have given here in the problem check what is the toal tot fix it over ites for one one problem here why sir all this above cost they give it at total level or per unit basis for one unit how much is a cost they give but fixed overheads did they give it on unit level or total level they give it at total level what is a total fixed production over ites 4 lakh what is the normal capacity 20,000 what is actual capacity given or missing actual capacity they gave or they did not give normal capacity means how much normally we produce okay so we have a capacity to produce how many units 20,000 units just because we have a capacity to produce 20,000 in the current year should we produce 20,000 or we we can produce lesser also suppose we have a demand for only 5,000 units we have Demand only for 5,000 that means in the current year how much will I produce though I have capacity to produce 20 since there is a demand for only five my actual capacity will only be fine but in this problem is that actual capacity given or missing if they don't give what to do ignore that absorb it based on what normal capacity itself so calculate sir what is the total fixed production overes 4 lakh so 4 lakh is for One units or all the units what is the total normal capacity in units 20,000 units so 4 lakh is a cost for 20,000 units for one unit how much is a cost tell me 4 lakh is a cost for 20,000 units for one unit how much is a cost 20 per unit got it our people so fix it production overs also can you add it to the cost of inventory yes how much is it on a per unit basis 20 that's what I've added here 20 that's all the calculation manageable Okay Okay Okay g all this you have to put it as a separate working note here we quickly reviewing it so what is the total cost of finished goods then adding all this what is the total cost of finished goods add if you add you'll get 660 manageable okay let's read the data further closing balance of raw material X closing balance means closing stock in units how many unit units of raw material we have at the end of the year 1,000 units and chemical wise finished goods how much is finished goods closing stock at the end of the year 2,400 let's copy that data we have to solve this particular question and two scenarios how many units we have of raw material 1,000 finished goods car 2,400 I'll copy that 1,000 and 2,400 this is in units okay sir all right let's see sir first you will value the raw material or first you'll value finished goods finish Goods because raw material valuation is linked to finished goods that's re okay check you need to find out the total value of closing stock of raw material X as well as the closing stock of finished goods chemical y under two cases these are two separate cases first when net realizable value of chemical y chemical Y is a finished goods finished goods NRV is how much 800 so what is the cost of finished goods we already got it here what is the total cost of finished goods 660 the total cost of finished goods is 660 NRV they G they only gave NRV of finished goods is how much 800 tell me the valuation basis cost is 660 NRV they gave is how much 800 so which you will value the finished goods inventory at what value you will value finished goods inventory at cost more importantly and what is that cost 660 okay s and now if you know this automatically you know raw material valuation basis also if finished goods is valued at cost means raw material also will get valued at cost what is the cost of raw material 440 that means raw material also will get valued at 440 so one unit of raw material will get valued at 440 how many units of closing stock we have 1,000 so multiply these two you'll get the value what is the value 440,000 manageable similarly one unit of finished goods will get valued at 660 how many units we have 2,400 multiply these two 15ak 84,000 so adding these two you'll get the total value of closing stock that will come in your bi okay people all right this is the first basis first basis is a scenario where NRV was only 800 of what finish now the second case what if net realizable value of chemical y that is finished goods if it is only 600 sir check what is the cost of finished goods 660 what is NRV of finished goods 6 that means the finished goods will now get valued at cost or it will get valued at NRV now now now now now finished goods would get valued at NRV and how much is NRV of the finished goods in the second case only given the question 600 each unit of finished goods will get valued at NRV of 600 if finished goods is getting valued at NRV means raw material will get valued at what replacement cost have they given replacement cost of raw material yes how much is replacement cost of raw material 300 each unit of raw material will get valued at 300 these are the number of units so if you multiply you'll automatically get the closing stock value okay sir not much calculation but still a pretty good question H okay this is done next one or two concepts quickly are there then we will cover that next one is something called Joint products joint product if you remember I used to give arind mil a example in my regular class Arin mils is a company which produces multiple shirts your van husen Peter England all the shirts no Arin Hill Arin Mills rather produces that okay or let's take a simple example or join product simply means sir we are producing multiple products we are prod using multiple products but by incurring a common cost let's say a company wants to manufacture three products means they will have three separate factories to manufacture three products will they have three separate factories no it will be only one Factory will they have three separate supervisor three separate workers and all or can you have a common cost common cost one manager one laborer can produce multiple products so let's say company incurred 10 lakh Rupees company incurred 10 lakh Rupees not to produce one product they incur 10 lakh Rupees to produce all all the three products that means you are incurring a common cost you're incurring a common cost one cost you're incurring but are you generating one product or multiple products multiple products that only we call it as joint products all right now sir are these inventory same or are they different these inventories are different okay product a is different from product B and which is different from product C that means can you have to Value each inventory separately so how do you value the inventory cost or NRV whichever is lower do you know cost of product or don't know so what is the total cost you have incurred 10 lakh this 10 lakh was incurred for one product or all the three products all the three products but you need to Value each product separately for that you need to know cost of product a you need to know NRV of also product a okay NRV easily you can find out because product a you will you will sell it so this is not a problem but what is the cost of product a do you know or this is a common cost common cost hence what you have to do this 10 lakh rupes you have to allocate among all the three products that is a concept of joint product that's all so you will have a common cost which you'll have to allocate to all the products so in what ratio as2 says you use any rational basis you use any rational basis you can allocate the cost in units number of units produced ratio in sales ratio whatever all right usually for our examination we allocate this particular 10 lakh in sales value ratio sales value ratio sales value means let's say we have 1,000 units of product a 1,000 units of product a anyway you will sell the product a know each unit of product let's say we sell it for 10 Rupees that means what is the sale value of product a 10,000 rupees let's say we have produced 1,500 units of product B each unit can be sold for 15 rupees so what is the sale value quickly calculate 155 are what 125 12,500 20 to 500 so this is a sale value of product B let's say I produce 500 units of product C and it can be sold for 5 rupees per unit that means what is the total value 2500 that means this particular 10 lakh 10 lakh will be allocated in what ratio 10 lakh will be allocated in sales ratio of 10,000 is to 2 to 500 is to 2,5 this 10 lakh will be allocated to all the three products in this particular ratio that's all you'll have to do here that way you'll get cost of all the particular products any confusion or okay all right next one is byproduct byproduct means 1 plus one offer so lucky you are you wanted to produce one product another product you got it for free it is a one plus one offer okay sir you tell me will you be so lucky that the product you have got for free will it have very high value or low value usually by product value realizable value will be very significant or insignificant insignificant that means as to acknowledges this and says that usually byproduct byproduct means the product which you have got it for free all right that byproduct value will be very immaterial so let's say the realizable value of the let's say the total cost of the main product is 10 lakh to produce main product how much cost you incurred 10 lakh assumption this by product the product that you have got for free let's say you can sell it for 2,000 Rupees you can sell it for 2,000 Rupees that means compared here it's material or immaterial immaterial so what standard says is find out the NRV of byproduct find out the NRV of the byproduct which I've assumed in this problem to be how much 2 2,000 reduce that 2,000 from the cost of the main product that means is the cost of the main product 10 lakh no it'll become 9 lakh 98,000 that's all this is D all simply find out net realizable value of the by product and reduce it from the cost of the main product itself there is no separate valuation required for byproduct because their value will be significant or insignificant insignificant that's all quick again all this relevant for your McQ question they're not much relevant for bigger question doubtfully not that it can't be asked just that not that particular frequent so something which is pretty straightforward I'll move on I hope this is understandable with you okay next sir remember as10 we did some cost exclusions tell me some of the examples of cost excluded from PP we have studied General administrative overheads selling and distribution overhead relocation cost reorganization cost initial operating losses promotional expenditure similar to that your cost exclusions in inventory also same if you have any general administrative and selling and distribution over ites they are not added to the cost of inventory because are they related only to the inventory or they are general cost general cost so General administrative overate selling and distribution over rates are not added similarly storage Cost Storage cost sir for inventory there is a cut off what is that cut off no no no up to inventory reaches a certain certain conditions you'll go on adding what is that condition just now we studied that Purchase cost conversion cost what is the third criteria any other cost incurred to bring the inventory to the present location and present condition present location here refers to factory present condition here refers to sellable condition all right sir you will you will store what product you will store finished goods after it has reached sellable condition yes or no so hence storage cost of finished goods we will not add it to the cost of inventory because you will store the product only after after it has reached the sellable condition so storage cost of finished goods is not added what about storage cost of raw material raw material storage cost and work in Pro work in progress storage cost you can add but if the question just mentions storage cost in many examination question may we have seen this they will give you storage cost 10,000 they will not tell you whether the storage cost is relating to finished goods raw material or Wap in that case may always assume that it is a storage cost of finished goods and exclude it no logic just the convention I say uses you also follow the same for examination okay people all right even abnormal loss is also not added to the cost of inventory rather abnormal loss will be transferred off to P okay what about normal loss normal loss can be absorbed by the cost of inventory but abnormal loss will be transferred off to pend account what about the refundable taxes refundable taxes can we add nonrefundable taxes you can add refundable tax means on those taxes where you can claim your ITC input tax credit they are not added abnormal loss I'll take up one question and tell you a little more detail fine people all right so these are your data or maybe one minute I will just go for this abnormal lka calculation same question in the problem this question is also a little popular has come quite a few times in examination and you'll see this in quite a few rtps also no problem car check in a production process read this question in fact if you remember I told you normal Los an example anybody remembers what is the example we used to tell for normal Ross apple apple example forgot hey you guys have forgotten a lot of things okay maybe one minute I'll give you a recap of this sir sir 100 apples 100 apples I asked you to sell I'm an apple dealer I made all of you agents told I have 100 apples you sell I told on 100 apples totally I want 1,000 rupees totally I want How much rupees 1,000 rupees that means each apple you'll sell it for what price 10 Rupees that way you will get totally th000 got it now but Papa you busy in Marathon class now from morning till evening you are in Marathon then you are studying and all so you forgot about selling the apples the Apple got rotted the red color Apple has become full black color blackish has become and 50% of the Apple have got rotten I means do you have 100 apples with you now or only 50 apples 50 apples okay sir but my instruction was very clear what did I tell you you do whatever you want finally I want How much rupees 1,000 rupees but now do you have 100 apples with you or only P apples that means will you sell each apple at 10 Rupees now no totally you want to recover how much th000 that means now each apple you will recover at what price 20 rupees yes people in fact this I told is a concept of normal loss when whenever normal loss comes quantity from 100 it became 50 whenever normal loss comes quantity will increase or quantity will reduce or quantity will reduce check what was the price before 10 now is the price 10 or Price become 20 that means what sir the selling price or the cost price per unit will increase all right this is the concept of normal but really pay attention is there any loss over here or no loss is there any really loss here or no loss sir I had to recover initially how much 1,000 now also we recovered how much means yes but 50% of the Apple has got rotten but that 50% rotten apple car loss has been absorbed by the other Good Apples yes or no whatever remaining apples has absorbed the loss that's the reason here also it is th here also it is th000 that's the reason we say normal loss is absorbed by the remaining good units okay that application we'll have to do it in this particular question can we review this yes okay everybody check this particular question in a production process the normal wastage or normal loss is how much 5% of input how much of material you insert 5% you can't do anything it'll be lost go in the only so how much materials of input did you do 5,000 calculate how much is normal loss so how much of you insert 5% is going the totally how much did you insert 5,000 m so 5,000 into 5% you do how much is that normal loss is 20 250 metric tons or we can call it as 250 units for Simplicity okay sir 250 units is normal loss expected no matter what you do you cannot escape from this loss great next 5,000 metric tons of inputs were in process resulting in actual wastage how much 300 so normal loss was how much 250 but did you incur only 250 loss or 300 units loss your actual loss is 300 units as given in the question that means do we have only normal loss also in this problem or also abnormal loss total loss is 300 units in that if 250 is normal means the balance 50 will be abnormal loss stop normal loss will it be absorbed by the remaining good units yes that means normal loss will it be absorbed by inventory yes abnormal loss will it be absorbed by inventory or it will go off to pend account abnormal loss will go off to pend account this is what we need to calculate and give the breakup aware everybody cool okay so how many units of input did you purchase 5,000 and what is the cost of each unit of input 1,000 so one unit cost 1,000 rupees and how many units have you purchased 5,000 so what is the total cost calculate for me one unit cost 1,000 5,000 units the total cost will be 50 lakh rupes is your total cost so far as given in the question manageable yes okay sir all right now no stop now excuse me normal loss is how much 250 normal loss will the company actually suffer or it will be absorbed by the remaining good units absorbed by the remaining good units one second hang on we just now proved it to you whenever normal loss comes whenever normal loss comes quantity will increase or quantity will reduce quantity will reduce what about the cost per unit it will be same or it will increase increase stop how many inputs did you put in how many units you had before 5,000 now you have 5,000 or 250 normal loss in 5,000 May if 250 is normal loss means how much is a good units 4,00 ,750 that means from 5,000 the unit became 4,750 got it so what happened to your quantity quantity increased or quantity reduce quantity reduce okay what was the cost before each unit cost earlier was how much th000 after normal loss will you have cost as thousand or cost will increase cost should increase yes people okay now everybody pay attention how much is the total cost 50 LH how much is the remaining how many remaining good units 475 I mean now this 50 lak total cost will it be absorbed by 5,000 units or remaining good units remaining good units 50 lak cost will be absorbed by the remaining good units of 4750 so what is the cost of each unit Now 50 lakh will be absorbed by 4750 units means the cost per unit will become how much 10 52. 63 any problem so before this what was the cost of one unit 1,000 after normal loss the cost has become 10 52. 63 that means the quantity has reduced the cost cost per unit has increased so far there everybody all right now one second how many units of closing stock you actually have will you have 4750 or 4,700 sir totally you bought 5,000 in that totally how much did you lose 250 you lost it as normal 50 you lost it as abnormal totally how much did you lose 300 that means how much is remaining with you 4,7 so actual quantity remaining with you is only 4,700 units and what is the cost of each unit now revised cost after normal loss the cost will get revised what is the revised cost per unit 10 5263 multiply for one unit the cost is 105 2.63 for 4,700 how much is the total cost that will be 49 lakh 47 368 this is the cost that will be absorbed by the invented okay people so what about remaining what is the total cost actually you incurred for purchasing this product 50 LH but is there any abnormal loss also yes abnormal loss Will will it be absorbed by inventory or transferred to P transferred to P how much of abnormal loss we have 50 units and each unit cost is how much 105 2.63 we have 50 units of abnormal loss each unit of cost is 105 2.63 if you multiply what are you going to get 52 lakh 632 this two if you add automatically you will get 50 lakhs that's all it is that's what we mean by normal loss will be absorbed by the remaining good units and abnormal loss will be transferred off to B this is also one pop question has come a few times in the examination easy easy Paka got it just to be on the everyone cool okay just to be on the saf side let's see some response were a little weak so let's modify this and see how well you have understood sir same 5,000 units we have inserted all right actual loss is uh let's say 750 units actual loss is how much 750 units normal loss let say is 10% normal loss is 10% so calculate sir 10% means how much normal loss is 10% means 5,000 10% how much 500 okay now you calculate the purchase cost the total cost before this transaction was same number I'll take it as 50 LH quickly quickly calculate let's see or maybe help me out we'll do it parall first what we will do sir first we will calculate what sir good units how much is a good units sir in 5,000 units May how much is how much is a normal loss 500 units what is the remaining good units then 4,500 units okay now now whatever is a total cost it will be absorbed by the remaining good units so what will be your cost per unit now the cost per unit the 50 lakh will be absorbed by the remaining good units which is 4,500 calculate I means for one unit how much is the cost 50 lakh divided by 4,500 if you do quickly quickly do, one one triple one four 1111111 I'll take two decimals okay all right this is your cost per unit all right so how much cost will be absorbed by inventory how much cost will be absorbed by inventory sir before how many units you had 5,000 500 units you lost as normal but totally how much did you lose 750 that means how much is abnormal loss sir total loss is 750 in that 750 if normal loss is 500 means abnormal loss will be 250 units clear that means how many units do we actually have though we have 5,000 units totally we have lost how much 750 that means how many units do we have 4250 correct this is the number of units we have and the cost of each unit the revised cost of each unit after abnormal of normal loss is this number so multiply how much is this 47 lakhs 4722 lakhs huh that's what they saying 47.2 to lakhs okay remaining is what sir abnormal loss abnormal loss will be absorbed by inventory or transferred to pel abnormal loss will get transferred to pel account how many abnormal loss units we have 250 units and each unit what is a Revis cost 111 1.11 if you do this ultimately you'll get you may get some round off error that's okay 2. 77s that's how to calculate yes people little important so I thought I'll do one more with you okay great so this is done this is done this is done okay this is okay this should be fine all right so this is okay cool all right now sir to find out how should the inventory be valued at cost or NRV whichever is L now I'm a calculator dealer that means I my business is buying and selling calculator so on the day one in the current year if the first day if I buy my calculator at 200 means second day also I buy the calculator at 200 only or it'll keep changing second day it may be 202 after that it make it become 205 correct or no that means the cost will go on fluctuating right so I will buy only one calculators or thousands of calculators that means each calculator can I keep a record like this H it becomes difficult so hence to find out this cost we have some Shortcut that shortcut only we call it as cost formulas to find out this cost as a shortcut only we have some formulas that only we call it as cost formula that only you learned it in your golden days as fifo method fif method means what first in first out or weighted average method all these these are certain shortcut method to find out the cost because cost will go on fluctuate manageable people I hope I don't have to take you through that problem and doubtful that they will ask all that in CA intermediate that fif method of inventory valuation WC and all though we have done it in regular class I'm just saying though they're not that very popular for examination once in a blue moon it will come but not often asked all right but but but but but but but but go back to that example suppose a calculator dealer has purchased th000 calculators he have purchased 1,000 calculator sir is calculator number one calculator number 95 calculator number 190 they all different or they are all same whether you buy calculator number one from me or you buy calculator number 95 from me is it different or same only same that means these inventories are interchangeable they are these inventories are interchangeable meaning they are same if inventories are interchangeable then only you can go for that fifo or weighted average method to find out shortcut method for cost suppose inventories are not interchangeable suppose inventories are not interchangeable remember I used to give mango example a person is there he's selling mangoes what are the varieties of mangoes P huh Mal Mal malpa okay malpa badami Alonso bangan now the vendor vendor will he put all the mangoes together and say ma whatever you want you take now what will he do he will keep that malpa separately bangan separately badami alons separately why they are in they are same or they are not same are they interchangeable or they are not interchangeable if they are not interchangeable Sorry boss you can't apply fif method and all in that case may you'll have to go for specific identification method meaning you'll have to find for each type of inventory cost separately NRV separately okay like here jewelry for a jewelry company if they have if a jewelry company has 10 jeweleries means all the 10 jeweleries are same or are they different each jewelry is different yes or no that means you can't put everything together and do the valuation for each type of jewelry you need to find out cost separately NRV separately and inventory will be Valu cost or NRV whichever is low like this each type of inventory have to go on doing the valuation separately that method we call it as specific identification method theoretical in case for two marker mcqs and all all right this is about the disclosure disclosure is not that very important for this particular topic okay sir that's all is the basis of uh inventory valuation revision thank you hello people welcome back after that break so next we'll be starting with accounting standard 7 construction contracts all right so why this particular standard was necessary so let's take a small example let's say an architect is there they want to construct up or maybe I think here I think I've already written that example huh let's say a limited is there they architect company they are constructing a building on behalf of customer not for their usage they are constructing this building for customers this building will take 2 years for construction and after construction when the when the construction gets completed total money how much architect will recover 10 rupes this is a contract now this building will get completed today or after after 2 years after 2 years so how much is the total revenue for this architect company 10 should architect company recognizes 10 CR Revenue after 2 years when the building is fully completed or can they recognize the revenue periodically maybe monthly weekly yearly or whatever that there was a confusion that Clarity is given by accounting standard 7 so A7 only talks about the Construction contract so if an engineering or architect company constructs any asset for other party how the revenue should be recognized is the emphasis of accounting standard 7 all right as far as as7 goes there are two types of contract one is fixed price contract another one is Cost Plus contract fixed price contract means what architect company simply will tell me the C tell the customer give me 10 Rupees I will construct the building is the price changing here or it fixed fixed so this is an example of fixed price contract another type of contract is there which is a cost the plus contract where architect company will say to construct this building approximately I feel 7 cost is required architect compan is telling the customer I may have to incur a cost of 7 will anybody do any assignment at cost price or they will add profit margin AR company is saying my profit margin is 30% so whatever is a cost incurred to that I will add a 30% profit margin and that that means the total contract price will become how much 9.1 so such if such a contract is entered means such contract we call it as Cost Plus contract again relevant for mcqs not relevant for bigger prods okay this is one next scenario is suppose an architect company if they have three contracts if they have three contracts they got awarded they constructing for the same customer same customer they're constructing how many buildings three buildings and there how many contracts are made three contracts now the question is should we account for accounting purpose should we treat all the three contracts as separate contract or should we treat them as one because we have entered this contract with a different customer or same customer same customer but we are constructing how many buildings three buildings so should we for accounting purpose should we treat them as three or should we treat them as one that is what we trying to say over here segmenting means you are treating them separately segmenting means you're treating them separately so you will treat them as three separate contracts provided conditions are satisfied what of this question came in I think in the recent RTP only this concept only they have tested as an RTP question all right so as7 says that you will treat the contract separately if one separate proposals are sent to the customer each contract proposal you have sent separately you have not negotiated them as a package it's not a combo offer each contract you have sent a different different proposal contract signing may be done through one agreement but how have you sent the proposal same or differently different proposals are sent for the different contract that is condition number one and and it is separately negotiated the value for each contract you have negotiated as a package or separate negotiation if you have sent separate proposal if you have negotiated or bargained separately and if the contract cost each contract revenue and cost if you are able to identify if all these three factors are satisfied means you will treat them as three separate contract if the condition fails means you will treat them as one particular contract theoretical question but important considering it's being asked in RTP one of the rtps done people once again what is that now if you have multiple contracts will you treat them separately or will you treat them as one is the concept when will you treat it separately for you to treat separately three conditions should be satisfied one separate proposal should be sent for all the cont all the contracts separately then they should be negotiated separately each contract how much revenue you will get how much cost you'll incur all the contract revenue and cost you should be able to identify identify separately if all of them are satisfied you will treat them as separate contract if these three one of the three condition fails means then you will segment you you will you'll rather combine them and treat them as one contract that is one all right next one is additional asset quickly 5 10 minutes may we will review the concepts then we will dive into the numerical question okay we don't have too many theories over here it's usually we get a practical question from as7 but there are few Concepts also which I don't want to ignore quickly we'll run them by and mind you people in Accounting Standards I do understand that you will enjoy solving the questions but you may not enjoy reading the provisions so much but keep in mind that they can form new new questions right unless you know the provisions accounting standard Provisions properly you will not be able to solve it so do not ignore the provisions oh who will do this you don't have to mug up everything but you need to know their applications few things are important they have practical applications H okay here next one is additional asset what is this additional asset concept very simple same example I used to give in class let us say sir we have a contract we are constructing a fly over on behalf of government one fly over we are constructing on behalf of the government earlier the contract was to construct a flyover for 2 kilm work has started 6 months is already over now the government is saying instead of 2 km make it as 3 km 1 kilm you extend 1 kilm you extend so this 1 kilm you have extended no that we are calling it as additional asset that we calling it as additional asset now now the question is should this additional asset of 1 kilom should you treat them as a separate contract or should you merge it with a old contract should it get merged with the old contract itself or should this 1 kilom extension be treated as a separate contract that concept only as7 says it as additional asset what as7 says is you will treat additional asset as a separate contract you will treat this additional 1 kilom as a separate contract provided one of the two conditions are satisfied one that additional asset differs from the original asset compared to design technology nature and all original asset nature design technology and additional assets nature technology same or are they different if original asset and additional asset if they are nature design or technology if they are different means then original contract you'll treat it as a separate contract additional asset you will treat it as a separate contract this is condition number one or it's not and or or price of additional contract is negotiated separately price is negotiated separately now come back to this example sir originally the contract was for how many stretch 2 km from two it has now Become Three additionally how much are you extending now you tell me compared to the original asset original flyover this additional asset technology nature and all is different or same only same only instead of two now you are stretching it to three that means first condition in my particular example first condition passed or failed first condition passed or fail first condition says what additional asset should be different from original asset is additional asset ass different from original asset or pretty much same that means in my example condition number one has failed if condition number one fails test the second condition what is the second condition you will treat additional asset as a separate contract if it is negotiated separately if it is negotiated separately I told the government that for this 1 kilometer you have to pay me 10 CR extra government told I already paid two for this 2 kilomet only I paid a lot more to you I told nothing doing if you want me to extend 1 kilomet means you have to pay me 10 rupes that means I negotiated as a package or separate negotiation if you have negotiated separately means then this additional asset you will account it as a separate contract like that all right next one is incentive payment incentive payment what is this it's like a bonus it's like a bonus like today I'm going to give you a bonus what bonus one extra one extra accounting standard that same that way let us say same example architect company they're constructing a building okay on behalf of customer this building contract price is how much 3 meaning after construction architect company totally will recover 3 but the time to complete this contract architect company feels about 2 years or 24 months the customer told architect company if you construct it within 20 months only Quality Construction if you do within 20 months I will give you 25 lakh rupees extra originally what is the contract price 3 what is the original timeline 24 months customer is saying by chance if you do a proper work and complete the contract within 20 months I will give you extra bonus how much 25 LH that extra bonus only we call it as incentive payment okay now the question is when should we recognize this incentive payment for architect company this incentive payment or bonus is a revenue when should they recognize this Revenue should they wait 24 months and then recognize because when or rather now if they want to get bonus means contract will should be completed with how many months 20 months that means this 25 lakh should be recognized after 20 months or can we recognize it today only or can we recognize it monthly what we should do that there was a some guidance required as7 opinion on this particular regard is you don't have to wait 20 months to recognize a revenue there incentive payment to recognize that as a revenue architect company don't have to wait for 20 months what as7 Sayes I'll give you two condition the day those two conditions are satisfied you can recognize this particular bonus or incentive payment what are that two condition very simple the contract should have started the contract should have started and the contract should have reached that stage where architect company is reasonably sure that they will receive this bonus or in layment terms the day architect company gets a reasonable assurance that they will be able to complete the Target because you'll get the bonus straight away or you have to meet the target what is the target here 20 months suppose 5 months over 5 months over all already 60% work over okay now Arch company saying AR say I will complete within 20 months that means they don't have reasonable Assurance or they have reasonable they have reasonable Assurance okay that is what is the first condition is trying to say you recognize the incentive payment as a revenue the day architect company feels that they will receive this okay that is condition number one second condition is the incentive payment which in this example is how much 25 lakh you should measure it reliably by completing the target how much incentive payment you will get as an architect company you should be able to measure it reliable the day these two conditions are satisfied you can go ahead and recognize the incentive payment as a revenue till then you'll have to wait that could be 5 months 6 months 7 months depending on the case to case basis all right next one next one for accounting purs this is important in theory but we'll apply it in the problem immediately so as far as Construction contract goes when I asked you the question when I asked you the question here in the previous example may this building C construction time is how many years two years should architect company wait two years to recognize the revenue no what as7 Sayes as far as accounting of Construction contract is concerned there are two accounting methods one we call it as percentage completion method another one completed contract method in percentage completion method it's very simple first find out the percentage of completion how much percentage of the work is completed like you ask yourself that question how much percentage of syllabus have I completed so don't even ask that that hurt okay leave that so architect company first has to find out how much percentage of the work is completed suppose 30% of the work is completed by chance then Revenue recognition can be done to the extent of 30% as as simple as that how much of work you have completed that much of Revenue you can go on recognizing that's your percentage completion method okay people all right sir when can you go for there's one method or two methods two what are those two methods percentage completion method and completed contract method but if if if the architect company if they want to go for percentage completion method there is a condition okay what is that condition one outcome of the contract you should be able to measure it reliably only if contract outcome if you can measure reliably we can go for percentage completion method so when can you say outcome can be measured reliably for this they've bought out few condition what is that pretty simple sir if you want to recognize Revenue means first what you should know total revenue that is what they're trying to say the total revenue or the total contract price you should be able to measure it reliably the total cost associated with the contract you should be able to measure reliably percentage of completion you should be able to measure reliably and it should not be our Malia case where you recognize the revenue but other party is ready to pay or other party has left the country that should not be the case you should have reasonable assurance that you will get the money meaning benefit will flow to the entity if these four conditions are satisfied we say contract outcome can be measured reliably if outcome can be measured reliably means you can go for percentage completion method if you cannot go for this method automatically you will go for completed contract that's like a balancing figure okay saru Paka s once again tell me zaru what is it there are two methods of accounting what are those percentage completion method completed contract method when you will you go for percentage completion method when the outcome of the contract you can measure reliabil when can you say outcome can be measured reliably Revenue you should measure reliably cost you should be able to identify reliably percentage of completion you should be able to find out reliably fourth one benefits should flow to the entity meaning Rec AR company should have reasonable assurance that they will recover the money so if these four conditions are satisfied then only you can go for percentage of completion method condition fails means then you'll go for the other method which is completed contract method and you know the significance of this if percentage of completion method May how do you recognize the revenue based on percentage if first year may if 30% work is completed means in the first year you can recognize the revenue to the extent of 30% if first year 70% work is completed means 70% of the revenue you can recognize now the next question is how do you find out this percentage that you already know you have done it in costing also how do you get this percentage of completion we use cost method what is that formula anybody remembers percentage of completion is given by the formula cost incurred till date divided by total estimated cost into 100 okay it's very simple sir let's say to complete a contract we are expecting architect company feels they need to incur a total cost of 10 CR in that 10 CR first year they have already incurred one first year they already incurred one total cost estimated is how much 10 in that how much is already incurred one so means how much cost is already incurred in percentage if you find out it will be what 10 per that's always is Express this formula what is this 1 cost already incurred what is this 10 total estimated cost in since we wanted in percentage multiply by 100 you'll get the percentage like this you go on doing the find out and accordingly recognize the revenue easy people okay this is one all right the this one yeah we already discussed this fine next is completed contract method so don't be misled by the name what is the name saying completed contract method some students will read the name H completed contract method means we will recognize the revenue when contract is 100% complete no what completed contract method says is okay sir out when will you go for first of all completed contract method when outcome can be measured reliably or it cannot be it cannot be measured reli then only you'll go for completed contract method in completed contract method what as7 says is recognize Revenue to the extent of cost incurred you recognize Revenue to the extent of cost incurred let us say in the first year man the contract suppose will go for 10 years contract is expected to go for 10 years first year let's say you have incurred a cost of 1 if you're going for completed contract method means first year no you not find out any percentage completion because you're not using that method if cost is one CR means Revenue also you'll recognized for one revenue is recognized to the extent of cost incurred that means first year may are you booking any profit or loss or no profit or loss that is what this method says revenue is recognized to the extent of cost incurred and profit or loss should be accounted or should not be accounted in this particular method May there is a scope to book some profit or loss here there is no scope to book any profit that's all as a distinction Okay g we'll apply it in the question also this and all maybe I'll uh do one question and come back to this let's take up one question review this question so everybody this is a RTP May 24 question good question has come uh quite a few rtps mtps and previous year paper also so let's review this okay pay attention the following data is the provided for Raj Construction Company maybe engineering company or architect company total contract price is how much 85 LH this is a total revenue entire Revenue can be book immediately or what no that is based on the percentage of completion or completed contract method we will see materials issued is 21 lakh obviously to construct the building we have to incur various cost material cost labor cost blah blah how much is a material issued 21 lakh out of which material costing 4 lakh is still lying unused okay stop sir how much material totally have you issued as per the question 21 but have you utilized entire 21 lakh for building construction or four is unutilized four is still lying unused that means how much have you actually utilized 17 l so what as7 says is we want to know is material cost required for construction yes so can you treat this as a cost for Construction contract purpose yes but we want to know not the toal total material purchased we want the total material used we don't we don't take total material purchased we want Total material used why is many people know they started using this loophole like let's say to construct a building you need let's say total construction cost uh to construct the building you need 10 CR worth of material what the architect company started doing is they purchased 10 CR material first year only they purchased 10 CR material first year anyway they have good or no and these are not perishable product Aram say you can store it how much materials you need 10 how much totally purchased 10 that means percentage of completion you tell me out of 10 CR if they already purchased 10 CR means percentage of completion is how much 100% I mean they started recognizing entire Revenue in first year so hence asmn is saying that we don't want Total material purchased we want Total material utilized for construction though you have purchased 21 lakh worth of material how much is unused 4 lakh that means how much got utilized 177 lakh only 17 lakh should be considered for your calculation purpose okay people all right first of all I'll give you a break up what are we trying to do here in case you're wondering what sort of question is this you are required to compute percentage of completion you required to compute percentage of completion and you also need to tell how much revenue and cost you will recognize in the current year first tell me sir how do you get percentage of completion what's the formula or one minute stop since they have said percentage of completion is it complete contract method or percentage completion method only it's a percentage completion method tell me how do you find out this percentage cost incurred till date divided by total estimated cost means there will be only one kinds of cost or many many costs that breakup of cost they have given as various adjustments here they have given various cost material cost labor cost blah blah blah all that we need to add then we will get cost incurred till dat are we good with this so far okay toward that how much material should we take 21 lakh as a material cost or 17 lakh why 17 lakh once again tell me because in this 21 lakh 4 lakh have you utilized or not yet not yet that means so totally how much 17 lakh okay that's been taken take take your calculator 17 lakh you punch in uh next Labor expense sir is labor required for constructing the building yes how much is the labor cost labor expense for the workers engaged at site is 16 lakh so total labor cost is how much 16 out of which one lakh is still pending that means how much have you paid 15 sir we don't want paid are we doing the accounting on a cash basis or acral basis acral basis we want the total labor paid or labor charges charges how much is the total labor charges 16 in 16 lakh 15 lakh you have paid 1 lakh is still outstanding but that doesn't matter what is the total labor expense 16 lakh so can we consider 16 lakh yes 16 lakh is a labor charge you can income understood everybody everybody cool cool cool cool okay suppose suppose suppose they tell you in the problem 15 lakh is the labor charges paid 15 lakh is a labor charges paid one lakh is still outstanding how much will you take for your calculation 15 lakh is a labor charges paid one lakh is still outstanding if they say like that what they do suppose they reframe this equation and give like this what you'll do we don't want labor charges paid we want Total labor charges itself what are the total labor charges 16 so there are multiple to reframe this in some papers May they've given the adjustment like this but in this particular question may they have given the adjustment like this multiple ways they can frame but do remember we don't want labor charges paid we want actual labor charges itself which is in this question how much 16 lakh so totally 16 lakh can we take off okay add in your calculator 16 lakh we have already incurred next what is the next cost specific contract cost how much is that specific contract cost 5 lakh specific contract means this is a general one or it is a related to this contract it is the related can we add this yes add 5 lakh rupees next subcontract cost for the work executed sir if it's a big project everything can we only do it or some we may have to Outsource though we told the customer like architect company will tell the customer I will construct the building but for electric work in all do you think architect company will have expertise or they will Outsource this for plumbing work archit I mean electric work and all they'll appoint an electrician and get it done so that is your contract cost here is it related to this construction yes can we add it yes how much 7 lakh in this 7 lakh already you have given an advance how much 4 lakh that means how much you are yet to pay three lakh we want the payment or we want the cost cost how much is the cost 7 lakh that means which number you'll add 7 lakh punch in that number Okay g all right anything else they' have given this is further estimated cost that means that's all these are the cost that we have incurred what is the number your calculator is saying so cost incurred till date is 40 5 L clear people so one numerator we have got what is the denominator we need cost incurred till date divided by total estimated cost sir 45 lakh you already incurred how much more are you expected to incur in future check further cost estimated to be incurred to complete the contract is 35 lakh so 35 lakh more you are expected to incur so what is the total cost expected for this contract 80 laks yes find out the percentage for me how do you find out percentage cost incurred till date which is 45 lakh divided by total estimated cost which is 80 lakh into 100 how much is that 56.25 percentage that's the percentage okay sir sir why do we need this percentage because the revenue is recognized based on percentage if 56.25% of the work is complete means we can recognize 56.25% of the total revenue what is the total revenue or contract price the total contract price is 85 LH can we recognize 85 lakh or only 56% of that 85 lakh 56.25% if you do you'll get the total revenue that you can book in the current year which is 47 l81 250 yes okay sir how much cost have you already incurred in the current year how much cost have you incurred 45 LH that you'll book it as a cost that you'll book it as a cost so revenue is how much 4781 250 how much cost you have accounted in P 45 LH that means in the first year have you book in any profit or loss yes revenues this much cost is this much so means is there any loss in the first year or profit profit the balancing figure these two becomes your profit that is accounted in the first year in percentage completion method there is a scope to book profit but in completed contract method is there any scope to book profit or you should not book The Profit you should not book The Profit because revenue is recognized to the extent of cost incur revenue and cost will be same that means you will not get any profit under which method completed contract method we are not doing completed contract method here here we doing percent percentage completion meth that's what I've written in the chart see this makes sense revenue is recognized to the extent of percentage of completion cost is recognized to the extent of cost incurred till date Revenue Minus cost will give you profit or loss done done people okay another way is sometimes in the problem instead of cost incurred till date they will give you something as work certified work uncertified instead of cost incurred till date they will give you work certified and work not yet certified or uncertified cost incur till date is nothing but work certified Plus work not certified normally sir in case of Construction contract now when the work happens you know remember in the movies and all there will be one minister or some person who will check the status of the work and then release the payment like that so work certified means how much of the work is approved by the engineer or the necessary concerned person and work uncertified means how much work is not yet certified but doesn't matter anyway expense we have incurred no so cost incurred till dat is given by the formula work certified Plus work not certified or uncertified instead of this they may give you this data also we have worked out a couple of questions like this as well done people all right another one is another one is uh I think I had given you remember this pen example if I had given you maybe one you might have forgotten so I'll give you so suppose I'm the pen dealer okay the cost of my pen is 100 rupees I purchase the pen at 100 rupees I sell each pen at a profit of 20 rupees that means what is my selling price 120 correct sir I have sold a pen to a particular datar and I already received let's say 70 rupe now means how much more I have to receive once again sir I purchased the pen at what value 100 rupees I am selling the pen not at cost price I'm selling with a profit margin of how much per pen 20 rupees that means what is my selling price 120 yes so far sir I have already sold one pen to my datar and how much Advance have I collected from my data 70 that means how much more still I have to receive 50 so you tell me how did you get that in equation format for me how did you get you saying 50 right how did you get 50 tell me you took 100 and you added profit and then you reduce amount received correct now this way this you will get what this is the amount due from the customer amount to do from the customer any problem no let's modify the scenario this is the case of profit next let's say economic conditions are bad so I have to sell my pen not at profit but at a loss cost of my pen is 100 I'm this time around I'm not selling the pen at profit I'm selling this pen at a loss of 10 rupes that means what is my selling price what is my selling price 90 let's say I have already received 60 rupees from my datar as an advance how much more I have to receive 30 rupees okay tell me this in equation how did you get it you took 100 and loss you added or you subtracted subtracted and then amount received you added or you subtracted subtracted that way if you do what are you going to get finally amount due from the customer that's what I've written here check amount due from the customer is given by the formula instead of cost instead of cost here we will write cost incurred till day instead of cost we call it as cost incurred till instead of profit we call it as recognized profit if it is profit means you'll add if it is loss means minus here next what did you next you reduce you receive you reduce amount received that amount received only in A7 terminology we call it as progress Billings instead of amount received they use the term progress billing so tell me what should we do for this progress billing add or minus minus that's what I've done here minus progress billing you do finally you'll get amount due from the customer this amount due from the customer means it's our datara closing balance where will deara closing balance come in pnl or balance sheet so this particular data will be directly shown in your balance sheet okay Zar any problem no all right great so this is one next one is all again this one also I'll apply in one problem next one is Sir as7 runs on prudence concept or conservatism concept what does conservatism concept say expected losses future losses we will wait or we'll book right away if there is any future loss expected means you will you wait for the future or you'll recognize now only you should recognize now only but future gain will you recognize or waight wait that's what conservatism say as7 borrows that conservatism concept or prudence concept what as7 C is if there is any loss expected on contract if there is any loss expected on the contract book that loss immediately no need to wait for the contract to start or end the day you come to know that there is any loss expected on the contract that day only you book the loss like just give you an example let's say we have entered into a contract now not even work started we have just made the agreement contract prices 5 okay this is a government contract so we have won this contract through bidding process and how much is the revenue we will get from the government 5 rupees but we know it's a Construction contract let's assume we want to construct a flyover we feel as the construction company that to construct this flyover minimum it will take 575 lakh minimum 575 LH but my revenue is only how much 5 my cost is expected as how much 5.75 that means this is a profitable contract or loss making how much is expected loss 75 have I already started the work or only signed the agreement signed the agreement how much loss have I found out 75 LH should we wait let's say the contract will run for 3 years should we wait 3 years to book this loss or immediately book this loss immediately okay that's a prudence concept go drama okay so why does any why will anybody accept uh loss making contract advertising purpose initially you will take up some loss making contract so that later on you can it's so like here sir let's say this is a Metro project this is a Metro project Metro is a small contract or a huge contract even though suppose I'm the company who has got who has bagged the Metro contract I feel through this Metro contract I'll make heavy loss I'll make a heavy loss but it will give me a lot of branding yes now I can announce to the world I constructed bengalur Ruka Metro so on this contract I would have made a loss but I can use this contract as a base and get 10 more contracts where I can earn much more money so I don't mind taking up this loss making contract for the sake of advertising or publicity okay so why they take up it is their headache we don't want to know that but yes few people still take up loss making contracts ini okay now why are we doing Marathon at free of cost branding like just s this is why you're doing a are we thought you helping us that told okay now anyways as per cons conservatism contract should we wait for this loss or book the loss immediately book the loss immediately so these are some Concepts can we go ahead and apply it in the question now Okay one minute two components are relevant for examination let's have a recap of that one is how do you find out percentage of completion tell me sir cost incur till date divided by total estimated cost into 100 for cost incur dat sometimes in the problem cost in Cut till day directly they will give it to you sometimes they'll give you a breakup of cost if they give you a breakup of cost you want especially with respect to material you'll take the total material cost or total material utilized total material utilized with respect to other expense we will take the expense paid or expense incurred expense incurred keep that in mind another one is after percentage of completion you'll recognize Revenue to the extent of percentage cost you'll recognize to the extent of cost incurred till that is okay one more thing we need to keep in mind is the amount due from the customer how do you get amount due from the customer cost incurred till date plus recognized profit minus recognized loss minus instead of amount received we call it as progress Billings so do this equation if you get a positive number means we have to collect money from the customer so it becomes our data after plugging in this number by chance if you get a negative number that means customer has paid us more advance in that case may it will be custom amount due from the customer or amount due to the customer custom if it's a negative number then you will show this number on the liability side of balance sheet positive number means you'll show it as a datar in the balance sheet otherwise you'll show it as a credit are in the balance sheet yes people and also keep in mind instead of cost incurred till date they also give you work certified and work uncertified add the two you'll get the cost incurred till okay we'll apply that in one other question now this one check it's our normal class material question Shanker limited undertook a contract to build for building a crane for 10 LH we are building a crane one asset we are building not for our ourself for some customer and when we construct this crane how much money are we going to get 10 lakh this is our CP as in contract price as on 31st March it incurred a cost of 1 and a half lakh and expects to incur 9 lakh more stop there only how much have you already incurred 1.5 how much more are we expected to incur nine so add these two what is the total cost 10.5 easy sir our contract price is only 10 lakh but the total estimated cost is 10.5 L that mean this is a profit making contract or loss making how much is the total expected loss 50,000 yes no contract price is 10 lakh total estimated cost is 10.5 lakh that means expected loss is how much expected loss is 50,000 should we wait to book this 50,000 or book it immediately it immediately let this data be there for the time being okay let's go further uh it has also received 1.2 lakhs of progress payment you know what to do for this this is relevant for our Revenue booking or amount due to calculate amount due from the customer or due to the customer this particular component is relevant so discuss the treatment they're asking treatment means you need to tell how much revenue is recognized how much cost is recognized and amount due all that you need to call first we'll do the normal calculation did they say outcome of the contract is not reliable anywhere there is the outcome of the contract because there are two methods to which you can use for accounting what are those two methods percentage completion method completed contract method when will you go for percentage when outcome of the contract is measured reliably when can you measure the outcome when Revenue can be measured reliably which is 10 lakh when cost can be measured reliably which is 10.5 lakh percentage can be measured reliably here you know cost incur till date you know total estimated cost can't you estimate the percentage Yeah and benefit should flow to the entity have they told anywhere that our customer is Malia I hope Malia doesn't listen to this yeah all right anyways that means what sir which method here completed contract method or percentage method percentage so first we'll have to find out the percentage of completion for that we need two components what are those cost incurred till date given already how much is cost incurred till date 1 and a half lakh how much cost you expected to in future 9 LH so what is the total estimated cost 10.5 if you remember our questions all the questions we for soled in this format only almost five six questions so that it becomes easy for you to remember that format as well okay cost incurred till date is 1 and a half total estimated cost is 10 and a half that means what is the percentage of completion cost incurred till date 1 and a half divided by total estimated cost is 10 and a half lakhs so the percentage of completion is 14.29% okay sir if 14.29% of the work is over means can we recognize Revenue yes to 100% extent or 14.29% 14.29 what is the total contract price 10 lakh total contract price is 10 lakh in that we can recognize a revenue of 14.29 percentage so multiply these two that's what I've written here I've numbered all of them and given the multiplication so these two you multiply you'll get how much 1 l42 900 so in the current year you can recognize Revenue to the extent of 1 lakh 42900 how much cost did you incur in the current year 1 lakh 50,000 that means the cost that you'll book in your p is 1 lakh 50,000 Revenue income you have accounted 142 cost you have accounted how much 150 that means as per your pnl how much loss is getting reflected revenue is this much cost is this much means what is the difference between these two 7,100 that difference is profit here or loss here loss here how much loss have you booked 7,100 as per our method correct but stop as7 also uses prudence concept what does conservatism or Prudence say total expected loss you should wait or book it immediately book it immediately here contract total contract price is 10 lakh total expected cost is 10 and a half lakhs how much is the total expected loss 50 that means can we escape from this 50,000 or book it in first year only book it so totally 50,000 loss should be recognized but how much have you recognized the loss of 7 ,100 totally 50 should be recognized but we have only recognized 7,100 I mean should we make additional provision for loss yes how much is that difference of these two is how much additional provision required for 42900 that's it because when you make the provision profit balance will reduce or rather loss balance will increase that's the reason we just say additional provision way we say provision is Sir these are pakka losses or estimated estimate because future may the cost can be more also it can be less also data can change hence use the word provision here estimate this is the first aspect in pnl Impact this is the P did they ask you only pendl data or they ask you to give full accounting treatment they asked you accounting treatment that means balance sheet impact and pnl impact both you have to give so in balance sheet either you will show amount to Due from the customer or amount due to the customer how do you find out that tell me that equation again cost incurred till date plus recognized from Prof minus recognized losses minus progress bilding correct how much is cost incurred till date one and a half lakh plus recognized profit sir this is a profit contract or loss means recognized profit is how much zero minus recognized loss how much is the loss 7,140 to 900 or 50,000 ah recognized loss means how much loss totally are you recognizing here 50,000 okay 7,100 you had already recognized now addition provision you made for 40 to 900 so totally how much loss have you recognized 50,000 because the total loss was 50,000 you should recognize entire loss of 50,000 so recognized loss here is not 7,100 it is actually 50,000 minus what progress billing is that progress billing given yes how much is that progress payment received 1.2 lakh so minus you do that how much are you getting if you do this plus minus what are you getting sir you're getting negative 20,000 negative 20,000 you're getting sir if you're getting negative ,000 means will you show this number on the asset side of balance sheet or liability side liability side that's what we have done here 20,000 will be shown on the liability side of balance that's all okay again all this maybe five marker or maybe a two marker question depending on how ICI wants to structure and ask yes people okay this is one next is one more joural entry related question we will do what is that let's see X commenced construction till here okay now no issues X commenced construction on 1st April the fixed price was agreed to be 2 lakh the company incurred 81,000 in the first year that is 20134 all right and for 45% of the work so percentage of completion we have to find or given so first year may we already completed 45% of the work and they have received 79,000 as a progress framing from the customer all right cost incurred for 1415 1415 is current year or next year next year how much have you incurred First Year may you incurred 80 1 next year may you incurred 89 and next year may you contract is still pending or it's completed 89,000 was incurred to complete the rest of the work I mean this contract will last only for two years okay so now you need to give the journal entry or rather ler they had asked in this particular problem pnl account and customer Ledger is what specifically they had asked I just not copy pasted that but that's the requirement of the question but before The Ledger I'll give you the journal entry and then we will recognize okay take your calcul percentage we have to find or given given how much is the percentage 45% so in the first year if 45% work is completed means what we will do 45% of the revenue we will book it in the first year what is the total contract price total contract price is 2 lakh entire 2 lakh we will book in first year or 45% 2 lakh 45% is how much 90,000 yes people okay so what is the journal entry for credit sale Journal entry for credit sale Dela datar account debit to sales account yes one minute this monitor went off hope it comes back one minute online I know you were able to hear me I'm not able to see you that's all I think okay it came back all right so what is the journal entry you said again datar to sve how much will you pass that entry for what is the amount you'll recognize Revenue in the first year to 2 LH extent or 45% extent so 2 lakh or 45% is how much 90,000 so that means in the first year the journal entry will passes datar account debit to sales or revenue account 90,000 any problem okay s clear sir you can call it as I mean if your Revenue word is not sitting well with you you can also call it a sales the sales will be shown where in pendl account so if you want to transfer sales to pendl and express that in journal entry what is a journal entry to transfer sales to pel account sales account debit to pnl account correct that people the first year you'll recognize a revenue of 90,000 Okay g now pnl you need to prepare when you prepare pnl account sales will come on the which side credit side obviously in pnl account you'll write your you can write it as contract price Revenue whatever first year you'll show how much 90,000 is this okay sir any problem no sir you recognize only revenue or you'll recognize cost also how much is the first year you incurred the cost First Year may you incur a cost of 81,000 what is the journal entry for C uh salary paid 81,000 salary to bank what is the journal entry for cost paid 81,000 they've not given the breakup this 81,000 is material cost labor cost everything put together so what is the journal entry for contract cost paid cont contract cost to contract cost to bank account yes no how much is the contract cost you incurred in the first year 81,000 yes people cost and all will be transferred to which account eventually where it will go pendl what is a journal entry to transfer cost to pendl pendl account debit to contract cost how much cost you'll recognize in pnl first year 81,000 cost will come on the debit side of pnl yes so first year you recognize the revenue in pnl 90,000 cost you recognized in pnl 81,000 so first here are you getting loss or are you getting profit profit profit how much is a profit or net profit arrived as balancing figure how much n clear like this we'll have to prepare for 2 years that's all they did not ask journal entry but if you know the journal entry posting in Ledger becomes very straightforward manageable okay sir first year that's all or you also recovered money so in the first year you also recovered some money check that we incurred 81,000 in 134 that is first year for 45% work and how much money we received received 79,000 as progress payment from the customer what's the journal entry for money received from datar 79,000 you have received from datar journal entry is what bank account debit to datar account yes people they also asked you to show datar Ledger datar Ledger sir there are two journal entries affecting The datar Ledger one is first entry datar account debit to sales account so when you post this in datar account you'll write what datar to sales how much is the datar to sales 90,000 okay sir yes first entry first entry I'm just preparing the datas Ledger in datas Ledger you'll post this entry as what you'll post it as two s Sal or you can write it as contract price whatever how much value 90,000 yes people did you receive any money from datar in the first year yes how much money you receive money from datar 79,000 this entry when you post it in datar Ledger you'll post it on which side this entry when you post it in dat's Ledger you'll post it as by bank account how much 79,000 Clear sir 90 we had to receive but we received only how much 79 okay sir that means is datar ledger matching or there is a balance figure how much balancing figure 11,000 so first year P closed dat schure also closed manageable sir dat first year closing balance becomes next year opening balance that we started now let's read next year data so what is a total contract price 2 lakh sir in the first year how much work did you complete 45% in the second year is the work pending or balance work is fully completed fully completed that means in the second year how much percentage of the work you completed more 55% more you completed only then it will become 100% correct no so in the second year if 55% more work is completed how can I say it is 55% is this 55% given no since they said in the second year contract is complete so balance work is how much 55% that is 100% minus 45% so hence 55% is work is done in the second year sorry 55% of the work is done in the second year means can you recognize the revenue yes how much is the total revenue 2 lakh how much did you work completed in the second year 55% so how much revenue you will book it in the second year Tell Me 2 lakh 55% how much is that number 1 lakh 10,000 what is the journal entry for credit sales what is the journal entry for credit sales dats to sales same entry in the second year you'll pass datar to sale but amount is for 1 lakh 10,000 either you can calculate or get it as balancing figure what is the total contract price 2 lakh in that first year how much have you already booked sir since the contract is already over entire Revenue should be recognized so total revenue is 2 lakh in that first year you already recognized 90 means how much more you'll book it in the second year 1ak you can calculate this based on percentage completion or as a balancing figure your call done people now this entry if you have to post it in dat's Ledger what will be the posting this entry if you have to post it in datar Ledger you'll post it as what in the second year you'll write it as two sales how much 1 lakh 10,000 manageable okay sir sales will sales will be transferred where sales will be transferred to P what is the transfer entry to transfer sales sales account debit to P what are second year sales 1 lak 10,000 so in your pel account second year sales value will be 1 lakh 10,000 done G okay sir in the second year how much extra cost did you incur 1415 is year two in the year two how much extra cost did you incur 89,000 what is the journal entry for cost incurred 89,000 cost spent 89 ,000 what is the journal entry contract cost account debit to bank how much did you spend in the second year 89 this cost will be transferred where pel account what is the transfer entry pendel account debit to contract cost how much 89,000 so in the second year you will recognize an expense of 89,000 revenue for the second year is 110 cost for the second year is 89 Revenue Minus cost will give you profit or loss arrived as a balancing fer here it's a case of profit this is over done all right next to what did they say sir have they uh you can assume to thing over here contract is completed is it necessary we should have already receive 100% of the money from the customer or we can collect it a little later also it depends on negotiation yes no here IC has assumed that money is being fully collected from the customer whatever pending money is there we have already collected from the customer so totally how much money we should collect from customer two lakh in the first year how much they already paid 79 that means how much is balance how much is balanced quickly tell our contract price is 2 lakh in that first year we have already recovered 79 so how much more we need to rec 1 lakh 20,000 IC has assumed that 1 lak 21 okay no problem IC has assumed that we have received that 1 lak 21 from the datar in the second year what is the journal entry for money received from datar bank account debit to datar 1,000 okay that entry you have to post it in your datar Ledger you'll post it as byy bank I means should datar account have any closing balance or fully sorted fully sorted that's all this is all another type of problem okay a simple one only yes people Construction contract usually is a very simple topic you usually four to five mark question comes but now that McQ is also there in our framework even they can also ask for two two marks question also not necessary it will come difficult to say if it comes either between two to five marks somewhere they will ask yes people that's it with respect to A7 thank you yes people continuing our marathon discussion further next we'll be taking up accounting standard n which talks about Revenue recognition Revenue Rec for Construction contract how we should recognize the revenue guidance is given in as7 for all other contracts how the revenue should be recognized the guidance is given in accounting standard n all right and as9 F is very simple at inter level this is the easiest standard at CA final a lot of funders are there okay it's a big ticket Topic at CA final level and Inter not so much okay because the scope they only limited to few things as9 only talks about five areas coverage is only five if you are selling any Goods if you are a manufacturer or a Trader who selling any Goods when the revenue should be recognized relating to Goods when the when and how much revenue recog Revenue should be recognized with respect to service if you're providing any service like us are we selling you any product no we are giving you a teaching service so service provider how they should recognize the revenue and IDR I means interest D for dividend R for royalty so Revenue recognition for these five aspect is a scope of accounting standard n that's all okay sir one by one we will go very very straightforward standard sir when should the revenue be recognized with respect to Goods if I am a bottle dealer my business is to purchase this bottle and sell the bottle so when should I recognize the revenue relating to this bottle okay as9 simply says you recognize the revenue when performance obligation is satisfied as a seller when your responsibility or when your obligation is satisfied you recognize the revenue tell me when will my obligation towards this bottle get satisfied when I give this delivery of this bottle to the buyer that is what is they're trying to say over here performance obligation will be satisfied when are when the goods are transferred to the buyer at free of cost or for a price for a price when I deliver this Goods to my buyer for a price I could say that my performance obligation is completed sometimes what happens is sometimes what happens I am ready to deliver but buyer is saying wait I will take it after two days today the I mean timing is was to problem timing is not good I will take the delivery tomorrow all right I am ready but buyer is saying I will take it tomorrow but I told the buyer boss I am ready for delivery if you want to take it now I I'm considering it as a sale after now whatever happens to Goods is not my responsibility why I told no problem you keep it I will take it tomorrow that means have I delivered the product to the buyer no but have I transferred the risk and reward yes so if you have not delivered the goods means at least you check if the risk and reward is transferred to the buyer this is condition number one okay there are three conditions for Revenue recognition of goods first condition is either good should be transferred to the buyer for a price or if you have not transferred the goods means at least check risk and reward associated with the goods have you transferred to the buyer okay people this is first second one sir tell me after selling this bottle to you can I say don't put hot water into this bottle uh don't use this bottle Beyond 10:00 yeah keep it in this place only keep it in Almira only can I like that tell all that no that means after selling the goods I should have control over this Goods or I should relinquish my control that is what is the second condition after if you want to book it as sale beans now the goods does not belong to you it belongs to whom other party so seller should have no effective control over the goods I should not put any restriction associated with the goods that is what condition number two is trying to say got it third one is there is no uncertainty in collecting the amount so majority of the sales which the business do know will not be a cash sale it will be a credit sale so if you want to recognize the revenue means we should have a reasonable assurance that suppose I sold the goods at 2 months credit I've sold the goods at 2 months credit means I've delivered the product today but I will receive money after two months so standard says you can recognize Revenue today only because your obligation is complete but as a seller you should have one more reasonable assurance that let's say the goods value is 10 lakh as a seller I should have a reasonable assurance that I will collect this money of 10 lakh after 2 months I should have a reasonable assurance that I will collect this money there should not be any uncertainty in collecting the amount meaning I should be reasonably sure that I will collect this one so the day all these three conditions satisfied that day you can go ahead and recognize the revenue usually again theoretical question they will not ask if it comes you may have to call out this particular pointer and then mention okay in that case may this could be important so that let's have a quick recap again what is this now we talking about first of all as9 only talks about five five areas what are those five areas when the revenue should be recognized associated with Goods then Revenue with respect to service then IDR I for interest dividend royalty Goods car Revenue will be recognized when performance obligation is satisfied when can you say performance obligation is satisfied when goods are delivered to the buyer for a price or risk and reward is transferred that is one second condition the the seller should have no control over the goods that seller should don't have no control over the goods third one there should be no uncertainty in collecting the amount meaning we should have a reasonable assurance that we will collect the am sir we sold Goods to one party sir but doubtful that they will pay us sir still we made the sale can we recognize the revenue today I sold Goods to one party today I've already delivered the Goods credit period is 3 months that means when will I receive the amount now or after 3 months after 3 months but my gut feel is he'll not pay me after 3 months he'll put you up okay but still I feel it's okay for marketing purpose I will take the hit can I recognize the revenue today or I should not I should not why because third condition what does the third condition say there should be no uncertainty in collection meaning we should have a reasonable assurance that we will collect the money here reasonable Assurance of collection is there or not there not there if if this condition fails means you cannot recognize right all the three conditions should be satisfied for you to recognize the revenue with respect to Goods okay sir that is one one more pointer associated with the goods is normally a seller uh seller of the goods if you make a bulk purchase as a seller what will I give you instead of purchasing one bottle from me you purchase thousand bottles from me in that case may obviously you will also ask for your right that is what discount yes or right so this discount only we call it as trade discount suppose sale value is 780,000 assumption I think this was one examination questions hence I took that particular value sale value suppose is 7 lakh 80,000 as a seller I have given you a trade discount of 7% that means are you going to pay me 780 or lesser so if there is any trade discount given trade discount means discount given at the time of purchase sale at the time of purchase and sale if you're giving any discount that we call it as trade discount so can we recognize a revenue of 780,000 you know this already for trade discount do we pass separate journal entry or reduce it reduce it here you'll reduce it from what sales price so 780,000 minus 5% you do how much is that 7 lakh 41,000 so you will book the revenue only for 741 ,000 here that is one suppose I give you cash discount means cash discount is it given at the time of sale or it's given later usually to collect the payment earlier we give discount so if the question says it is a cash discount cash discount will you reduce it from revenue or will you accounted separately cash discount you'll book it separately as an expense it doesn't affect suppose here I gave a cash discount of 10,000 means I will recognize revenue of 10,000 only I will book 10,000 or rather I will recognize sale of 7 LH 41,000 and I will book cash discount as a separate expense of 10,000 in my P okay people only trade discount is netted off or reduced from sale cash discount is booked as a separate expense because usually cash discounts are not given at the time of purchase sale it is given little later that's a treatment if it comes I'm saying not a that popular adjustment but if they target you can remember it and do it yes people all right uh one more H or is it okay uh there are only like 7 eight coins I mean probably like small small concept over here can we finish off this and then take up all the questions together would you be fine with that all right so first concept over which is respect to what sir Goods what is the next one service sir if I'm a service provider when should I recognize the revenue like here I am the service provider I'm giving you some teaching service let's say I'm doing Advanced accounting batch I'm not doing but just saying right right now I'm not doing that is so let's say Advanced accounting batch completion duration is 2 months let's say if I start today I'll be able to complete it after 2 months assumption now should I recognize the revenue after 2 months when the syllabus is 100% complete or can I recognize the revenue on a percentage basis understood the understood the question so if I'm a service provider and if my service is expected to get completed after how many months two months should I recognize my Revenue suppose if I give a coaching of advanced accounting let's say I get a fees of 1 lakh rupees assumption okay so my fees is my Revenue so when should I recognize this 1 lakh immediately or as a percentage method or after two months after after two months okay that what is guidance as9 is trying to give what as9 says is if you are a service provider same like Goods you'll recognize the revenue when service is performed okay service is perform and service consideration should be fixed by giving the service how much money you will receive should be fixed and the last condition of goods what is the last condition of goods there should be no uncertainty in the collection all right for a service provider like Construction contract two methods are recommended for Construction contract what are the two methods we use for recognizing Revenue percentage completion completed contract method for a service provider either you'll go for instead of percentage completion here they say proportionate completion it is as good as saying percentage completion or you will go for completed contract either per percentage or completed contract so when will you go for percentage when will you go for completed contract method very simple if the service has many acts if the service has many small acts then you'll go for percentage method if that service whatever you are providing has only one act if it is a single act while contract then you'll go for completed contract method like to give come back to this example sir how much fees will I get due to Advanced accounting coaching I assume 1 lakh okay how much is the dur 2 months let's assume that there are 30 topics in advanced accounting totally there are about 30 topics assumption I'm not counted I don't know you might be counted I you might have a better idea but just assumption I'm saying that there are 30 topics sir I completed let's say six topics first six topics I have completed after that I had some personal commitment I had to drop out of the coaching I started my classes I completed how many topics six topics I completed after that due to personal reason I had to take a leave emergency family emergency Health Emergency whatever emergency so I had to quit this coaching that means I will take the remaining topics or I will not take I'll not take that means new faculty will come and take for you that new faculty will again take six topics which have already covered or they will take the remaining 24 they will take the remaining 24 that provided you understood the six topics properly yes or no all right so REM usually the next faculty will take how much sir the remaining 24 topics means you tell me this particular service contract has one act or separate separate acts separate each topic is one one act because is other faculty repeating that act or they're not repeating they're not repeating so like this so in this particular coaching man there are how many acts there are 30 topics means each topic is one one act or one one small part okay so that means should we go for should I wait for me to complete entire 30 topics and recognize the revenue no if the contract has many acts if the contract has more than one act you will go for which method percentage completion method that means in this case I will not recognize my Revenue after two months if one topic is over means that one topic related Revenue I can recognize to like that if another topic is over tomorrow means another topic related Revenue I can book tomorrow like that when as and when each topic gets over I'll go on recognizing the revenue because this particular contract has single act or many acts acts means a part small small parts like that okay saru let's modify the example suppose I called you for one day accounting standard seminar one day seminar due to some reason I had to cancel the seminar after 15 minutes I started the seminar I caught hold of mic and said hello then I had to go personal emergency okay now what you'll do can I can I cancel the seminar but I'll have to redo this whole seminar again I have to do this whole seminar again because now the seminar has many acts or it's single act single act so if it's a seminar while job at all then I will recognize the revenue only when the seminar is fully complete that means I will go for which method completed contract method because in case of completed contract method there will not be many acts there will be a single act for a single act contract you will go for completed contract method that's how to identify whether to go for which one and which one usually majority you will go for percentage methods only but just saying that in few cases you'll also go for completed contract method weit or carry on carry on sir that's all sir next is are the three things what are the three remaining things i d r what is I interest D for dividend R for royalty sir interest sir you know this already sir interest you'll recognize on what basis on payment basis or acal basis interest expenses and all you'll book on payment basis suppose March month all of employees came and worked okay March month all our employees came and work March month salary I paid them on 10th April will I book salary expense on 10th April or March only March only why because we do the accounting on cash basis or acral basis basis that's what we trying to say over here interest is always accounted on the time basis or acal basis so interest is an expens sir how is it Revenue sir interest sir if you are if you invested in some company debentures if you invested in some company debentures you will pay interest or you will receive interest receive interest that we are talking about here so that interest income you will recognize not on receip basis you will book it on acral basis so if if suppose I purchase purchase the debenture in March I purchase one company debentures in March all right they are paying the interest in June they'll pay the interest on a quarterly basis they will pay it in June should I wait till June to pass to recognize his interest income or I can recognize in March only on March only right because interest as an expense or for that matter interest as an income is recognized on a Time basis or approval basis straightforward next what about royalty so suppose I I wrote a book how to clear CA examination in first attempt okay or how to pay attention in class how to listen to every godamn thing faculty is saying without sleeping in class okay I wrote I wrote this book okay wonderful book publisher told wonderful I don't know why yeah he read and he said wonderful book I will publish your book I told what's in it for me publisher told each book when I sell I will give you 10 10 Rupees for every sale that I make I will give you 10 Rupees sir who is the owner of that book I'm the author of that book that book is copy book a copyright is with me but I gave this copyrights to whom publisher using this publishing copyrights publisher is publishing the books and he is selling the books in the market when he makes sales I will get on each book how much how much money 10 Rupees that we calling it as royalty because publisher is using my copyrights so if I'm getting any return for exchanging this that only we call it as royalty so royalty and all can you book it as per your choice or as for the agreement as for the agreement here in my example what does the agreement say I will get 10 Rupees when the publisher makes the sale that means I will recognize the revenue when I give this copyright to him or when he sells the buy book when he sells the book I can't recognize the revenue till he sells my book The Moment he sells the book I'll recognize on each book sold how much revenue 10 Rupees that's that that is called out where in agreement so that's what as9 says royalty you recognize as a revenue based on the agreement whatever agreement says keep that clause in mind and go on recognizing the revenue okay next thing is dividend suppose I purchased infos shares today all right can I recognize the revenue or can I recognize the dividend on that Equity shares today only or I'll have to wait I purchased infosis Equity shares today Equity shareholders get dividend let us say I purchased Equity shares of infosis worth 1 lakh Let's assume that in the last 10 years May infosis has given a dividend of 8% every year their historical dividend rate is how much 8% assumption now this year I purchased the first time in forisa shares worth how much 1 lakh Let's assume one lakh is a face value only right so what I want to do is dividend is anyway calculated on face value I took 1 lakh and multiplied 8% how much is that 8,000 so I'm saying I will recognize dividend income in the current year can I do so no sir when will I get as a shareholder when will I get the dividend as per my choice or when infosis declares it only enforces declares means I will get the dividend otherwise will I get the dividend or I will not get so that means a dividend income you will recognize when the right to receive the dividend gets established and that right to receive the dividend gets established when the other company declares so you can't recognize the dividend like interest only if the other company has declared it means you can recognize it as a dividend income in the current year if enforces has not declared the dividend means can I recognize dividend income in the current year no suppose if the in the next year if they declare the dividend means I can recognize the dividend income in the next year that is what we are trying to say there fancy word which as9 uses but it simply means you'll recognize the dividend only when the other company declares it that's all done people this also you already know so one of the conditions to recognize the revenue is there should be uncertainty in collection or there should be no uncertainty there should be no uncertainty sir suppose at the time of sale or service itself uncertainty was there means when I provided service only I thought I will not receive now I'm giving a service to aru Pro I feel they'll default K okay then can I recognize the revenue or I cannot I canot so if there is any uncertainty at the time of rendering service or at the time of rendering Goods can you recognize revenue or don't recognize Revenue don't recognize okay people all right so sir I sold the goods today when I sold the goods today when I delivered the goods today I was sure I will receive money credit period is 3 months credit period is 3 months but after 1 month I started getting a feeler that this will become a bad dates this will become a bad that means at the time of sale was uncertainty there or not there at the time of sale uncertainty was not there but uncertainty came when after sale if uncertainty comes after sale means you make provision not only you call it as provision for doubtful debts no at the time of sale or service only if uncertainty is there means do not recognize Revenue if uncertainity in Collection comes after you render service or after you deliver the product after sale means then just make a provision that's all next the small 34 scenarios are there quickly we'll Round Up This Cas is so sometimes what happens is you will deliver the product let's say it's a sophisticated missionary I am a missioner dealer that means my job is to my job is to manufacture missionary and sell Machinery to the interested customer and it's a sophisticated Machinery okay it requires fancy installation nobody can install it I only can install it my team okay now if the goods that you supplying to the customer if it requires any inspection major inspection or major delivery okay now now I've delivered the product I've given the Machinery to my customer but will the customer install it or I have to install it that means in this case may if the goods that you have sold has any major inspection or major uh installation means you will recognize the revenue only when that inspection or installation is complete okay suppose today I delivered the goods I completed installation after 5 days means I will recognize today or after 5 days I'll recognize the revenue after 5 days this is only relevant if it's a major inspection or installation when you buy TV and all on Amazon when you buy TV today if you buy TV TV may be delivered to you today today only the person will come and install or they will come after 2 three days after 2 three days in that case may they have to wait or not required sir TV installation is Major or it's a simple installation simple install only if it's a major inspection or installation you'll wait you'll recognize the revenue only after the inspection or installation is complete if it's a simple simple installation and all the day you deliver the goods that you can recognize the revenue so in case of Amazon example if they sell the TV today to the customer they can recognize the revenue for TV today they don't have to wait till the time installation is complete because usually these sort of products installation is complex or not complex not complex next is Consignment Sales you know this arrangement in Consignment uh in con one second what is that sir in Consignment Arrangement how many parties will be there in Consignment Arrangement how many parties two rather three okay what are the three parties consigner consig and the final customer correct no so consigner consig and finally the customer when consigner sends let's say consigner sent 10 lakh worth of goods to consigning okay at today can we can the consigner recognize the revenue today or not permissible not permissible in case of Consignment sale the consigner who is the owner of the goods will recognize the revenue only when the consign that is the agent sells the goods to the final customer only when this consign sells the goods to the customer we will recognize the revenue when we send the goods to the consigner we cannot recognize the revenue one one pointer so all this they will make a case study especially this table May what have written from examination perspective this is examiners one of the favorite topic from this chapter you'll see they will use this pointers and build a case study question which we will solve one or two question so this pointers are important watch out for this this is okay now any confusion or okay all right next one goods sold on approval basis all this you have learned in your ca Foundation right good sold on approval basis how does it work sir good sold on approval basis how does it work I had given you pen example if you remember sir I'm this pen manufacturer I'm this pen manufacturer now I wanted to sell this pen to the customers okay I'm a manufacturer so I went to various retailers and told wonderful pen my pen I only manufactured it is wonderful please take the retailer saw my face and told po V po all right is said there are enough pens already in the market usually people prefer only i i pen they don't prefer normal pens so we don't want your product please go but I have already manufactured so I told that particular retailer you use my pen for 5 days use my pen for 5 days after 5 days if you like it you can buy it or you can return it that particular Arrangement only we call it as goods sold on approval basis so today I gave the pen to that retailer can I recognize the revenue today today I gave the delivery of the pen to that particular retailer so today can I recognize the revenue no because will that retailer buy the product for me or he may also return return that particular arrangement only is what we refer to as goods sold on approval basis in case you have sold the goods on approval basis you can recognize the revenue only under three circumstance if one of the three circumstance happen you can recognize the revenue one buer acceptance buer so I gave how much time for the buyer how much time I gave to the retailer in this example five days second day only buyer called that retailer called me and said I would like to buy your pen it is actually nice for a moment I did not believe you but now actually I believe you I would like to buy your product which day he called me second day that mean should I have to wait for 5 days to recognize revenue or I can book it in second day second day only because buyer has accepted that's one second one time has lapsed sir how many days time I give to the retailer 5 days suppose now five days are over and we are on the sixth day should I have to wait or automatically sales if time has lapsed means automatically it will become sales or buyer does any action amounting to sale that particular retailer broke my pen W fell okay now will I accept that product back no that is a third condition so buyer does any action amount to sale if one of the condition turns out means then only you can recognize sale otherwise no this is also examiner's favorite adjustment they will give it to you Consignment good in fact everything is is tested one way or the other all right next case me cash on delivery we call po know cood Sales Online many of us place the order on cash on delivery basis now it's a cood sale means when should Amazon Flipkart or whatever mintra or whatever when should they recognize the revenue if it's a coda sale sir if you have sold any product on a cash on delivery basis means you'll recognize the revenue when only when you collect the money from the customer only when you collect the money from customer sir do you think Amazon manager will come and come to your house and collect money no there will be thousands of customers so usually they will appoint collection agents so in case of cood sales you will recognize only when the cash is collected by the company or their agents which they will give it to you in the data if they want to ask next one is this okay which is delivery delayed at buyer's request sir I am a bottle dealer okay a customer came to me and tell told that I want 10,000 bottles I want how many bottles 10,000 bottles I told no problem it is ready I will give it to you today only buyer told there is no space in my factory I will take it after two months he gave the money to me the let's say the contract value is 5 lakh rupees 5 lakh rupees money he gave today only I told take the bottle is ready take the delivery today only but the buyer is saying what I have space shortage I will take it after two months in this case may I'll be able to deliver my product when after two months one of the conditions for you to recognize revenue is what good should be delivered to the buyer for a price am I able to deler deliver the product now no and gos are still with me only correct so in this case what you have to do it's simple sir am I ready for delivery yes so delivery is delayed at my end or customer's end so delivery is delayed at my request or buyer's request if delivery is delated buyers request means you don't have to wait two months to recognize Revenue you can recognize the revenue on today itself for this there was a conditions which I discussed anyways leave not required simple terms May if delivery is deleted buyers request means you can recognize the revenue to only you don't have to wait till the delivery time you can recognize today only conditions it's okay if you remember our regular notes we used to call this as sip that one anyway why s because in CA final me same things were there I told you that anyway now it's not required leave it's fine H Insurance claim insurance claims sometimes what will happen sir we will keep Distributing the product all over India some products are such that where we have to distribute the product all over India so when you are constantly Distributing your product all over India some Goods will be lost so that means that means you tell me insurance claims is abnormal to me or it's kind of part and parcel of my operation part and parcel of my operation because daily I will ship 101 Goods okay in that some percentage of goods I lose you do whatever and I'm smart I'll not bear the loss I have taken insurance policy that means if I lose my goods on the highway will I suffer a loss or I will get compensated from insurance company I'll recover the money from insurance company suppose I have lost goods worth 10 lakh Rupees today today I have lost goods worth 10 lakh Rupees on highway there was an accident my truck met with an accident and my goods worth 10 lakh has got damaged but I have taken insurance policy it's 100% coverage it's a 100% I means am I suffering any loss or no loss I will recover entire 10 lakh Rupees to the extent of cost yes people now today I have lost the goods so can I I will anyway recover the money from insurance company so that insurance claim becomes a revenue for me because it is part and parcel of my business that insurance revenue or the revenue or money I'm receiving from insurance company can I recover it today can I recognize that insurance claim as a revenue today so just because I've lost the goods will insurance company compensate me or they will check insurance company will have their own checkpoint no right so that means for insurance claim may just because you have lost the goods and eligible to claim insurance compensation can you recognize the revenue or wait wait wait till what here when will you recognize Insurance claim when the claim gets approved the claim gets approved that is what they're trying to say over here Insurance claim you can book it as a revenue provided there is no uncertainty in collection there should not be any uncertainty in collection till the time that claim gets processed uncertainty will be there only once the insurance company sends a mail to me or sends any message to me or claim is approved on that day is there any uncertainty there or uncertainty resolved uncertainty resolved till that time you need to wait on that particular day when uncertainty is not there you can go ahead and recognize the rep that's what we're trying to say yes people okay next is sale and repurchase agreement sale and repurchase agreement is a scenario where today I will sell the product to you after two months I will sell the maybe let's take an example like this a limited sold goods worth 15 lakh to be limited today on cash basis on cash basis that means a limited recover the money later on or today only today only after 3 months after 3 months a limited will buy the same Goods back from B Limited at let's say 16 lakh rupees this is the contract I have made understood the contract a limited sold the goods to B limited today and recovered how much cash 15 lakh after 3 months a will buy the same Goods back from whom B limited and how much will they repay 15 or they will repay 16 lakh 16 lakh now the question is today we have made the sale as for our contract can we recognize this as a revenue can I show 15 lakh as a revenue and after 3 months can I show 16 lakh as a purchases is the question okay now honestly you tell me sir is this really a sale Arrangement no sir I am using what this actually what it's not a sale Arrangement this is actually a finance arrangement I need money I need money sir when you ask money from a particular Banker will the banker give you the money at free of cost or they'll ask for some security they'll ask for some security now I wanted money let's say Banker rejected my money because I already taken enough loan so I approach another company be limited and told I will give you the good I will deliver the goods to you today only all right give me how much money now 15 LH means goods are used as what here security a limited is pledging the goods and recovering how much money now 15 lakh after 3 months they are prepaying this loan if you take a loan of 15 lakh means will you repay 15 only or you'll pay more you'll with interest you'll pay no that means how much extra they paid 1 lakh rupees extra so that means this is really a sale and purchase Arrangement or it's a finance Arrangement it's a finance arrangement in fact you needed money you're using Goods as a basis to recognize the revenue so if you make these sort of contracts and on you should not recognize the revenue rather it's a finance Arrangement so you should not recognize the revenue book it as a loan taken do not recognize the revenue that's all okay G all right one last concept before we dive into the question is principal versus agenta confusion or dilemma sir if you are a principal in a particular contract you'll recognize the revenue at gross amount if you are an agent in a particular contract you'll recognize the revenue at net let's take a small example one airline company called bahubali limited okay they have sold the tickets airline tickets they have sold and each ticket selling price is how much 4,000 they have sold this to Kapa this is the vendor okay after buying the tickets you know what Kapa does Kapa sells the tickets to customers for how much value 5,000 rupees I means you we are thinking from the or analyzing from the Kapa angle over here so what is Kapa doing here Kapa is purchasing tickets worth 4,000 and selling the tickets to customer at 5,000 through this process katapa is earning some commission how much commission he sold the tickets for 5,000 and he's purchasing the tickets for 4,000 so that means indirectly Kapa is making a commission off on one ticket how much commission 1,000 rupees now the question is should Kapa recognize the revenue at 1,000 rupees which is commission or at what price is Kapa selling the tickets to the customer 5,000 so should Kapa recogniz a revenue at 5,000 that is a selling price amount or should Kapa recognize a revenue at commission amount which is 1,000 that is what we are about to discuss is it okay with you that depends on whether Kapa is the principal or whether katapa is the agent if by chance if you conclude Kapa is the principal if Kapa is the principal then Kapa at what price did he sell the goods to tickets to the customer 5,000 if Kapa is principal means he will recognize the revenue at 5,000 and how much did he pay for this tickets to The bahubali Limited 4,000 that means he will show 4,000 as a separate purchases Kapa will show 4,000 as a separate purchase and 5,000 he'll show it as a sales in that case by chance if you conclude katapa is not the principal he's an agent then in that case may Kapa will recognize Revenue only to the extent of commission amount how much is the Commission in this regard th000 that is fund okay sir so how to find out whether Kapa is principal or agent simple principal is is that person who Bears risk and reward principal is that entity who Bears risk and reward let's modify the example let's say like this bahubali limited sold the tickets to Kapa and after this what will the Kapa do sell the tickets to customer Kaa is telling bahubali limited if I sell the tickets well and good if I don't sell the tickets I will give the tickets back to you what is katapa telling after purchasing the tickets if I sell the good tickets to the customer awesome if Kapa if they are not able to sell the tickets to the customer means will katapa keep the tickets with themselves will Kapa bear the loss or return the tickets to bahali return the tickets to bahubali if that is a Arrangement means is katapa bearing the risk or he's not taking the risk he's not taking the risk if this is the arrangement means Kapa is is principal agent in this example May Prince Kapa will become agent because he's not taking the risk and reward so in that that case may he will if he's an agent means he'll recognize Revenue only to the extent of commission amount okay now you have to analyze based on the case to case suppose I modify the example and tell katapa will buy the tickets from bahubali after that they will sell the tickets to customer after buying the tickets from bahubali limited Kapa limited cannot back out if Kapa is not able to sell the goods to tickets to customer means cut up only will bear the loss cut up only will bear the loss in that case you tell me Kapa is what now agent or is bearing the risk and reward he's bearing the risk and reward so in this particular example Kapa will become principle so in that case may Kapa will recognize purchases for 4,000 he'll recognize sales for 7,000 so you'll have to analyze based on the agreement okay that's the conclusion okay now there some questions we will take up this one is okay this one you will tell me the answer for all of this or moment let us see how well you paid the attention some of you are doing and all right let's see how much attention was actually went in how much stuff went in standard name yes and now suddenly correct sir this is what we want sir last five minutes we wake up Sir as9 as9 standard name is revenue it only talk about five aspects Goods service interest dividend perfect you'll recognize the revenue relating to Goods when performance obligation is satisfied when can you say performance obligation is satisfied when goods are are delivered to the buyer for a price or risk and reward is transferred to the buyer okay second one seller should have no control over the goods okay and the last one there should be no uncertainty in collecting the amount that is one and at the time of sale if you give any discount that is called trade discount and trade discount will you account separately or reduce from the selling price reduce from the selling price if you have given cash discount then Revenue affected or not affected Revenue not affected cash discounted is accounted cash discount is accounted separately service revenue is also same you'll recognize the revenue when service is being performed and by performing the service how much money you will receive that consideration should be fixed and there should be no uncertainty in collection for service Revenue there are two methods acceptable one is percentage completion method or also known as proportionate completion method and completed contract method when will you go for percentage method when the contract has many acts when the contract has many acts you will go for percentage method if a contract has only single act you will go for completed contract method then I I for interest interest is recognized on acral basis or on time basis and then d d for div dividend dividend you'll recognize on time basis or when other company declares another company declares this only we say dividend is recognized as Revenue when the right to receive the dividend gets established R for royalty royalty is recognized as a revenue based on the agreement terms okay next at the the time of sale if you want to recognize Revenue one of the conditions for Revenue recognition of goods and services uncertainty should be there or it should not be there not be there so at the time of sale or at the time of service only if uncertainty in collection collecting the amount is there means can you recognize the revenue no all right at the time of sale or service uncertainty was not there but it came later in that case may what you do can you recognize the revenue yes but after recognizing Revenue we will book a provision all right next we looked at Major inspection or installation you have sold one Goods but it requires a major inspection or installation means can you recognize the revenue on the date of delivery or after inspection after that inspection or installation is complete then only you'll recognize the revenue then Consignment sale in case of Consignment sale you'll recognize the revenue only when goods are sent to the cons or when cons cons sells the goods only when the cons sells the goods to the final customer you'll recognize the revenue next a good sold on approval basis you'll recognize revenue on goods sold on approval basis when one of the three condition happens one when the buyer's acceptance or the time has got lapsed or buyer does any action amounting to sale in case of cood sales you'll recognize the revenue only when only when the money is collected by the company or by the agent only when you collect the money from the customer you can recognize the revenue then delivery delayed at buyer's request if the delivery of the goods if it is delayed at buyer request means should we wait or recognize Revenue immediately recognize Revenue immediately Insurance claim can you recognize it as Revenue yes provided it is part and parcel of your operations but and also there should be no uncertainty in collection all right next is sale and repurchase agreement first you will sell and you'll later you'll repurchase the same Goods in this Arrangement May is it really a sale or it's a finance Arrangement it's a finance Arrangement so will you recognize revenue or no Revenue no no Revenue recognition principal and agent W consideration if you are a principal you'll recognize the revenue at gross if you are an agent you'll recognize the revenue at net amount that is net amount here refers to commission am all right how to find out you are a principal or agent that depends on risk and reward principal is that entity who Bears risk and reward so if you are taking if that agent is taking that okay The Entity is taking the risk and reward then they are not agent they are principal if they are not taking risk and reward then essentially they are agents like that work now this particular question Goods of 2 lakh rupees sold okay the company name is BS products limited they have sold goods worth 2 lakh to den limited on 20th March but at the request of the buyer they were delivered on 10th April at the request of the buyer so I have have I delivered the product or I have made the delay there is a delay in delivery from my end or due to buyer request that means will you recognize revenue on 10th April or 20th March only 20th March only you'll recognize Revenue how much 2 lakh rupees Revenue you can recognize in the first case yes people here you need to tell they'll give you this this is the popular way they usually they ask as9 question they'll give you four five cases each case will carry one one Mark you you'll have to tell the answer maybe sometimes with justification or sometimes just simply they'll ask tell the revenue recognized if they just ask Revenue to be recognized don't put garam masala oh we will recognize Revenue because this so that to only if they ask just justification put blade otherwise blade not required you can keep it with yourself okay now check this on 15th March 2020 2023 Goods of 3 lakh were sent on now Consignment basis you know Consignment BAS May will you recognize the revenue immediately or only when the consigny sells of which 20% of the goods is unsold and lying with a cons sir we sent goods worth 3 lakh entire Goods is lying with a cons or only 20% only 20% is lying unsold means how much consign is sold 80% I means can I recognize the revenue for 100% extent or 80% so 3 lakh 80% how much 2 lak 4,000 so you'll recognize revenue for 240 awesome 4 lakh goods were sent on approval basis okay but when did you send first dates are important here watch out for that 1st December 2022 how much time was given 3 months stop there only you gave it in December count our year is ending on 31st March okay so December 1 month January 1 month February 1 month that means in the current year time is still pending or time has got lapsed we are on the current year is ending on 31st March people all this drama you're doing on 31st March on 31st March is a still time there or time is fully lapsed by the end of February or 1 March only rather the time will get lapsed I mean should we wait or you can recognize Revenue they can give whatever goalie okay but should we have to wait or recognize Revenue how much revenue entire 4 lakh you can recognize his Revenue because time has got lapsed now apart from this BS products sells Goods to dealers also fine fair enough one of the condition of sale is that interest is payable at 2% per month for delayed payments by the dealer oh okay the percentage of interest of recovery is only 10% now we are selling the goods to dealer and as part of this Arrangement if dealer makes any delay means will we ignore that delay or collect interest means interest here for us is an expense or an income income interest income stop all right interest income is recognized on what basis approval basis okay but there is one underlining principle for Revenue recognition that is uncertainty in collection should be there or it should not be there should not be there watch out for that and then give me the answer okay the percentage of Interest recovery is only 10% that is how much 50,000 we feel we'll be able to recover interest only to the extent of 50,000 is this actual interest or recoverable interest recoverable interest on such overdue interest but however company wants to recognize entire interest receivable of 60 actually total interest income is 60 company feels we can recover only 50 now they are asking how much revenue will you recognize for interest Revenue 60 or 50 50 why because for that 10,000 certainty uncertainty in collection not there or there or this 10,000 we may collect we may not collect it company feels we can recover only how much 50,000 that means towards this 50,000 recovery is there any uncertainty in collection or not there not there so we can recognize Revenue only to the extent of Interest Revenue only to the extent of 50,000 Rupees got it people sum it up and that's what you need to give us Final Answer totally in the current year company will recognize a revenue of 8 lak9 ,000 that's it next one what is next one H this one maybe all right now check this for the year ended 31st March one more question we will take up uh for the year ended 31st March 20 X1 KY Enterprise has entered into following transaction on 31st March 20 X1 KY limited they supplied two missions so missionaries PP know for a missionary missionary dealer missionary is PP or inventory inv inventory so we have made a contract to supply two missiones to customer both the missionaries were accepted by the St that is customer on 31st March sir I have just made the contract that I will supply two machinaries all right and is that machinary subject to customer acceptance yes and when did the customer accept that product 31st March itself machine one was a machine that was routinely supplied by K by to many customer and installation process is very simple that means it's a major inspection installation or a simple one so in case of major inspection or if it's not a major one should we wait or recognize immediately we can recognize the revenue we don't have to wait till the time installation is complete we can recognize the revenue immediately machion 2 was installed on 2nd April by sta employees okay in fact customer employee only the mission one is so simple that they customer only using their own employees they did the installation themselves I did not do it because I am KY Enterprise Machine 2 was more specialized in the nature and requires installation process which is little more complicated requiring significant assistance from KY that means who is installing the second missioner customer is only installing on their own or I am installing the supplier the seller is ready to install or should install the missionary number two because the installation is little complex the in missionary 2A installation was scheduled somewhere between 2nd to 5th April so have I already supplied the goods to which on which date 31st March I've delivered the missionary on 31st March but installation will I do it on 31st March or 2D to 3rd April second to third April means it falls in the current year or next year next year details of cost and selling price are as follows missionary one selling price is 320 the cost to produce this missioner is 160 installation fees installation is simple so we are not charging any money so stop machinary one have I supplied to the customer yes is installation complex or not complex in fact I don't have one one minute go back to the provision we just now read one provision and came what is that provision if an asset requires a major inspection or major installation will you recognize the revenue on the day you deliver the goods or only when the inspection is complete only when that inspection or installation is complete only then you'll recognize the revenue machinary one car inspection is complex or very simple very simple that means should we have to wait are first of all are we giving any inst ination service here or customer only installed I means should we recognize his Revenue next year or current year so machinary one Revenue you can book it in the current year only how much is the revenue for missionary one 320 how much is the cost of missionary one 160 that means profit associated with this Goods is 160,000 okay sir missionary number two missionary number two however it's a normal installation or it's more complicated complicated and am I have I delivered the product this year yes but have I providing installation service in the current year or next year next year and is customer installing this missionary or I'm only installing the seller or supplier of the missionary only is giving the installation service yes people and installation is given between second and 5th April as per the provision ideally what you should do you should recognize the revenue how much is the revenue of missionary 2 sir they told the selling price of missionary 2 is how much 3 lakh as for the provision this three lakh Revenue relating to this missionary you should recognize in the current year or next year next year why sir this is subject to Major inspection or major installation and installation happened in the current year or next year next year that means ideally you should recognize the revenue in next year but stop they gave one killer sentence in the question which you forgot customer has accepted the product on 31st March if customer normally sir when the goods are subject to Major inspection and installation all right what what you will do first if suppose major inspection means what you'll deliver the product after that customer will check the product how everything is proper yes and then he will say Okay correct that's what they will do when you deliver the product customer will check and then he will confirm yes but here is customer waiting till 2nd and 5th April to give the confirmation or he gave confirmation on 31st March only even though the inspection or installation is spending customer has accepted the asset on which date 31st March that means the risk and reward is with me or risk and reward have transferred to customer the customer that mean should I have to wait till the time of installation or not required so if this sentence was not there if this missionary was accepted by the customer if the sentence was not there in that case may that means what sir normally what happens in case of major inspection or installation first we will give the installation then customer will check everything and then say Okay correct or no that means only after the installation is complete risk and reward will get transferred but here is the risk and reward getting transferred after installation or on 31st March only it got transferred on 31st March only it got transferred yes people that means should I have for missionary related Revenue should I wait till next year or recognize current year recognize current year getting the Contra I mean the two little slightly different different provision interpretation okay the on what basis am I recognizing revenue of missionary 2 in the current year based on one sentence which is what both the missionaries are accepted by the customer on 31st March on 31st March since they have accepted risk and reward is transferred to the customer hence we can recognize the revenue okay sir so missionary 2 related Revenue also how much is the selling price of missionary 2 3 l what is the cost of production 150 so revenue is 3 lakh cost of production is 150 so relating to missionary to how much profit I can book in the current year 150,000 got it but one more point is that check sir for Miss to am I only selling the product or I'm also giving installation installation installation I'm giving at free of cost or I'm charging the money Char charging the money I'm charging how much as installation fees from the customer for this 10,000 this is a service you'll recognize service when when sir this has many acts or single acts sir I have to install my Machinery what single single or many acts or a single act single act in case of single act W contracts you will recognize service Revenue when in percentage completion method or completed contract method completed contract method and completed contract means when will the contract get completed when me the supplier gives the installation service and installation service I give it in the current year or in the next year next year somewhere between second and 5th April that means installation Revenue can I recognize in the current year or next year that's what you need to comment installation fees of 10,000 car Revenue recognition will happen only in the next year when the installation is complete machinary since the missionary was accepted risk and reward associated with the machinary has transferred now only so current year only missionary related Revenue you can recognize but installation Revenue should happen only in the next year that was this particular problem Point yes people that's it with respect to as9 thank you hello people welcome back after that short break so next We are continuing our marathon series next revision which is accounting standard 17 which talks about segment reporting sir now let's say you are an investor you have 15 lakh rupees money with you you want to invest in that company which has higher exposure to Electric Vehicle sales which you want to invest in car companies but you have a very clear principle what is your principle you'll invest your money in that company which is having a higher electric car sales okay now let's say Tata Motors you decided on two companies Tata Motors and maruti Suzuki Tata Motors is generating 30% of their sales is coming through electric vehicles okay balance 70% is coming through other vehicles like petrol diesel Etc maruti Suz Suzuki 5% of their sale is coming through electric vehicles balance is coming through other vehicles now you tell me if this data is given to you which company will you choose for your investment purpose you will choose to inv the shares in tata or maruti Suzuki if this data was given to you you'll obviously go for Tata why because your investment thesis is what you want to invest in that company which has higher exposure to electric vehicles here it's only 5% here it is tataka it is 30% so obviously if this data is given to you you will take your decisions better and you'll obviously select tataa now go back in your P account tell me the P format revenue from operations so Revenue from operations means total sales yes no do you know electric car car sales how much petrol Car Sales how much diesel C sales how much like that will you get breakup of sales in pnl or you'll only get total sales total sales so you will have the total sales information but you don't have the breakup information but if this breakup is given will this help will this be helpful to you for the users yes that is what segment reporting intention is all about segment reporting simply means giving some additional data giving some additional data it is not an accounting W standard you don't have to do any accounting for as7 accounting standard 17 is a disclosure related standard it's only a disclosure if you remember I told you any accounting standard or any indas for that matter covers only four things which is rmpd R for recognition Okay M for measurement P for presentation D for disclosure as7 is a disclosure related standard you don't have to do any accounting you don't have to measure anything you don't have to talk anything about the presentation A7 is totally out and out disclosure related standard so some additional information you need to give it in your notes to accounts what additional information simple some product information or some location information you will give it in your notes storees that's all it is because if you give that information it will help the users to take their decisions better that's all a segment reporting all about in shell can I proceed further all right now sir sir how should we give the information should we give it product wise or should we give it location wise because if you look at the aru pro we have different products also CA CS Acca we have different location also bangalor chenai K Malay blah blah so how should we give the data so as17 says analyze what sir if the risk and reward for the company if the risk and reward if it is influenced by the product or service if the risk and reward if it is influenced by the product then you give the data product twise if the risk if a company organization major risk for the company if it's a product and major reward for the company also is coming through product means you will give the data not location wise you will give the data product wi suppose X limited is there in Bengaluru they have three products a b c that means in this case may tell me X risk and reward is driven by the location or products X is there only in one location which is what B Balu but they they're selling multiple products that means here the risk and reward is driven by the product that means this particular company should give their segment information product wise if you are giving the information product wise we call it as a business segment we call that segment reporting as a business segment all right however if the risk and reward if is influenced by the location let's look at this there is one more company why limited they are dealing with only one product they sell only one product but they sell it in three locations they sell in India they sell in us and they sell in UK now you tell me if you sell in India at 1,000 rupees in US also will you sell it at 1,000 rupees or you will sell it at a different price so US economic conditions and Indian economic conditions are different right Indian marketing strategy would be different in US May the marketing strategy will be different same product but the risk and reward is driven by the product or driven by the location location so in this example May the risk and reward is driven by the location that means you you tell me now giving information product wise will help the users or giving information location wise will be better if the risk since in this example risk and reward is influenced by the location you will give location wise data what data I'll tell you you'll give location wise data if you give location wise data we call that as a geographical segment that's all it is all about okay sir sir if risk and reward is influenced both by product and location what you'll do you give you can give a disclosure of both you can give the data product wise also you can give the data location wise also as7 permits that that's it with I mean that's all till here can I move on so segment reporting simply means what giving additional data you'll give additional data either product wise or you will give it location wise how will you decide on that based on risk and reward if the risk and reward is influenced by the product means you will give the data product wise that we call it as business segment if the risk and reward if it is influenced by the location then you'll give the data location wise which we call it as geographical segments okay let's go one step back so imagine big companies they will suppose risk and reward is influenced by the product risk and reward is influenced by the product that means we'll have to give geographical segment data or business segment Data Business segment data meaning you have to give the data product twice big companies will they have only two or three products or they will have hundreds of products Reliance tataa britania Hench H and all if you see there they'll have thousands of products that means all the products data if you give annual report will become this big it'll become like our C final book okay or rather CA books only correct no right then will anybody read that such an annual report no they will they forget about reading they'll not even take it if you give them they will say it's okay no problem you only keep it if this much bigger annual report if you give means will anybody read us no I means see giving extra information is useful but you should not do information overdose like I am doing now corre now you don't want all this but Chum I am telling extra cholesterol for me you are wondering about when 130 will happen when this guy will leave and when can I have my food correct no yeah now coming back to the pointer sir big companies they will not have one product they will have many many products so how many you can't give all the products C data that will be information overdose hence as7 has introduced a rule which segment data you will give which product data you will give they've introduced a rule that rule only we used to call it as 10% threshold test there are three 10% test you'll calculate those three% three 10% test whichever division whichever product or whichever location satisfies this 10% test that segment data you will give if it fails the test means you don't have to give the data okay all are 3% 10% test only tell me what are those 10% test let's test our memory what are the three 10% test 10% Revenue test 10% result test 10% asset test so you'll have to do three tests so let's quickly review this first is the revenue test what Revenue test says is first you find out internal and external revenue of all the segments internal and external revenue of all the segments you sum up let's say internal and external revenue of all the segments put together is 100 these are what percentage test 10% so this this is the total internal and external Revenue that is 100 that 100 10% you calculate how much are you getting 10 so this is the number that you're looking for if any segment has a total revenue of 10 or more is a reportable segment because it has passed a 10% Revenue test like that you'll also apply in the problem but hope I'm whatever I'm saying making sense to you yes people okay this is about 10% Revenue test next is 10% result test result means for us the result is pass and only pass we don't want to even utter the other world yeah but for the company the result is what profit to loss so it is not 10% profit test it is 10% result test that means result could be either a profit or a loss so in this case may what we will do is if you have 10 segments suppose we have a 10 segments you have to first find which and all segment reported only profit which and all segment reported only profit add them up suppose six segments in this reported a profit add them up let's say that number came to 500 all the segments which reported the profit no there profits you added let's assume you got it as 500 sir in 10 segments if six are reporting profit means other four are reporting loss what in all total loss is reported by all the four segments you add how much ever loss the these four segments have made add it up let's say that comes to 700 for this 10 perc test what you have to do is total profit is how much 500 total loss is how much 700 you'll have to compare this 500 and 700 in absolute number absolute number means ignore the sign ignore the sign 500 or 700 you compare and take whichever is higher ignore this negative sign 500 700 if you compare Which is higher 700 so in absolute number ignoring the sign if you compare and take the higher number the higher number in this example is 700 so 700 is a number you're looking for and these are what person test 10% test so 700 10% you multiply how much is that whichever segment has either a profit of 70 or more whichever segment has a loss of either 70 or more has passed this particular test and if the test is pass means they become reportable segment meaning that segment data compulsorily you need to give notes to like that okay that is your result test once more we will apply in problem in case you still having any confusions but quickly discussing next is 10% car asset toest what you'll do is all the segments all the segments assets you add if you add let's say you got it as 5,000 all the segments asset you added you got it as 5,000 these are 10% test no so multiply 10% of that if you calculate 5,000 10% how much is it 500 so this is the number you're looking for if any segment has an asset of 500 or more if any segment has an asset of 500 or more has passed this particular 10% asset test okay it's not necessary it should be 500 it is 500 or more that is your 10% asset CEST criteria manageable now quickly we'll go ahead and apply it in one of the problems check this the chief accountant of the sports limited gives you the following data regarding six segments and all the numbers are in lacks segment asset result and revenue they have given great one by one we will do it now have they given uhbe first we will do the revenue test sir Revenue test break up once again you tell me first you'll do what total internal and external revenue of all the segments you will add have they given the breakup of the revenue as internal revenue and external revenue or breakup not given breakup not given sometimes they give you the breakup sometimes they don't if they give add it up otherwise not required so they only added such nice problem what is the total revenue of all the segments 1,200 so the total internal and external revenue of all the segment is 1,200 what percentage test are these 10% so calculate 1,200 10% how much is that 120 yes now whichever segment has this number of 120 or more what number this is what test Revenue test so whichever segment has a revenue of 120 or more have passed this test go back and check which segment has 120 or more Revenue M has n has o PQ and all has or it failed the test that means Revenue test which segments have passed only M and N are reportable segments because they have passed 10% Revenue test Okay g we have only 10% Revenue test or we have other two also so let's go for next 10% result test in result test what you'll do first all those segments which reported only profits find them and add them which and all segments reported profit here 50 here 10 here 10 and here 30 so add them 60 70 100 off so four seg ments have reported profit and the total profit reported by all these four segments if you add you'll get 100 this is one but result means profit also it means loss also next find out the loss reported by all the segments which in all segments reported a loss only two segments and if you add the two losses 190 and 10 if you add what is the total loss reported by all the segments 200 easy now you will compare this result you'll compare By ignoring the signs in absolute number 100 or 200 ignoring the sign you compare and tell me which is higher 100 or 200 Which is higher 200 so the number you are looking for is 200 but these are what test 10% test so 200 10% you do how much is it 20 now this is the number we are looking for what is this number result right whichever segment has either a profit of 20 or more or whichever segment has a loss of 20 or more have passed this particular test so it should be 20 or more which segment has a 20 or more M has a yes n has so it can be profit of 20 or more or it could be loss of 20 or more n loss is more than 20 so n is reportable what about o we are looking for 20 or more so o p have failed Q also failed R passed that means as per the result test which are reportable segments MN and R are reportable segments that's it one more test one more test which is your 10% asset test in 10% asset test what you'll do all the assets of the all the segments you will add we have to add or they only added already they only added total assets of all the segment is how much 200 calculate 10% of this 200 10% is how much 20 now whichever segment has an assets of 20 or more asset refers to both fixed asset and current assets non-current asset as well as current asset both are considered here okay so whichever segment has a total assets of 20 or more are reportable segments which has 20 or more check M has a yes n s o s p it is 20 or more P has passed P exactly has 20 Bast Q yes R paid that means as per this asset test which and all are reportable m n o p q a reportable segment as per the 10% asset test all right so is all the three test necessary for it to be reportable segments no as7 says that even if you pass one of the 10% test any one of the 10% test if you pass means automatically that segment data you need to report now check M and pass this test R passed this test to opq passed last test to that means indirectly what sir all the segments have at least passed one of the segments that means what is the final conclusion all the segments are reportable segments that means all the segments data you need to give the the chief chief accountant is saying we will only give you the data of M and N acceptable or not acceptable not acceptable only M and N data you cannot give since all the segments have satisfied the data you need to give the data for all the segments that's a conclusion d z okay one more uh this is done next sir there is one more test this is called 75% threshold test after 10% test we also do something called 75% threshold test what does the 75 first you have to do in a proper order first you'll do 10% test all the three 10% is required to be satisfied or anyone is good enough anyone is good enough first you apply 10% test and find out which and all segments are reportable segments reportable segment means those segments whose data you need to disclose in no stores okay they are known as reportable segments first apply 10% test and find out RS RS as in reportable segments next you have to apply after 10% you have to apply 75% threshold test what 75% threshold test says is this is external test 75% threshold test says the external revenue of reportable segments should at least be 75% of the total revenue of the company what is it the external revenue of the reportable segment should at least be the total revenue of the company sir I didn't understand what is external Revenue what is internal revenue sir sir in this particular example May let's go back sir is it necessary we have one segment m is it necessary M has to sell the goods only to the outside customer or M can also sell it to the other division also if M sells the goods to another division called n it becomes your Internal Revenue if M sells the goods to an outside customer that we call it as external Revenue okay people this is what the meaning of internal and external means clear so for 75% test are we taking total revenue I mean are we taking internal and external revenue or only external Revenue only external Revenue because Inter Internal Revenue sir it will get eliminated Internal Revenue will get eliminated why sir for if M division sells the goods to end division means for M it is a sales for n it is a purchase so but still m is your left hand n is your right hand but both the hands are my body only no that means can I say from 500 rupees from here from my left hand if I transfer it to right hand can I say I have th000 rupees now no that means what sir if M sells the goods to N means has the goods gone out of the company or still within the company so inter segment sales and all will you show or will you eliminate you eliminate when you in your pnl account you only show external Revenue okay so 75% threshold test says that the external revenue of reportable segment should at least be 75% of the total revenue of the company and total revenue of the company will include internal external or only external only external because internal will get eliminated okay or simply if you want you can also restructure this as as per 75% threshold test the external revenue of of the reportable segment should at least be 75% of the external revenue of the company like that if you want you can write off instead of total revenue substitute with external Revenue to avoid the confusion okay sir how this works if this test is not satisfied what happens let's understand through one question where is that question a here let's see identify reportable segments from the following data amounts are in lcks now check sir they have given you result and asset information or only Revenue information sir if they give give you only Revenue information can we do all the test or only one one test one test which is that one test 10% Revenue test and here have they given you total revenue or have they given you breakup they have given you internal and external revenue of breakup so the external revenue of a segment a is 30 Internal Revenue is zero so total is 30 first only can we do 75% test or first 10% test first 10% test you need to do which 10% test is the only possible over here we do all the three or only one only one only 10% Revenue test we can do how do you do the 10% Revenue test sir find out the total internal and external revenue of all the segments total internal revenue of all the segment is how much 50 total external revenue of all the segment is how much 50 if you add the two how much are you getting 100 okay sir so the total internal and external revenue of all the segment is 100 lakh it's a 10% threshold test so you'll take 100 10% 100 10% is how much 10 lakhs whichever segment has a total revenue whichever segment has a total total here refers to both internal and external whichever segment has a total revenue of 10 lakhs or more have passed this particular test so check number we are looking for is 10 or more a total sales is how much 30 has it passed yes B it should be 10 or more so it failed this so failed this passed that means as per the 10% Revenue test which segments have passed this A and D are reportable segments clear people this is as per 10% Revenue test the stop it stops there or we have to do one more one more what is the next test we will do 75% threshold test 75% threshold test what is a provision the external revenue of the reportable segment should at least be 75% of the external revenue of the company correct all right now first find who are the reportable segments as per the 10% test yeah e and D find what is the external revenue of a 30 what is the external revenue of D five why am I only taking a and d because as per 10% test only A and D are reportable segments so the external revenue of A and D is how much 35 clear yes people what is the total external revenue of the company 50 the total external revenue of the company is 50 yes okay now multiple ways you can present sir out of 50 what is the total external revenue of the company 50 out of this 50 how much come how much has come through A and D 35 what is the percentage out of 50 if 35 has come through external revenue of a and d means what is it in percentage 35 divided by 50 into 100 if you do how much is that 70% is it okay like this you can present or one more way also you can present is this good so this percentage should be 70 or it should be 75% it should be at least 75% meaning this percentage should be 75% or more more for your 75% threshold to pass this number should be 75% or more is it more or less less that means the 75% threshold test fail passed or failed 75% threshold test has failed done people or another way you can present this what is the external revenue of the company 50 50 70% you do how much is that 50 75% you do how much is that 37.5 that means the external revenue of reportable segment should at least be 37.5 but the external of reportable segments is only 35 so passed off it should at least be 37.5 but it is only 35 like this you can answer in percentage or throw like this whichever is comfortable for you but either ways the result is still the same that 75% threshold test has failed okay sir so if 75% threshold test fails means what you should do is you can't give only A and D data you can't give only A and D data management has to identify more segments and they have to give the data which are the segments remain B and C so along with A and D either B or C has to be picked up and their data also has to be given because you have to compulsorily satisfy 75% if you want it can take it so let's say company went for B data company went for B it's company choice that means they want to report what a b d abers okay now what is the external revenue of ABD now let's see if it is passed if they pick ABD what will happen a external Revenue 30 B 6.5 D rather de 5 so 30 + 6.5 plus 5 if you do how much is it 41.5 okay sir so what is the external revenue of the whole company 50 lakh now find out the percentage out of 50 41.5 has come through these segments so percentage will be percentage is how much sir 83% that percentage should be at least 75 percentage failed up pass now what is pass that means can they report ABD can the company go for a ABD yes if if they don't want to go for ab BD they also have a choice of going for a c d also or they can report all if they want that is company choice so if 75% threshold test pass means management should identify more segments and report it even if now here sir if company wants to report B has B satisfied 10% Revenue test or it has failed failed even though even though it has failed 10% test still you will go ahead and report it because 75% test also should be satisfied that is what I've written over manageable oh okay any doubt or need some time to review no review got it all review you already done maybe you did it home andly on came okay so this is over this is over some more pointer is so normally if you have seen any annual report financial statements in financial statements may we only give current year data or also even previous year we also give previous year data for comparison purpose so here also same thing is notes to accounts part of financial statements yes balance sheet pnl cash flow statements notes to accounts put together only we call it as financial statements yes so that means can you give segment data can you give only reportable segments data for the current year or also previous year if a particular segment is reportable segment is in current year means its previous year data also should be given for comparison purpose you can't just give current year reportable segment data but also for previous year data you need to give so that user can compare and analyze okay this is one next provision is if a particular segment was a reportable segment last year if a particular segment was reportable segment in last year why because it passed 10% test it passed 10% current year it failed current year it failed last year may previous year may the 10% test was what sir it was it was passed okay current Year may it failed okay this is the case sir ideally you will give the you will make it as a reportable segment only when what if it passes the test in the current year did it pass the 10 person test or it failed failed but here Institute I mean the standard sets have taken a little more liberal view what they have said is if a particular segment was a reportable segment in for one minute in the previous year is it reportable segment in the previous year let's say this is segment a y is the segment y reportable segment in the previous year yes why because because it passed this 10% test correct no so what as7 says is if a segment was a reportable segment in the previous year means in the current year also it is a reportable segment even if it fails a 10% test still you'll make it as a reportable segments understood the provision if a segment is a reportable segment in the previous year then current year data current year also it is reportable segment why this is this is more like a Prudence or conservatism concept extended sir if a 10 % test is passed means this particular segment is a small segment or big segment only big big segment only sir if one division is giving you one product if is giving you 10% of sales of the whole company means it is a small achievement or big one only that means in the last year this segment y was a small segment or a big segment only big segment in the current year suddenly it has become small segment I means something going correctly with the company or something going wrong if something is going wrong with the company means would you like to as an investor would you like to know it or no don't know it don't like to know it yes no that's the reason they said if a segment was a big segment in the current year but suddenly it has become a small segment in the current year means something has gone wrong with that segment give its data so that user will be aware so that keeping that in mind they have been introduced this particular Pro okay zaru once more or any problem which one H if you're considering it as reportable segment means it should be considered for 75% test correct see if you are if it's a reportable segment mean say 75% test says that what what do 75% threshold test say reportable segments external revenue is this segment why considered as a reportable segment in the current year yes that means will this external Revenue be considered for 75% threshold test yes because it is reportable in the current year yeah done people any confusion still2 234 one second 22 23 okay 23 in this year it's a reportable segment yes sir one second 2024 202 done okay not a reportable segment I'll write maybe like this instead of reportable segments I will write 10% test so in the last year 10% test was passed okay current Year may it is failed huh 26 okay she's saying it's not this year sir I'm thinking forward you thought I didn't get the provision I'm putting hula in your mind she's saying sir I understood last year it was reportable segments since last year it was reportable segment current year also it is reportable segments now next year also it failed next year also should I make it as reportable segment or not required only one year backlog only one year back beyond that c okay so that is what good question but I hope you got it okay fine all right fine fine sir it doesn't satisfy 10% in the current year but last year it was reportable segment should we include it in 75% yes an it will be since it's a reportable segment in the current year this reportable segment external Revenue will also be considered for 75% threshold test yes that was his question again same question you asked I hope you have got it ah super duper move on h ah sir can management voluntarily give additional segment data even if it has failed a 10% test acceptable if management voluntarily if they want to give more data no standard will say no okay they will say Bas this is the minimum reportable requirements if voluntarily more data they want to give no problem no company will do it but just say okay if they want to do it it is acceptable okay this is done now this is done no this is done no this is everything done uh sir everything done we'll go sir oh no one minute sir if the risk and reward if it is driven by product if the risk and reward is driven by the product you will give the segment information location wise or product wise product wise that only we call it as business segment that means location wise data completely we will ignore us sir no if the risk and reward if it is driven by the product means Main segment data we will give it product wise that we call it as primary reportable segments primary reportable segments even location wise data we need to give that we call it as secondary reportable segments okay I means indirectly everything we have to give us sir no if your primary reportable segment is product means if if you have 100 locations all 100 locations data you don't have to give you need to check which location is generating a sales of 10% or more which location is generating a sales of 10% or more like here in example let's say our risk and reward is driven by the product carefully understand this example risk and reward is driven by the product that means we will give the data mainly what wise product wise that means what segment are we following business segment correct all right so location wise completely can we ignore no location wise data also you need to give which location let's understand this with an example let's say India I think question maybe no problem I'll do it again India us and UK Japan we have four locations sir we sell our products in four locations we have multiple products and we sell operate in multiple location Also let's say 70% of our sales comes through comes in India 70% of our sales happens in India only about 25% of our sales happens in us okay uh then 3% of our sales happens in UK 2% of our sales happens in Japan that's a breakup okay sir now what as7 says is since your risk and reward is influenced by the product since the risk and reward is influenced by the product you give the data main data you give it what product wise but location wise data completely can you ignore no few locations data you need to report which location simple check which location is giving you a sales of 10% or more which location is giving you a sales of 10% which location here is giving 10% or more sales India and USA so only India and USA sales data report because it is giving you a sales of 10% or more that's all they're trying to say over here understood people so UK and Japan data should we give or not required not required because the sales percentage is 10% or more or lesser lesser this is secondary information or extra information we will give it location wise yes people same also goes you need to give this location wise data location wise information you have to give sales also you have to give location information asset wise also okay same F over here let us say we are operating in India USA UK and Japan next is the asset test let's say 80% of our assets is is located in India 80% of our total assets is located in India about 15% is located in USA about 4% is located in UK 1% is located in Japan same wise also check which location has an assets of you check the total assets total assets 10% you calate total assets 10% if any location has an assets of 10% or more of the total assets if company total assets let's say or I I hope this is okay what I'm saying right so whichever location has 10% or more of the total assets of the company that location asset Wise information also you need to disclose here check sir which location asset is 10% or more is UK asset 10% or more no Japan Ka no USA and India yes that means you need to give Indian location Us location assetwise data also basically location wise information you have to give two information what is those two information asset Wise information and sales Wise information you need to give for every location you have to give this information or 10% whichever location has 10% or more of the total sales or whichever location has 10% or more of the total assets only that location asset wise and sales Wise information extra you need to report that's all is this person mean this particular extra reporting all about I hope this is clear Okay g Paka G okay if you understood the next question you will tell me G review this question PK limited is a company they've identified business segments stop there business segment means risk and reward is driv by the location or product if the Lisk risk and reward is if it is influenced by the product product or service we call it as a business segment that means main data we will give it what product wise okay and that only we call it as primary main data what we call it as primary reporting can we only do primary reporting or we should also do secondary reporting secondary reporting is given on the location base check it has identified India us and UK as three locations three geographical segments it sells products in Indian market which constitutes 70% I mean 70% of the sales is coming through Indian market 25% of the sales is coming through US market that means the balance how much 5% so out of the total 10 total sales 70% of the sales is happening through Indian location Us location is generating 25% UK is generating only 5% now which location secondary reporting you will do only that location which has a total s of 10% or more which location has 10% or more India and us so you need to give the data India and US UK required not required or not required UK I mean disclosure is not particularly required H yes is this information additional to what we provide correct correct so here main data you'll have to give it what main data you'll have to give it product wise main data you'll have to give it product wise other than giving the data product wise location wise data also Additionally you will give F and what location data you will give only those locations which has total of 10% or more of the total sales or 10% of the % or more of the total assets that's all is that additional disclosure yes to answer your question withi it is an extra reporting requirements clear yes people I think this is okay sir what data we need to give about segment sir that you didn't tell only it's a very simple assignment sir naturally you tell me what as an investor what data you would like to know about segments use a common sense and tell now we are company has to give the data segment wise we'll take it as a division what data about the division would you like to know one you would like to know that division C sales that division result profit aot division can also make a loss so you need to give a disclosure of segment Revenue segment result segment asset segment that disclosure you need to give it in notes to accounts if a particular segment if it is a reportable segment if it is a reportable segment that reportable segment has how much revenue in total has how much result in total how much assets totally it has how much liability it has totally you need to give it in a statement format that's all it is done people that's all is with respect to segment reporting there's also one more kind of problem called reconciliation that reconciliation may not be that important we have covered a couple of questions on that you can review that that's a pure format driven data and even this one also this particular table I put it up in the chart okay or 2 minutes maybe I'll quickly review this this is not important from the I feel from the overall all bigger question two Mar McQ question may be picked up from this table what if assets and liabilities are not separable for each segment you'll have to allocate more okay you'll be allocating in some ratio some bases you'll have to use and allocate them you can use equal ratio practically if if it's impossible to allocate okay now coming back to this so you already know now what data you need to give relating to reportable segments you will give four data what is the data segment Revenue segment result segment asset segment liability now we are trying to say what constitute segment Revenue what constitutes segment Revenue sir if there is a division means is it mandatory that division should sell the goods to outside customer only or to the other other division so segment Revenue here means internal revenue and external segment revenue for disclosure purpose is both internal revenue and external revenue and also you have something called allocated reue so Revenue segment revenue for as7 reporting purpose are of three types internal external and allocated so what is this allocated simple I had given you the same example in class also if you remember let's say Hyundai company they have two segments theyve identified two segments one is petrol vehicle is one segment diesel vehicle is another segment that's the reportable segments they've identified One customer crazy fellow he has purchased two cars one petrol car one diesel car and he got this both the car for servicing he already has two cars one is a petrol car another is a diesel car car means periodically you get it for service no so he got the service from Hyundai because Hundai know they not only sell the car they also service the cars all right now what happened is we sent Hyundai Hyundai company since they receed both the car will they make two separate bills or they will they may make prefer to make only one bill since it's the same customer they sent they made one bill for how much 20,000 so this when one one bill of 20,000 is it related to one car or it's related to two cars two cars and in that one car is a petrol car one car is a diesel car both are same or both are different segments means this is a revenue correct no this is a revenue this Revenue belongs to one segment or it belongs to both the segments correct that means what you have to do now this 20,000 you'll have to allocate some portion of this 20,000 you'll have to allocate to petrol segment some portion you have to allocate to diesel segment hence segment Revenue not only includes internal and external Revenue it also includes allocated Revenue also manageable this is the inclusions next is what and all is excluded as revenue for a segment Revenue calculation so simple you will take only operation related part only you will take operations related income so if you have any extraordinary items extraordinary item means Lottery income or loss due to fire or compensation from insurance company all all these are related to our business or completely unrelated so if there is any unextraordinary items don't treat that as a revenue for this purpose that is one and then interest income tell me is interest income when you'll get interest income divident income when you'll get when you make the investment is investment part and parcel of your operation or you'll invest only when you have Surplus money is this part and parcel of our operations or no we want to give tell me sir look at the intention Our intention of giving segment data is what so that the user can analyze our business information better is this related to our business or this is Surplus money Surplus money that means will this data and all help the users no it lead to information overdose hence they are saying interest income dividend income and all don't treat it as Revenue don't consider it as a revenue for reporting purpose because this is not related to our core operations it is not related to our main operations similarly if you have an investment you can also sell the investment at a profit profit on sale of investment also don't consider it as a revenue for the reporting purpose so these are the inclusions these are some exclusions just REM remember them in case they ask an McQ question you should be able to figure out that similarly next one is what sir after segment Revenue you disclose segment result so to get result how do you get result how do you get result income minus expense now we are talking about segment expense same same basis okay you construct what are the three components of segment Revenue tell me once again don't look at the chart three revenue for SE uh segment Revenue breakup Internal Revenue external Revenue allocated revenue on the same basis give me segment expense breakup internal or you can say when you make an external sale you will incur some expense not only you can call it as operating expense that segment operating expense yes is it necessary they'll have to transact only with outside customer or can they transact with each other that means there will be also some expenses relating to inter segment transaction there you called it as an internal revenue here we call it as inter segment expense there you call it as allocated Revenue here you call it as allocated expense that's all it is done people same ground same things may you tell me the exclusions what are the exclusions there you excluded extraordinary items so extraordinary items can be from the revenue side from the income side or it could be from the expense side here also extraordinary items you minus there it was interest income here it will be interest expense there dividend dividend is it really an expense is dividend and expense or appropriation so cut off the dividend after that there you wrote what profit on sale of investment here it will be loss on sale related number yes and any income tax expense you do because income tax you pay division wise or overall company wise overall company wise so hence this data will not be helpful for the users because tax is usually calculated at the company level so if a segment has made any provision for tax and all means exclude that none people this is about segment car Revenue this is about segment car expense from revenue minus expense if you do automatically you'll get segment car result next is segment car assets tell me on the same ground what is it if there is a division means can that division have its own Assets Now if aru Pro if CA is a separate division means can we have a laptop separately for CA yes so segment assets includes their own operational assets as well as some allocated assets in our case may it is allocated assets why so this laptop are we using only for CA class or also for CS in the morning may we may take CA means evening may we may take a Acca class that means one laptop we are using it for multiple divisions right that means you'll have to this asset now has to be allocated so segment cets include their own operating assets as well as allocated assets because you will have some common assets which you which will be targeting multiple seg segments also these are your inclusions next is your exclusions one exclusion is a defer tax asset defer tax asset is is a timing asset temporary asset it's not really an asset see if segment asset if it is including defer tax asset means excluded more about this we'll talk about it in as22 for now if they've included means you need to exclude if you have any general assets if which you can't allocate at all if you conclude like that H head office assets in fact i' given you a research example or in fact yeah here maybe I can tell this take this example only sir Hundai has how many divisions over here two what are those divisions petrol and Diesel now suppose Hyundai has a building Hyundai has a building in this building may they will be making petrol sales also they will be making diesel sales so that means this building relates only to petrol diesel or it relates to both both that means you'll allocate this building you'll allocate some portion of the building you'll allocate to petrol some you allocate to diesel okay this is an allocable assets suppose Hyundai also has another building which they own but they're running a research center in that they're running a research center meaning Hyundai is thinking which new business to start next now they don't want to be in car and car business alone they want to start some other business Which business to start that research is going on in this Research Center while building now you tell me is this Research Center anywhere related to petrol and diesel or completely unrelated completely unrelated so those are your general assets they cannot be allocated if it cannot be allocated ideally majority of the assets can be allocated if at all you conclude that there are some assets which cannot be allocated at all then you can exclude them that's what in this particular example me this Research Center becomes your general head office while assets which you cannot allocate Okay g last one is segment liability on the same ground as segment asset construct segment liability definition for me what are what do you will say if it is a division means that division can have their own liabilities that only we call it as operating liabilities and you can also have some allocated liabilities exclusion will be defer tax liability and some general Hoka liabilities if you have by chance if you have that's it with respect to the segment CER I think all the components one more question is there on the reconciliation if you want you can review that okay that those are not popularly asked but if you want you can review that on your own yeah this is with respect to aa7 thank you yes people hello welcome back so we are continuing our discussion on Marathon Series so next we are doing accounting standard 18 that talks about related party disclosure again this is not a recognition standard it's not a measurement standard it's not a presentation standard it's a pure and pure disclosure disclosure related standard some extra information you need to give it in notes to accounts no accounting just some extra information pres I mean disclosure what is the background behind this standard is simple same example I had used sir we are in CA coaching business let us say for CA inter coaching we charge 30,000 rupes fees They're laughing yeah not much only we charge online coaching yeah uh for let's say for C inter coaching we charge 30,000 rupees I have one of my cousin my cousin came to me and told an C coaching I told okay all right for you for you only 15,000 for you only 15,000 so normally we charge how much fees 30,000 but for my cousin I'm a charging how much 15,000 why am I charging less because of that uh relationship called cousin yes or no so when a related party now aru Pro and this cousin are related party whenever transaction happens between related party do you think transaction will happen at fair price or it may happen at a lesser price lesser price now you think from the investor of Aro Pro perspective okay it was my cousin so I gave them the discount now there will be other investors in aruo from their perspective is this transaction fair so they invested the money thinking that aru will make good profits so and they will get good dividend if I go on giving coaching only to my cousin my Conan is very big I have 50 cousins so okaya is very very big now if I give coaching only to my cousin and that to it discount discount discount means for my aroa investors is it fair or unfair unfair don't you think they should be aware of such transaction yes so if any related party transaction if it has happened means as18 say you need to disclose them you it's a 18 does not say you cannot do a transaction you can do a transaction with the related party but if you have done any transaction with the related party it doesn't matter whether you have done it at market price or lesser than market price or more than market price doesn't matter give a give a disclosure of that so that the users let them be aware that you have done such sort of transactions done people that is one now the scope of the standard is very simple three things first you need to identify who is a related party who is is not a related party what disclosure we need to give who is RP as an related party who is not an RP what and all disclosures we need to give that's all is a chin to concept this particular standard is trying to cover yes now let's dive in sir first of all who is a related party who is related party sir two parties are said to be related party if one party is able to control or significantly influence the other party if one party either has a control or significant influence over another party then these two parties will become related party let's take a small example now Mr X is there he owns 80% in y limited with 80% what do you get control means Mr X is able to control y limited so the what key number you're looking for if you want to call it as a related party either there should be a control or there should be a significant influence here control is there yes I mean are these two parties related parties yes they are related party why because controlis let's go further second case Mr X has 30% Equity stake in y limited with 30% you get control or significant influence so Mr X has now significant influence over y limited that means are these two parties related party yes it can either be a control or significant influence okay sir all right one more provis or maybe first I'll do of this now let's look at this example here we looked at one individual and one company can two companies be related party yes let's say x limited has 90% shares in y limited that means X has control over y so if x is controlling y means are these two related parties yes okay the party here refers to both individual as well as company if you just check I've written here two parties in bracket may have written individual or companies two parties are related party if one of the party has either control or significant influence over the other part now let's modify this example suppose X has only 30% stake in y limited with 30% you only get control or significant influence so X limited has significant influence over y limited yes that means are they related party yes they become related party that one n let's take another example let us say where vendor ah here a limited or maybe I'll construct here x limited okay or maybe I'll call it this m or M or it's okay M Zed she is a managing director of EX limited one person called Z okay she is a managing director in X limited managing director only we call it as KMP KMP full form is what key managerial person KMS are those individuals who are responsible for planning controlling directing the activities of Enterprise whoever runs the Affairs of the business whoever runs the business whoever takes the major decision of the business that only we call it as KMP now miss Zed she is she she's a managing director in ex limited so are these two related parties is the question to you are these two related party yes use your common sense can miss Zed influence xited if she's a man if she's a director means if she's a KMP means can she influence the company yes so company and KMS are related party company and KMS are automatically related party the KMP need not own any share here miss Z need not own any single shairs also if she's a KMP automatically these two will become related parties okay s huh this particular provision no this provision is little big what do I mean let's take this example or maybe let's build another example or I think I already have okay check here Mr X Mr X has 30% in y limited has 30% in y Limited 30% what do you get signant significant influence that means Mr X and Y limited are they related party yes Mr X and Y limited are they related party yes sir now Mr EXO also has a Wi-Fi Mr wife okay now is this Mrs XO and Y limited are they related party yes understood the question first of all are these two related parties yes we are not talking about that these two are anywh related parties that is established correct we're not talking about that we are talking this WiFi and this company are they related parties yes yes they are also related parties because of as I said the vaka is little big okay so again how I mean what basis these Provisions are built up is Sir can X influence y limited yes can X influence y limited yeah so an office so X will influence Li when X goes home and X goes home X will say what you know what honey today this and all happened in office like that Mrs y also will have information about the company so miss y will be able to influence Mr X and Mr X will be able to influence y limited that is the reason these two people also will be considered as lied party so it is not just the person it is not just the it is not just the person and the company are related party if the person has any close family member if the person has any close family member here here miss X is a close family member that close family member and the company also will become related party sir who and all are close family members sir Common Sense Mr X came into dun how MRI so mother father are close family members then siblings brothers or sisters then wife or children these are considered as close family members for as8 purpose so what about girlfriend or boyfriend or live in relationship no they're not related party in as they become related party in inds because inds is CA final syllabus which is international standard internationally man all this living relationship boyfriend girlfriend are accepted so they consider that boyfriend girlfriend also as a related party but in India we are saying shantam pap so they are currently as per we are writing as exam CA inter exam as per CA inter are your living partners that we call it as domestic partners are they related party or they not they are not related parties okay so what about steppo huh steo you have to analyze okay they have not called out stepm mother or father or step sister and all if you have to analyze in my view they should be related parties in my view okay it depends I I have not seen I'll also probably review that as per as my knowledge it should be because you probably live under the same house means uh you'll gather information H so far okay s comfortable this is one okay uh yeah I think this is good yeah ah KMP definition you already know no all right this is also over next next next or maybe first one we will maybe we'll take up one question or is it okay I'll finish off two or three only three concepts are that we'll finish off and then take the question so so far we saw who is a related party next we will see who is not a related party one more is there for related party that I'll directly take you through the question because you may not understand it for the Ning this one okay one question is there then I'll come back to this provision again so now let's go for who is not a related party so two companies if they have common directors then they are not related parties two companies if they have common directors then they are not related party like Mr X he's a KMP in a limited also he's a KMP in B Limited Al stop is Mr X and a limited related party yes sir company and KMP are they related parties yes so are these two related parties yes is Mr X and B limited related party yes they're related party we are not talking about that the provision is are these two related party no because these two companies have the same directors no that is what the provision is trying to say two companies which has common directors are not related party so here X is a common director in both the companies just because two companies have the same director these two companies will not become related party as a thumb rule if you want to prove that they have to a related party you have to prove it with evidence okay they have transac huh since they are not a related party their transaction need not be reported because as18 what is as18 related party disclosure so if related party have done any transaction means that disclosures you have to give are A and B are related party here or they are not related party in since they are not related party if they have done any transaction be it purchase sale or whatever should this transaction be reported or not required not required to be reported like that only related party a transaction you'll give a disclosure that is the first one okay saru next next one is excuse me uh providers of Finance maybe first I tell providers of Finance government departments labor unions all these are not related parties sir I took suppose X limited we took 100 CR loan from SBA we took 100 cor loan from SBA just because I have taken a major loan from one company called SBA because I have taken a loan these two people will become related party no what is Bank Main intention give out the loan so bank will obviously give out the loans so just because bank has given a loan if you make it as related party think from bank's perspective nobody would like to work in bank because if the moment Bank gives loan to one party if you say it's a related party related party transaction you just say or you need to disclose also banks will have one customer or they'll have lcks of customer all the customer data you'll go on reporting h no that's what they've taken there providers of Finance are not related party so just because you have taken a loan from one entity these two entities will not become related party that is all right then your labor union normally in cas case of manufacturing concerns and all there will be labor unions company and labor unions are not considered as related parties okay next is the pro if you have any major customers and suppliers franchisers Distributors agents they are also not considered as related party even if the volume of transaction done is high what does this mean suppose a limited they purchase 90% of 95 90% of the purchases a limited makes from B Limited that means 90% is a small amount or a significant amount out of the 100% purchases 90% of the purchases a makes from B that means are these two related parties no they don't become a related party okay your customers your dears creditors and all are not related party even if you do a transaction in high volume with them you can do 90% 95% whatever percentage doesn't matter the I mean the datar creditors and all want to become a related party as a thumb rule if you want to prove prove that they are related party prove it with evidence so but as a basic rule these are not considered as related party as far as as8 is concerned doubt or okay P Mo on then Okay g this is done this is done this is done this is done okay let's review the questions then a limited enters an agreement with Mr Bol okay 1 minute I'll tell you the provision sir is company and KMP are they related party if if Mr X if they are a managing director in y limited is y limited and Mr X related party yes yes company and KMP are related parties keep that um point in mind and read this particular question a limited enters into an agreement with Mr Bola for running the business so whose business it is A- limited but who's running that business Mr Bola okay all right the people who run the business are usually called as what K people who run the business who who take the business card decision only we call it as KMS okay but they not stop there they've given further data so analyze for a fixed amount payable to the later every year so baola will not do this running of a business at free of cost he's charging some money whatever amount the contract says that the daytoday management of the business will be handled by BF day-to-day management only is handled by B of while all the financial and operating policy decisions are taken by the board of directors of the company so all the major decision is B are taking or all the minor minor ones only the day today small small decision is taken by the Bowa but all the bigger decisions operationally and financially is taken by the board of directors of a limited only yes now Bola does not have any voting power also in A- limited so Bola does not have any stake Equity stake in a limited R is the question here is is a limited and Bola related party or not a related party here is baa really a KMP or not a KMP they are not KMS are those people who takes some major decisions of the company is Bola doing that or running only day-to-day management that means is Bola the km of this a limited or not a KMP not a KMP that means is a limited and baa related party or they are not related party they are not related party means should we give this disclosure because company is giving Remer to Bolano should that be disclosed or not required not required since they are not related party disclosure is not required here only identification is what they asked okay check here next one Mr Manoj a relative of KMP oh relative they only told it is a relative okay we already studied this wraa extends only to that person or also close family members close family member means relative okay M Manoj a relative of KMP person received a remuneration of 350,000 for his service from the company from April to June first to July he left the service sir was Mr Manoj there with the company for whole year or 1 minute let's look at I'll give you a little more example a limited or rather uh Mr a is a managing director in let's say Zed limited now Mr a has a relative Mr a has a relative okay now company or I'll take that case further first is Mr A and Z limited related parties sir managing director means mean they become automatically what so all the directors of the companies are KMS all the directors of the companies are KMS so that means is Mr A and Z related party is Mr A and Z limited are they related party company and KMP are related parties so these two are related parties yes so the related party relationship extends only to this person or it extends to the relative also because Mr a is a related party to zed will relative of Mr a and Zed limited they also will become related party yes done now so means this relative of Mr a and this company they are also related party now has the company and this relative they've done any transaction is this company Zed and relative have they done any transaction yes that's what they've done here Shri Manoj this relative name is what Shri Manoj is a relative of KMP and this Shri Manoj has received how much remuneration from the company 3 ,000 why he gave he is working in the company from 1st April to 30th June for 3 months he gave some service for that service he recovered how much from the company 350,000 so company has paid 350,000 to this relative Mr Manoj or Shri Manoj or whatever got it h okay so first of all are these two related parties yes sir if it is a related party means related party transaction you'll ignore or you'll have to disclose you have to disclose but stop this related particular relationship was there for the whole year or only 3 months so this particular person left the service from 1st to July means he was in he gave the service to the company only for 3 months so it's not related part relationship existed for the whole year or only three months so what you have to do since the transaction has happened only for 3 months should you give a disclosure sir just because we say related party related party transaction or relationship should not be there it's not necessary that the relationship should be there for whole year here how much was how many months did he give the service 3 months is it a related party yes have you done a transaction yes for how much did you pay 3 lakh 30,000 so that means should you disclose or ignore you should disclose that related party transaction in the current because they are related party okay people it's not necessary that the relationship should continue for whole year it's not necessary that the transaction should be done for whole year even if you do a transaction only once only for a single day still you need to give a disclosure that's what I'm trying to say h the period is irrelevant okay next what is next uh uh this one a limited look at the graph a limited holds 51% in B A has 51% in B B has B has 51% in O B has 51% in O that's the graph then they are saying Zed limited holds 49% in O there is another company Z they own 49% in O this is the graph that they've given in the question yes people okay now you need to identify who is a related party for each company for each company who is the related party first let's analyze it from a sir a has 51% in b means a has control that means are these two related party so for a limited is B limited a related party yes sir a can control B and B has control over what o limited sir a can control B through b they can also control o because they are all in the same group yes or no yes they're all in the same group this we call it as members of the same group though as8 does not use that the definition you can easy for decoding you can remember like this p holding companies and subsidiary companies holding companies and subsidiary companies they are all members of the same group okay so these are all members of the same group they're all related to each other they're all related to each other or if you use your common sense also you'll get it a can control B through b a can also control o that means a a and o do they become related party yes that means for a limited o is also related party sir can a control Zed sir o has shares in Zed or Zed has shares in O Zed has shares in O that means a can a has any relationship with Z or no relationship that means is a limited and z z related party or not related party not related party so a drama is over now analyze from B limited B is controlled by which company a that means is a a related party for B yes it's not necessary you have you should have control if you are controlled by another entity then both are related to each other okay since B is controlled by a a and b automatically become related to each other now B can they control o if you can control another company do you become related party yes that means for B limited o is also related party B has any relationship with zed or no relationship that means is B limited and Z limited related party or not related party not a related party that is for B next for o Papa o o is controlled by whom B A also can control o with the help of B that means for o limited who and all are related party A and B that's all h no even Zed also has 49% with 49% what do you get significant influence that means Zed has significant influence in o means is O limited and Z limited related to each other yes that means for o who are related party everybody for o limited a a b z everybody are related to each other lastly for Zed limited for Zed limited who are related party Zed has significant influence only over one company called o so that means for Z limited only o is the related party yes sir done sir this question over sir next one someone's an's question was even Mr mono in previous example Manoj example she's saying if Mano worked by his skill still is a related party he can use use his skill he can use his brain kidney whatever it doesn't matter if it is a related party means related party transaction disclosure is a must okay doesn't matter how you're offering the transaction through your own skills you're doing I mean whatever still a disclosure is mandatory Okay g next uh this one provision is there I would like to discuss this listen to this provision Enterprise over which Enterprise over which KMP is either has a control or significant influence or related parties what did I say Enterprise over which the KMS have either control or significant influence are related party we learn this with the help of one question this one NADA limited sold goods worth 90 lakhs to ganga limited so there are two companies NADA and ganga are they transaction with each other yes one entity is selling to the other entity during the current year Fair the managing director of NADA owns 100% of Ganga so draw draw the chart here so there is a common connection between the two companies who are the common connection this managing director is a common connection yes no so there is one let's assume that managing director name is Mr X for Simplicity Mr X is a managing director in NADA he also owns 100% in ganga yes that is a graph that they have given in the question okay now first is m Mr X and NADA limited related party Mr X is an managing director means all the managing all the directors becomes KMP company and KMP are they related parties yes so Mr X and NADA limited they are related parties now is Mr X and ganga related party yeah Mr X has control over ganga limited so that means are these two related parties yes the provision says okay the Enterprise over which Enterprise over which KMP has either contr or significant influence okay then those the the then the entities will become related party or in simple ways me Mr X is a managing director in one company no but he also controls another company so if this is the case means these two companies also will automatically become related parties because it's very simple sir can managing director influence NADA limited can managing director influence n NADA limited yes can you also control ganga limited that means if man maning director says look at this if managing director says NADA limited you sell the goods to narmada at 30% discount will the company do that yes because Mr X is a managing director in that company right so if managing director says you sell the goods to other company at 30% discount means will this transaction happen very much yes so on these two grounds keeping this in mind these two companies are also treated as a related party that provision we call it as like this fancy provision but the meaning is this only Enterprise over which the KMP has either control or significant influence Then They al they become related party so in this case indirectly they're saying these two entities also will become related parties yes people I mean ah so he's saying Sir Mr EXO he's a managing director in NADA he's also a managing director in ganga this provision we already studied two companies because they have a common directors they become related party or they are not related party not related parties that we already covered who to who is not a related party or maybe let's build one more example Mr X is a managing director in NADA limited okay this time around Mr X has only let's say 30% in ganga limited 30% in ganga limit now are these two related parties they are also related party because they said Enterprise over which KMP either has a control or significant influence then these two will become related parties okay that's why they're trying but in this example anyway it is control Okay g okay come back are these two related parties yes are these two companies did they do any transaction yes NADA sold Goods to ganga sir they are related parties and they also done a transaction should we ignore this or should we report this transaction we should report see what our accountant ising uh the sales were made to ganga Limited at normal selling price so means was any discount given or it was not given it was not given the accountant of NADA contends that the sales need not require any different treatment from other sales and hence no disclosure is necessary as per the accounting standard the accountant is saying since the sales has happened at normal price but not at any discounted price we will not give any disclosure acceptable not acceptable not accept if they are related party means related party transaction disclosure is compulsory whether you have done the transaction at market price below market price or above market price it doesn't matter so accountant contention or opinion is not accurate you still need to give a disclosure that's what you'll write yes sir okay this is all right or maybe one more we will do okay this one maybe just check first one is a repetive one I'll not do that Goods amounting to 50 lakh H associate of our associate will not become related party associate associate will not become related parties uh don't worry more little more detail we will study in IND 24 now it's this much is enough for our syllabus there it's tested in a little more okay Goods amounting to 50 lakh is sold to associate company during the first quarter on 30th June sir we have sold Goods to our associate company associate company and V are are we related parties if a limited has 30% if a limited has 30% stake in B limited are these two related parties still with with 30% what do you get significant influence that means will a limited and B limited become related party yes so we have sold Goods to our associate company that means is there any related party transaction yes okay throughout the year or only first quarter first quarter after that related party relationship seized to exist when will the relation I mean they're saying this relationship is there or it got over when will this relationship get over sir we still hold 30% or we sold this sir when you have 30% stake you will have significant influence if you sell off the stake will it still have significant influence or you lose significant influence you'll lose significant influence so till the first quarter we had significant influence after first quarter we lost because why probably we sold the shares now however goods were supplied as supplied to any other ordinary customer so the transaction is happening only what sir transaction is happening only in the first quarter or probably it happened whole year we don't know actually they've not given clarity okay because they sold however goods were supplied as was supplied to any other ordinary customer you can interpret the sentence in two ways that one the goods are being sold at what below the market price or at market price market price that's one interpretation you can draw another interpretation you can draw is we have sold the goods not just in the quarter one quarter we have sold it in the all the quarters also anyways it doesn't matter check here decide in fact I think next pointer is giving more clarity decide whether the transaction for the entire year should be disclosed as related party transaction that means the transaction has happened only in the first quarter or whole year whole year we have sold Goods to our associate company not just in the first quarter in the first quarter we have sold goods worth how much 50 lakh okay sale stopped after first quarter or sales are still continuing sales is happening throughout the year sales is happening throughout the year but my relationship existed throughout the year or only in first quarter that was my associate company only till first quarter after first quarter I have sold my shares I've sold this 30% means is it still my associate or relationship came to an end so after first quarter is a limited and be limited related party or they are no more related party they no more related party everybody understood this now the question is since we have done the transaction for whole year whole year transaction disclosure should we give or only quarter one disclosure should we give is what they're asking you tell me sir standard name is what related party disclosure that means what will you give entire year disclosure or only related party Rel relationship existed for the whole year or only for first quarter since the relationship was there only in the first quarter you will give the disclosure only for the first quarter not for the whole that's yes any doubt working with the company for months but he was the related party for the whole in that Manoj example Manoj was a relative of one KMP correct Mr X let's assume is KMP okay Mr X is a KMP in Z limited now Z limited and Mano did a transaction for 350,000 this transaction took place only in first quarter for three months so okay now did the relationship is there only for the q1 or relationship is there for the whole year relationship Mr X is a KMP only for one quarter or there for the whole year since Mr X was a KMP for the whole year this Z limited and Manoj will be a related party for the whole year but you should not forget the standard name what is the standard name related party disclosure you will give related party disclosure when transaction happens no transaction happened for the whole year or only one quarter though the relationship is there for the whole year but transaction happened only for the one quarter hence only that transaction you'll that is thing huh because transaction happened only for first quarter here transaction has happened for the whole year but the relationship existed only for one quarter since the relationship came to an end after first quarter are they related parties no if they are not related party after first quarter should we disclose them or not required not required they were related party only for which quarter first quarter in the first quarter how much sales was made 50 lakh so only 50 lakh related sales you'll disclose both are different H Okay g uh all right one more example sir providers of finance and the company are they related party Bank bank and and the company will they become related party if you take if aru Pro takes the loans from ICA Bank ICA bank and aru pro will they become related party as a general rule no general rule no read this line One bank they One bank they hold 23% voting rights in P limit I means it's a bank it's a bank they only have given a Banks usually offer loan right here they're only offering offering loan or they also have purchase stake in our company with the 25% 23% what do you get significant influence that means our bank and P limited related party if if two parties are Rel become related party one party either has a control or significant influence over other party is Bank having a significant influence over P limited yes that means is this bank and P limited related party yes okay keep this in mind and read further the bank has provided 20 million loan to pmed at market rate no normally if you take a loan from bank is the bank and the company related party no but here you just taken a loan or Bank also has significant influence over you here bank has not only given you loan they also have 23% stake in your company with 23% they get significant influence that means now do they become related party now are they related party yes that means this disclosure should you give or ignore you should give a disclosure understood that is an exception in the previous case man Banks and Company are not related party only if loan is given here only his loan is given or they also have significant influence since significant influence is also there these two party will become related party and compulsorily you need to give a disclosure of this particular transaction that's what is the synopsis of this question okay zaru one I think one last one is that hang on so with respect to disclosure we saw who is a related party who is not a related party next is if they are related party what disclosures we need to give what disclosures we need to give sir if it's a parent and subsidiary company if it's a parent and subsidiary company you compulsorily have to disclose the name of the related party and nature of relationship nature of relationship will be here control nature of so between parent Ian between holding company and subsidiary company holding company has control over subsidiary company so if or what I'm trying to say is let's say h limited has 90% stake in s limited with 90% what do you get control h and S did not do any transaction in the current year H and S did no transaction in the current year okay still should any disclosure be given is what we are trying to test still any disclosure should be given or not what as8 says is if if the relationship is established with the help of control if a relationship is established with the help of control then you compulsorily need to give a disclosure every year compulsorily you need to give a disclosure what disclosure name of the related party for H limited who is the related party yes H limited will give a disclosure like this s limited is a s limited is a related party and how is this relationship established because H we are able to control s limited we are able to control s limited like that they need to give a disclosure okay even though there is no transaction still these two disclosure are to be compulsorily given that's what I've written over here if control exists means name of the related party and nature of relationship should be compulsorily given even if there is no transaction in the current year yes people yes sir if is related party relationship established only through control or there are other parameters what are other parameters you could be a significant influence you could be a KMP you could be a relative right so if the related party relationship is established through other modes through other modes then you will give a disclosure only if related party transaction occurs only if transaction is there means you give a disclosure use your common sense what do you like to know if company has done any transaction with the related party means what you would like to know what sort of information as an investor would you like to know first is name of the related party nature of relationship how are they related whether they have control over you significant influence over you or are they relative are they KMP that you disclose and then you you like to know what sort of transaction have you done have you sold Goods to related party have you purchased the goods have you taken a loan have you given a loan so that description of the transaction you give what sort of transaction have you done and then amount of the transaction 20 lakhs 30 lakh what what is it the total amount associated with the transaction you give a disclosure and if you have written off any amount as bad debts or provision for doubtful debts give it as a disclosure these are some disclosure you'll give it related to the related party transactions yes people ideally they will not give you they will not say that explain disclosure requirements of as8 doubtful not sir whenever I make a statement it can't come I'm only saying that there is a reasonable guess usually they don't ask such questions but in your ATT they may give you a straightforward question also I can't be blamed for that but generally what they'll give is they'll give you a case study and ask you to explain that case study with the help of as8 pro where you may have to remember few things out of this and give a pointer if it comes for one or two marks all this blade not required okay if it comes for five marks by chance rare if it comes then you have to put some garam masalas so there all the provisions will become helpful to you yes people okay just one minute 2 minutes let's recap the whole thing standard name as8 which talks about related party scope is only three things who is a related party who is not a related party related party disclosures who are related parties for can an individual and Company be related parties yes if an individual and Company to be a related party will happen only under three circumstance one either that individual should have a control over company or significant influence over the company or there should be a k only individual and Company will become related party or even that relative that relative of that individual ual and Company also will become related party that is one sir can two companies become related party yes if for two companies to become related party one of the company should either have a control or significant influence over the other company another one the Enterprise over which the Enterprise over which the KMP has either control or significant influence the NADA ganga limited they also automatically become related party that is one this is who is a related party next who is not a related party who is not a related party two companies if they have the same directors those two companies will they become related parties no that is one then uh providers of Finance government departments labor unions are not a related party your major customers like your data your datar creditors franchisers Distributors agents are not considered as a thumb rule not a related party even if you have done a high volume of transaction with them if you want to prove that they are related party prove it with evidence but as a basic rule they are not considered as related party next last aspect is related party C disclosure now with respect to one thing even if transaction is not there you need to give a disclosure what is that if the related party relationship if it is established with the help of control then compulsorily we need to disclose the name of the related party and nature of relationship even if transaction is not done these two disclosure compulsory has to be given with respect to other other related parties you will disclose only if related party transaction is there what disclosures you'll give simple name of the related party nature of relationship what is the nature of transaction you have done amount of transaction any bad debts provision for outut debts if you made give a disclosure of that that was a quick summary about as8 thank you hello people let's revise accounting standard five in our marathon series as5 scope is also very simple it talks about extraordinary items exceptional items prior perod items changes in accounting estimate changes in accounting policies that's all only these are the five areas which ASI targets okay first ordinary items so ordinary items means what ordinary items means they are income and expenses related to our Core Business Like if you purchase the goods if a manufacturing company if they purchase raw material it is related to their business on yes that means all those are ordinary activities purchasing the goods paying salary to employee paying rent to paying electricity Billow all these are related to their operations that is your ordinary activities for ordinary activities you don't have to do anything anyway P Andel has a proper format follow the proper format and show the respective expense under the respective category for ordinary item nothing extra no special treatment the next one is extraordinary item extraordinary item means it is Rel related to your business or completely unrelated any income and expenditure if it is unrelated to your business such we call it as extraordinary item like Lottery income or what I would suggest is usually again one sort of question that I see mostly from this particular chapter is uh lately theyve started asking this give one one example or two two examples of extraordinary item exceptional item prior period item they're asking so ideally I would suggest two two examples you remember something something which is totally unrelated to your business automatically becomes what sir extraordinary item let us say you suffered a loss due to flood or earthquake suffering a loss due to earthquakes is part of our operation definitely not part of aopr operations I don't know about other company yes no I mean this is related or totally unrelated example of extraordinary right suppose I did not pay tax to the government what will the tax authorities to they may seize our property possible the seizure of any property or company property attached and all is what it is related to our business or totally unrelated item so this is an example again of extraordinary items yes people okay two two examples if you remember I think it should be good enough for me next is exceptional item exceptional item means there are income and expense relating to ordinary items only they income and expense related to ordinary activities only but their nature and their size is such that if you give a separate disclosure user will understand financial statements better exceptional items are they are related to ordinary activities only but if you disclose them separately it will help the users to understand financial statements better examples is how should the inventory be valued at cost or NRV whichever is low suppose or here cost is 100 cost is 100 NRV is 80 that means you'll value the inventory at what value 80 rupees okay now you tell me is this a rare thing for the business or it can happen it can happen but but but but sir inventory is a major component for any business yes or no sir cost of that inventory is 80 NRV is only 80 means the company is in profitable state or law state law state correct no the because the realizable the selling value of their inventory only is 80 but they purchase this Goods at 100 I means this and all no so though it is part because due to due to some economic meltdown now due to that Russia Ukraine war or covid and all no conditions fell right so many Goods can net realizable value fell correct but if you disclose this information separately don't you think it help the users better yes so how much loss have you written down due to inventory initially you purchase the inventory at 100 so it was valued at 100 will you value it at 100 anymore or bring it down to 80 bring it down to 80 so how much loss is there 20 is this really rare for your business or it can happen it can happen but if you disclose this information better don't you think it'll help help the users yes so this is one examples of exceptional item though exceptional item are related to your ordinary activities if you show it separately in your financial statement it help the users to understand financial statements better one example is write down of inventory to net realizable value or sale of long-term Investments of property plan and Equipment when long-term assets or PP if you sell means again that is again common because at some point of time you have to replace your assets but if you show them properly users can understand financial statements better so these are some examples of exceptional item okay so what we should do for exceptional item so if it is extraordinary item or exceptional item no you have to show them separately in your pendl account this is your schedule 3 pendl format in schedule 3 format if you check there is a separate category called exceptional item there is a separate category called extraordinary item so exceptional item and extraordinary item needs to be disclosed separately in PN so that users will understand your financial statements better that's all so this standard only talks about should you disclose should you give any extra treatment for them no accounting again just should you give any extra disclosure done this is done next any doubt people no sir only one doubt when you'll finish over one or two more one or two more Concepts one or two more questions and we are done for the day next is prior period item prior period item name it is saying prior period prior period means it's related to current period or prior prior means it is related to the previous year or previous years yes whatever it could be it could be related to previous year itself or it could be related to four years back while data doesn't matter which year it is so prior period item means they are those income and expenses which are appearing in the current year they're appearing in the current year why why is it appearing because you did some error or Omission in preparing your previous financial statements when you prepared your last year or last year of financial statement you committed some error you did some mistake you identified that mistake in the current year so when you identify a mistake WIll you ignore it or Rectify it so when did you identify the error current year that means when can you do the rectification current year so prior period item is appearing when is coming when it's coming in the current year but is it related to current year or it's related to previous year previous year that is what is a definition of prior parad okay sir so if I committed any error or Omission some one expenditure you forgot to account two years back you came to know about it current year okay now that means will ignore it or account it account it but is that you will account the expense when you'll account the expense in the current year but is it related to current year or two years back two years back that in all we call it as what sir prior period item so as5 says that if you have any prior period item give a separate disclosure if it is prior per item you need to give a separate disclosure in your P account don't Club it with other component show it separately that's all it is okay basically all Extraordinary item exceptional item prior item needs to be disclosed separately that's all M uh 1 minute my first cover of this okay next point is changes in accounting policies so as F next pointer is if you have changed any accounting policies what to do first of all accounting policies are rules accounting policies are certain rules and protocols rules and all can you change it yearly monthly and all no accounting policies Since There Are Rules they should be consistently followed every year does it mean accounting policies can never be changed no accounting polic icies can be changed only under three circumstance if one of the three circumstance happen means accounting policy accounting policy changes can be made one if if it is required by the law of the country if it is required by the law or second one if it is required by the accounting standard or third one for the better presentation of financial statements okay like simple let's say company was following uh Leo method earlier in fact a accounting standard to allows Le for method it is banned correct ly last and first out method is allowed or it is banned okay suppose we were following Leo method does accounting standard allows Leo method or it is banned if it is banned means now can you follow Leo method or shift compulsorily shift because it is a requirement of accounting standard similar way if a law of a particular country if they ban Leo means compulsory from Leo you have to shift to another method third one is better presentation of financial statement what is this better presentation let's take a small example let's say one company is there are limited they are listed companies they are following for valuing their PP they are following cost model you know know there are two models cost model and revaluation model this particular company they are valuing their PP under cost model but all their competitor companies other competitors in the market they are valuing their PP using revaluation model so this company is valuing cost and other all other competitors are following revaluation model now tell me these competitor company financial statements and are limited financial statements are they comparable are they comparable no this one is following cost other the other companies are following revaluation model now the company C management decided that from cost model we will shift to revaluation because they feel financial statements will become better comparable is this allowed yes by doing so your financial statements will lead to a better presentation that's a third criteria okay sir this is again you'll have to analyze it on a case to case basis any accounting policy change is always done retrospectively meaning you have to do it from the beginning you have to work out from the beginning its effect you will give it in the current year okay so that is what is accounting policy retrospective effective means all right this is another important one which is quite popular in exam sir the name is what here changes in accounting policy sir if you want to change something means something should already be existing something should be already existing that if you replace with something else we call it as change suppose we did not have any policy now we introduced a new policy can we call that as a changes in accounting policy no introduction or adoption of a new accounting policy is not considered as a change in accounting policy because if you want to call something as a change means something should already be existing if nothing was existing and if you introduce a new policy then that introduction of a new policy or adoption of new policy is not a change in accounting policy that is one second one is adoption of accounting policies that significantly differs from previous occurring events are not considered as a change in accounting policy example is simply let us say earlier company used to pay pension scheme company has some pension plans to pay pension to their employee okay now company is paying the pension on an ad hoc basis ad hoc basis means is there any proper policy or their choice their choice company management likes few employees they will get a gradu company management does not like few employees they will not get gradua I means is there any proper policy or mmur entity or entity Choice whatever they want whatever the hell they want they are doing correct or no now now now now now they introduced a formal gratuity policy they introduced formal gratuity policy they introduced tell me ad hoc policy and formal gratuity policy they are same or completely different completely different now this cannot be treated as a change in accounting policies because earlier you used to pay on something on an add of basis on random basis that mean these two are same or completely different different that's what they're trying to say adoption of accounting policies which significantly differs from the previous occurring events this is previously occurring events if you want remember this this particular wordings is important this case studies has come quite a few times in examination that is not considered as a change in accounting policy so far okay sir all right next one minute I'll tell you off I'll go we'll go off through one question maybe better oh maybe that question got remoted I think one second I don't see that question okay but any which way you got it no the same gratuity and pension question only is there in many rtps and in our study material also you adoption of new if you adopt a new pension plan is it an accounting policy change no earlier you had an adoc policy now you brought in formal gratuity policy is that a change in accounting policy no this itself is one question it is there in many study material you'll get it review that one question okay next next one is changes in accounting estimate changes in accounting estimate sir estimate is a Paka number or approximate so estimates are simply some approximates or some judgments used to find some components of financial statements there are some components in financial statements their value no you cannot find out with Precision you cannot find out their value with 100% pration you can only approximate them like sir to calculate depreciation what do we need tell me straight line method depreciation amount carrying amount minus residual value divided by remaining useful life this useful life is a PKA number or estimate it's a judgment call yes or no can the Judgment or approximate should be same or it can change change similarly residual value Paka number or just a judgment call just a judgment call Sir if you ignore this if you ignore this will you will you be able to calculate depreciation no sir if you don't know the depreciation will you know the closing balance of pp or that will be again missing that means to know the depreciation and to find out the closing balance of pp this particular estimates are very much required that's the reason we say accounting is both an art as well as science for some we have a proper rules which is science back for these it is Art this is where your creativity comes into picture okay your judgment comes into picture over here all right done that's a aunda sir accounting estimates are based on circumstance yes or no like let's say when I I bought a planted missionary I bought a planted missionary initially I thought conditions were good I thought I will use the asset for 10 years after 2 Years sir after 2 years the technology has changed technology has changed now I feel I can use this asset for one more year I can use this asset for one more year because technology has drastically changed which is so especially back then everybody used to use in fact smartphone was a rarity can you believe that yes remember your school days yes sir how many of you had smartphone in your school days no how many of you have smartphone just as a matter of two to three years from school to like your college probably the transition was only 2 to three years at best 2 to three years May from no phone literally went to smartphone not even normal phone you want only smartphone that not normal smartphone only correct no yes that only sir initially when we bought the asset missionary life was estimated to be 10 but technology can change because of Technology change now company feels they can use the asset only for one year is this company a mistake no changes are Dynamic changes will keep happening now estimate has changed estimate has changed now can you ask the company do retrospective application from the beginning you rework your depreciation is that be right or it'll be like a penalty that will be like a penalty because accounting estimates are based on circumstance when I bought the missioner circumstance environment told that I can use asset for 10 years after 2 years no fault of M technology in the marketplace in the economy changed because of that I I feel I can use asset for only one more year is it my mistake technology changed no I mean should I be penalized to asked to do a retrospective accounting no hence accounting estimate changes are always applied what sir prospectively so if any estimate changes means whatever you have done previously should we change it or not required not required only from current day onwards whatever changes are necessary do it whatever you have already done in your previous years need not be touched yes people this wordings if you remember that is good enough policy changes always retrospectively estimate changes are always prospective in nature next so as5 talks about disclosure right accounting estimates disclosure and accounting policy disclosures are same so when you change an accounting estimate when you change an accounting estimates here sir what changed here check initially when I bought the asset useful life was how much 10 years how many years already over two years that means the remaining life should have been how much in 10 me said two is gone means the remaining life should have been 8 years is the remaining life 8 years or only one year sir if remaining life has changed means will depreciation be same or depreciation also will get revised depreciation also will get revised depreciation changes means your pnl will get impacted your balance sheet also will get impacted that is what we are trying to say here whenever you change an accounting estimate it will have an impact in your financial statements it will have an impact in your financial statements now you need to give a disclosure of that what disclosure whenever you change an accounting estimate first check is there any material effect in the current year financial statements or future year financial statement what is material in audit may you have studied for material is there any specific limit or case to casee toas case to case basis May you'll Define it yes for a 10,000 company 10,000 rupees is immaterial but for a 1 lakh company 10,000 rupees is med so you have to analyze it on a company to company case to case basis because a company has changed accounting estimate first check is that having any effect material effect either in the current year or in the future year if you feel yes it has a material effect in the current year financial statements or for that matter future financial statements then you need to disc close this fact and how it impacts your financial statements the fact that you have changed your accounting estimate and how each line item of your financial statements are getting affected you need to give a disclosure like like you will say here let's say before this change depreciation was 1 lakh depreciation every year was 1 lakh let's say now it has become 2 lakh now it has become 2 lakh that means from one lakh depreciation has become how much 2 lakh that change you will call out over here due to this accounting estimate change our depreciation has increased by 1 LH our PP has reduced by 1 lakh that that you need to give a disclosure in notes to accounts manageable suppose you have changed your accounting estimate it neither affects current year financial statements materially nor it affects future year Financial estimates materially in that case may no disclosure is necessary okay now if the company turnover is let's say 100 CR for 100 CR compan is one lakh material or may not be that material may not be that material that means is it you have changed your accounting estimate is it having having a material effect on this company or not a material effect in that case may you don't have to give any disclosure okay people another Cas is you have changed the accounting estimate you have changed one estimate it has a material effect not current year it has a material effect in future year to what extent or to what amount it impacts your future year you are not able to quantify you're not able to find out rare but if it's so then you you you say the same thing you give a disclosure of the same thing saying what I've changed my accounting estimate it will have impact in my future financial statements how much it will impact I'm not able to quantify like that you give a statement rare scenario but anyways if it is that quick run through you give you'll not get most probably a straightforward questions on all this if at all it comes you need to just warm it a few things Okay g uh no no no no no no no no not Endo some questions okay review the questions tell me a company finds that an inventory sheets on 31st March 2016 keep the dates in mind did not include two pages containing details of inventory worth 145,000 such a nice inventory storekeeper you have probably you did not pay him his salary that guy put full chuna to you two pages of inventory only he picked off and went and that two pages inventory value is how much 14 50,000 so if two pages only is not there means will you would have would you would you have valued the inventory properly in that year or incorrect value incorrect value yes and that you found out when how will you deal with the following matter for the year ended 31st March 27 I means that this is an Omission this is an error or an Omission it came in we are in this year we are in 31st March 2017 did this error or or Omission happened in the current year or last year last year last year that means this is related to last year but you can correct that error only in the current so means what this only we call what do we call it as prior period so if it is a is this a prior period item yes should you give a separate disclosure of this yes that's what you need to manage okay here here that gradu I told no question this question question number four I think we already reviewed that you you can manage okay uh the accountant of mobile limited has sought your opinion you are busy doing with something else only why will you give opinion now right now you want sa you don't want opinion yeah so current year is ending on 31st March 2017 sir few component this is one type of popular question that comes from ASI if at all they pick ASI as a question in your examination meaning they will give you various transaction and ask you to identify whether it is a changes in accounting policy changes in accounting estimate is it a prior period item like that you need to identify okay provision sir the moment I read provision I'll not even read further sir provision is Paka number or estimate you made initially provision of 2% then you changed it to 3% this is a changes in accounting policy or change in accounting estimate changes in estimate during the current year management has introduced a formal gratuity scheme in place of ad hoc gratuity payment so sir earlier you had ad hoc ad hoc means proper policy or manzi entity Choice earlier they used to pay the gratuity on ad hoc basis now they've introduced a formal gratuity is this considered as a change in accounting policy no this is not considered as a change in accounting policy till previous year Furniture was depreciated under straight line now onwards you changed uh for a period of 3 years in the current year useful life has been changed to three from three it has from five it has become three change in useful life is what sir accounting estimate change in useful life change in residual value change in depreciation method all these are changes in accounting estimates management decided to pay pension to the employee it came again here again management decided to pay pension to the employees who have retired after 5 years in the organization whoever serves 5 years and then takes a retirement they will get pension such employees will get pension of 20,000 per month earlier there was no scheme of pension in the organization earlier we had no policy to pay pension now we have introduced a new policy introduction of a new new accounting policy is considered as a change in accounting policy or not a change not a change in accounting policy sir you changed your inventory cost formula okay cost formula means your F4 LE 4 and all suppose from F4 you shifted to weighted average from F4 we shifted to weighted average or from weighted average you shifted to F4 doesn't matter if this only we call it as cost formula if this cost formula is changed means it is always considered as a changes in accounting policy if you go from cost model to revaluation model or revaluation model to cost model or cost formula if you change these two are examples of accounting policy changes one of the two will be asked in the examination if at all they test accounting policy see changes yes people thank you for your time and patience see you bye-bye hello people so let's continue our discussion in the marathon Series so today we'll be starting with the first standard that is accounting standard 11 which talks about effects of changes in foreign exchange rates okay all right this particular standard scope is very simple if you have done any foreign currency transaction how should we account them like you have sold go Goods you have not sold Goods in India you have sold Goods to a customer in Japan and you have buil not in Indian rupees but in Japanese currency can we pass the journal entry in Japanese currency or convert convert so do you think the exchange rate between Indian rupees and Japanese currency will be same or it'll go on fluctuating fluctuating so what exchange rate we should use that guidance as11 gives if suppose if you have any branch outside India if you have any subsidiary company outside India any associate company outside India or any joint Point Venture company outside India how we should convert suppose if you have a branch in USA that means that Branch will be preparing their financial statements in dollars but we have to prepare our financial statements in Indian rupees right Branch means even Branch data we'll have to add and then only we can prepare financial statement but our head office data is in Indian rupees but Branch data is in dollars so that means the dollar financial statement we need to convert it into Indian rupees how to convert that that's all is a scope of ASL foreign currency trans action what to do foreign operations all this we call Bran foreign Branch or foreign subsidiary and all we call it as foreign operations if you have foreign operations what to do that's all is the small scope of as Liv okay sir all right now let's diving into the things further so before you talk about the transaction as1 says first you need to find out what sort of items are foreign currency transaction as far as as1 is concerned all the transaction foreign currency transactions foreign currency transaction items are classified into monetary items and non-monetary items you need to figure out what sort of a transaction have you done monetary item related transaction or non-monetary monetary means monetary items are those items whose value is fixed we say in as1 terminology they're exible and fix it denominations of currency or in Layman or simple language value is fixed if you have 500 rupees Gandhi note today tomorrow it will become 600 or 500 only 500 that means cash is an example of monetary item cash in hand cash at bank if you have sold goods worth 10 lakh Rupees to datar how much will the datar pay 10 lakh is a value changing or fixed fixed so debt Arrow credit Arrow loan taken loan given Bill receivable bills payable all these are examples of monetary it okay sir if it is not a monetary item automatically it will become a non-monetary item if monetary item value is fixed means non-monetary item value will fluctuate so those components whose value fluctuates only what we refer to as non monetary item first figure out whether it is a monetary item or a non-monetary item that is one all right next all right uh I think this part I'll talk about it in a bit what as1 simple rule is they have given certain rules what simple rule is initially when you do a particular transaction initially when you do a transaction whether it is a monetary transaction or monetary item transaction or non-monetary item transaction doesn't matter initially everything is recognized at tdsr as an transaction date spot rate initially every transaction monetary or non-monetary doesn't matter everything is recorded at transaction dat spot rate all the settlement settlement here refers to money received money paid that we call it as settlement all the settlements are recorded at settlement datea spot rate which is sdsr first I'll tell the provision then we'll take a problem all right in between this transaction and settlement if you have any foreign currency if that foreign currency item has any balance if that foreign currency item has any balance you need to check whether that balance relates to monetary item or non-monetary item if monetary item has any balance means in that particular monetary item should be shown in your balance sheet by reconverting using closing rate and when you convert you will get some gain or loss that will go off to pend account okay s this this part is what is important for our examination non-monetary item is not that very important this one is important once we will recap that then we will understand it with a small example then we will apply it in a problem what did I say initially every component whether it is a monetary or a non-monetary item everything is converted using transaction date spot rate all the settlement settlement here refers to what money coming in as well as money going out all the settlements are recorded using settlement datea spot rate in between this transaction and settlement if your foreign currency item has any balance that balance you need to check it pertains to monetary or a non-monetary item if the balance pertains to monetary item means monetary item should be further converted again on the balance sheeted using closing rate and when you initially have converted using tdsr now you're converting using closing rate these two exchange rate will not be same so there will be a difference the difference is a gain or loss Forex gain or loss to be transferred to pel account or just see this particular example suppose on 1st February 2027 we let's say we are X limited we sold Goods on 1st February for $10,000 we sold to a customer in USA for how much value $10,000 okay sir is this is a transaction yes sir all right now you need to pass the journal entry it's a credit sale tell me what is a journal entry for credit sale datar account debit to datar account debit to sales account sir is my datar value in INR or it is in dollars dollars can I pass the journal entry in dollars or convert it convert it now you did a transaction initially all transactions are recorded using what rate transaction date spot rate when did you do this transaction first February on 1st February check on 1st February $1 is equal to 80 rupees that means you will convert this $1,000 by using what if $1 is equal to 80 rupees means $10,000 will be equal to8 like this so that's what I mean by that initially all transactions are recorded using transaction date spot rate fair enough all right now let's say we received the amount we received the amount on 1 may we received the it's a credit sale though you sold the goods on 1st February when are you receiving the money 1 May how much money you'll receive on 1st May $10,000 only correct this is only what we call it as what settlement settlement here does not refers to amount paid settlement here refers to both amount received so if you are doing any settlement transaction means for all settlement what rate you'll use settlement date spot rate when is a settlement happening 1st May on 1st May what is the rate $1 has become 87 that means you will pass the journal entry what is a journal entry you will pass for money received from dears bank account debit to dears how much Mone money you will receive $110,000 this $10,000 will be converted using what rate sdsr sdsr means settlement date spot rate when did the settlement happen 1st May what is the exchange rate 87 so converted using 87 like this so that means the journal this will be out okay sir this is the transaction this is the settlement but check hang on in between this transaction and settlement one important date is coming in what is our date so transaction is happening on 1st February settlement is happening on 1st May in between trans transaction and settlement there is an important date what is that important date 31st March on 31st March 2027 may you close your books no sir you close your books yes sir you have sold the goods on 1st February you sold your goods on 1st February how much data are you showing in your books 8 lakh have you received this money on 31st March or not yet you will receive this money on only on 1st May means on 31st March this datar account has a balance this datar account has a balance yes or no now if any foreign currency item has any balance on 31st March if it has any balance check whether this item is a monetary item or a non-monetary item datar is what item so if you have sold goods worth $10,000 your datar means will your datar will pay how much $10,000 only value changing or value fixed fixed that means datar is an example of what item monetary item and standard says as1 says all monetary item should be shown in your balance sheet all monetary item should be shown in your balance sheet using should be monetary item should be reconverted using closing rate okay people closing rate means very simple when are you closing your books 31st March the exchange rate on 31st March only we call it as closing rate so initially you have converted using what rate tdsr tdsr rate was how much 80 now can we use 80 or we have to use 85 why 85 closing rate is 85 that means will the dear balance be same or it is changing now changing that is only what we refer to as Forex gain or loss that exchange gain or loss should be transferred to P account because it pertains to monitary item this all we have to do okay people are we good so far all right now excuse me uh what is the journal entry first when you purchase the goods again dats to sales sales means this is what sir this is related to stock no or leave that it's okay fine or maybe I'll just tell you this so far everyone understood okay let's do a thing let's apply this is not a full-fledged question I just wanted to explain the terminologies so let's do a thing let's take one question question about this and take up the full fles one you are required to assertain gain or loss gain or loss here refers to Forex gain or loss to be recognized for the current year 31st March 20 X1 and 31st March 20 X2 for two years they're asking you to find out Forex gain or loss okay check as per as1 this time around in my example I had taken a example of goods sold here they're saying goods are purchase no problem when did you purchase 1 January from how much value $155,000 sir on 1st January the day where you purchase the exchange rate is how much $1 is equal to 75 this only we call it as what this only you did on this particular day you did a transaction this only we call it as tdsr transaction date spot perfect exchange rate on 31st March 31st March is a date on which you close the books or that means this $1 on the closing rate is how much $1 is equal to 74 that means this is what sir closing rate correct all right actual payment payment means here settlement settlement here refers to both payment as well as receip so here if you purchase the goods means you'll have to receive or you'll pay pay when is the payment date 7th May so I mean this is a settlement so that means this the on 7th 7th July whatever exchange rate is there that only we call it as settlement date spot rate all settlement transaction should be recorded using settlement datea spot okay can we go ahead and pass this now I'll explain it to you in journal entry but as I told you here have they asked to pass journal entry no I a suggested answer will always be in statement in pointers all right but for our easy explanation I passed it in journal entry so ideally I would also suggest that you write the answer in pointers only all right first try to understand it with the help of journal entry and then then trying to express it in words that'll be better okay all right tell me the journal entry sir you purchase the goods on 1st January you are paying on 7th of July means it's a cash purchase or credit purchase credit purchase what's the journal entry for credit purchase Pur purchase account debit to credit ours account yes how much did you purchase it for $155,000 can we pass the entry in dollars or convert convert you did a transaction initially all transaction whether it is monetary or non-monetary everything is converted using what rate transaction date C spot rate so on the date of transaction $1 is how much on the date of transaction $1 is equal to 75 have you done the transaction for $1 or $15,000,000 so $115,000 will be equal to how many Rupees so we'll divide we'll multiply multiply so 15,000 into 75 you do how much is it 112,000 so entry is purchase to credit are we have converted using transaction date C SP rate comfortable okay great now sir when is a settlement happening 7th July but in between this transaction and settlement is one important date coming in yes one important date is what 31st March 31st March is a day on which you close the books you close the books 1 minute hang on this purchases P you purchase the goods means it's your stock CH the goods means it is your stock sir stock value will be same stock value will be same or stock value will change will change yes or no if the economic condition is good we will sell it we will sell the stock at a higher price we'll make other person bakra if conditions are bad the rells will become bakra by selling it at lower price that mean stock value same or stock value fluctuate I mean stock is an example of what item non- monetary item okay sir all right that's what I've written here stock is a non-monetary item what about credit RS so I have to pay my credit R how much $155,000 sir if I purchased goods worth $115,000 means I have to pay my credit R $155,000 is the value changing or fixed fixed that means credit is an example of what item credit is an example of monetary item what does the standard say all monetary item should be restated should be shown in your balance sheet using closing rate okay initially I've converted using what rate initially I've converted using tdsr transaction date spot rate can I use this or I have to use closing rate I have to use the closing rate so on the day when I'm closing my books what is the closing rate $1 is equal to 74 this is a sad news for me or a happy news for me this is sad or happy news sad or happy Nows sad news Paka sad news happy news sir sir telling tell both sir let the sir only get confused sir yeah much easy sir very simple sir you have to pay the Creditor you have to you have purchase the goods means you have to pay the Creditor sir you have to pay it in Indian rupees Gandhi note or dollars sir if you have to pay in dollars means first you have to purchase dollar now first you have to purchase the dollar and give it to your creditor correct sir on the day you did the transaction to purchase $1 how much Gandhi note you had to give to purchase $1 you thought we have to give away 75 Rupees to purchase $1 we had to give away how much 75 rupees but on 31st March I'm happy why so I can purchase to purchase $1 now I have to give only 74 rupees now I have to give only 74 rupees I have to give more gandi notes or less gandi notes one rupee less Gandhi note I have to give yes or no I mean there a sad if I'm sir I'm for me what is important dollar or Gandhi note both patriotically and financially I'm interested in Gandhi notes right so that means what sir to buy $1 I have to give away more rupes now or less rupees less rupees so that means this is a sad news or a happy news for me happy news for me okay people all right this is one so happy news means it is what loss or gain gain nominal account rule say expenses and loss should be debited incomes and gain should be credited that means here you're getting a gain that means the entry is what here entry is what here gain should be credited what will you debit are you paying more to the credit R now or less less that means credit R balance you have to increase or reduce reduce credit R has what balance credit balance how do you reduce it debit so the journal entry all have to passes credit ours account debit to exchange okay people or if you want another explanation so initially you have converted creditor at what value 75 now it should be converted at 75 or 74 that means you have initially converted at a higher value initially you have converted at a higher value that means now you have to increase it or reduce it reduce it credit R has credit balance to reduce we will debit like that also you can figure it out okay people all right so the journal entry is credit our account deit to exchange gain okay how much how much is the how much is the gain sir 75 has become 774 means on $1 how much is a gain on $1 the gain is one Rupee my transaction is for $1 or $115,000 $1,000 that means how much is the total gain for me on $1 from 75 the exchange rate has become 74 means on $1 the gain is 1 rupee the difference between this is one Rupee I've not done the transaction for $1 I've done the transaction for $155,000 so the my gain is how much $15,000 rupes that means the entry is credit or account debit to exchange again 15,000 you don't have to put separate working note for that can present like this how much is the gain 75 - 74 if you do the gain is $1 for $1 the gain is one Rupee how many dollar we have 15,000 so 15,000 into 75 - 74 if you do automatically you'll get it okay people or if you are still confused you can also R click this sir what is a credit R balance required or what is the credits actual balance check here initially what is a credit R balance 11 lakh 25,000 how did you get that by converting 15,000 at 75 credit monetary item monetary item should be shown in the balance sheet by converting a tdsr on the balance sheet rate or closing rate what is the closing rate 74 convert it again 15,000 into 74 you do how much is it 11 lakh 10,000 now means I am showing currently credit are in my books at 11 lak 25,000 but required balance is only 11 lakh 10,000 that means what credit AR balance I have to reduce what is a difference between these two 15,000 that way also you can calculate how you calculate there are multiple ways this is the easiest and the quickest done people hope at least one of the explanation went P okay okay okay can I move forward online also cool okay so on 31st March okay I've reconverted the monetary item using closing rate and I've got an exchange gain all right people where will this exchange G gain go to Sir monetary item exchange gain loss will go off to P okay if you want you can pass one more entry what is one more entry if you want you can pass in the current year you can write this is the second entry third entry if you part exchange again you have to transfer for it to pel account so the entry will be exchange gain account debit to pel account how much 15,000 15,000 these are the three entries you need to pass in the current year they asked how much is the gain in the current year and next year so current year how much is the gain 15,000 rupees so far okay all right can I move on to the next okay next year our year first year ended on 31st March 20 X1 now settlement happened when 7th of July 7th July means first year or second year second year sir you are paying the credit R payment of a credit r as a settlement what does as1 say all settlement transaction should be recorded at settlement date spot what is the journal entry for paying the credit the journal if you pay the credit what is the journal entry credits to bank credits to bank so how much dollars you need to pay $115,000 settlement should be recorded using settlement date spot rate on the settlement date what is the exchange rate 73 that means how much Gandhi note will go out from your bank account so to purchase finally on the settlement day to purchase $1 we have to give away How much rupees 73 to buy $1 we have to give away 73 rupees how many dollars we have to buy 15,000 that means how much money Gandhi note will get reduced from us 15,000 into 73 how much is that 10ak 95,000 rupees will be deducted from my bank account 10 lakh 95,000 Indian rupees will be deducted from my bank account because I have to purchase dollar okay now sir so you will credit bank account 10 lakh 95,000 because it's a settlement correct people if you have settled the credit R means is credit R balance required or you need to close close come back check how much is a credit R balance here you have credited credit R by 11 25,000 here you debited by 15,000 that means what is a credit R balance in my books credit R balance in my books is 10 lakh 10,000 yes or no 10 lakh rather 11 lakh 10,000 that's my credit AR balance in my books is that balance required or close close credit R is credit balance how do you close debit so credit RS account debit 11 lak 10,000 okay people I thought till 31st March till 31st March I thought I have to pay the Creditor How much rupees 11 lakh 10,000 but again lucky me on 7th July when I finally settled how much Gandhi not deducted from my bank account only 10 lakh 95,000 I thought I have to pay 111,000 but eventually settlement value was only 10 lak 95,000 I mean this is a loss or gain there is a gain gain yes no because till 31st March I thought till 31st March I thought to put purchase $1 I have to give away how many Rupees 74 to purchase $1 I have to give away 74 but eventually on 7th July when I made the payment I can purchase $1 only by giving 73 yes that means it's a sad news or happy news happy news that's the reason it's a exchange gain that you can get it as calculated or get it as balancing figure that's fine this exchange gain also where it will go off sir P this is the gain related to which year second year that's what they asked in the problem first year gain is 15,000 second year also the gain is 15,000 so totally for two years put together you made a Forex gain of 30,000 in totality in this particular transaction that's what they've expressed in the statement check this year first year gain 15,000 second year gain is also 15,000 that if you want you can express it in words wait or carry on cool this is one concept sir what if it is non-monetary item monetary item perfectly got it sir what about non-monetary item what are the examples first of all what is a non-monetary item non monary item means value fixed or value changes value fluctuates tell me some of the examples of non-monetary item stock of P kidney you used just know it came no huh stock is an example of non-monetary item other than that huh property plant and Equipment sir if you buy any fixed asset or if you buy any laptop or land or Machinery their value will be fixed or it will fluctuate fluctuate usually reduces but sometimes it may also increase yes or no so basically property plan and Equipment intangible assets investment inventory all these are examples of nonmonetary items okay sir if you have non-monetary item what to do okay go back to the rule again what is the initial rule initially doesn't matter whether it is a monetary item or a non-monetary item everything will be recorded using transaction date spot all the settlement of monetary item as well as non-monetary item will be done at settlement date spotted in between this transaction and settlement if you have any balance that balance you need to check whether it relates to monetary item or non-monetary item monetary item you know what to do monetary item will be restated using closing rate and gain or loss will go off to p and if it is non-monetary item what you have to do sir if it is a non-monetary item non-monetary item are valued on one basis or multiple bases MTI like property plan and equipment for property plan and Equipment you can value either using cost model or revaluation first check if you have non-monetary item means before you value first check how is it valued in your books before you talk about exchange gain first check how is non-monetary item valued in your books if non-monetary item if it is valued at cost if non-monetary item if it is valued at Cost initially you have already recorded using tdsr initially you already converted using tdsr use the same thing further conversion not necessary you anywh converted using tdsr take the same value and show it in balance sheet further conversion not necessary means will any exchange gain or loss or come or no exchange gain or loss no exchange gain or loss Will Come come in this particular case comfortable people okay once more or okay clear clear suppose suppose suppose non-monetary item is Valu at any other basis like property plan and Equipment can be valid at Cost model or revaluation revaluation model means to show the asset at fair value when will you do the revaluation model on any particular date or usually end of the year so if you are following any other basis like fair value or net realizable value inventory can be valued at cost or NRV whichever is lower if inventory inventory is a non-monetary item if inventory is valued at NRV or if property plan and Equipment if it is valued at fairwell then which day you'll find out NRV or fair value on what day you'll find out fair value or NRV on the balance sheet date or the year ending date on the year ending date exchange rate you use and further convert if non-monetary item if it is valued at not at Cost model but at some other model okay find out use the exchange rate on the day you find out this fair value or another use that dat exchange rate and again convert initially you have converted using what rate tdsr now you are using the tdsr or further converting further converting using what exchange rate the exchange rate on the day you found fair value do you think those two exchange rate will be same or it will fluctuate it will fluctuate that means you will get some Forex gain or loss that gain or loss will be as for the respective accounting standard like in case of accounting standard gain in case of accounting standard 10 revaluation gain where did you transfer revaluation gain first time if you do revaluation and get revaluation gain where it will go revaluation Reserve if revaluation gain is going to revaluation Reserve means exchange gain also will go to revaluation Reser that's what we mean by gain or loss is as per respective this is not tested at an intermediate level we have questions on this in see a final level okay in fact I think I had told you explained this also but this is not that important for your inter exam as of now I don't have question I has not asked question so far but I have explained if it comes don't blame me okay but it is not there is what I want to tell you comfortable everybody yes Paka P Paka clear this is one aspect of the question there are only three concepts over here one is done majorly another one is there and one more is there relating to the branch that if you are done means this chintu is standed over more or less for us okay now let's go on to the next aspect now let's review this question this is one more type of question which is kind of popular in examination sir if I have purchased goods from my creditor the some previous example only previous question only I purchase the goods from my credit are at what value $115,000 okay will I make the payment immediately or usually it will be a credit purchase usually sales or purchase and all will be on a credit basis that means you tell me sir if I purchased the goods in dollar means I have to pay also in dollars sir will I purchase only like one one one time or I'll be purchasing a lot of times lot of times sir that means you tell me sir business means there is a big risk yes no now we are doing coaching now we are already taking one big risk what is that risk whether you mahanu will come to our classes first if you want to come to our classes means you should like our classes no big RIS correct so we are already taking one big business RIS now on top of that one more extra sh came what is that extra shy Forex loss Forex G correct now if I purchase the goods in dollar mean dollar value will keep changing if my wasu is good I may get Forex gain like last problem my wasu is bad and I may get loss also do you think as a business I would like to take that risk sir as a businessman we are comfortable taking the business risk correct are we comfortable do we want to take that Forex gain risk gain loss on all our on our head do we want that risk no hence to avoid this risk to mitigate this risk entities what they do is they get into something called as forward contract they get into something called as forward contract with a banker through this forward contract what will happen is now go to the previous example which day did we purchase the goods from which day did we purchase the goods from our creditor first January all right when we have to pay our credit R 7th July okay so if you count from here to here roughly it is 6 months roughly I don't want the exact date roughly 6 months what we will do in this case is we will approach the bank we will go to a banker rental I want to enter into a forward contract I I want to enter into forward contract you will tell the banker through forward contract what will happen is Bank bank will give you one rate bank will fix the rate banks will fix the rate bank will tell you okay no problem when you have to pay your creditor 7th July I'll tell that means I'll enter into forward contract for how many months 6 months and I will tell the banker I will purchase dollars from you I will purchase dollars from you which date 7th July give me rate give me rate Bank told no problem you can purchase the dollar from me at 80 rupees on 7th July you can purchase a dollar from me at what rate 80 that means now should I have to worry about fluctuation or I am bendas bendas because I know that exchange rate could be whatever it can become 80 it can become 90 or it can become 60 it doesn't matter I will purchase the dollar from the bank by paying how much Indian rupees 80 rupees this way now I have the risk or risk I have mitigated risk I have fixed or RIS risk I have covered such a contract only is what we call it as forward contract okay people yes people sir why will Bank do this sir Banks the business is this they'll be able to manage all this all right but as a businessman do you think I can control Forex fluctuations no bank has better capabilities hence they don't mind entering into this forward contract so why will Bank freeze the rate don't you think bank will suffer huge loss like look at this let us say on the date today when I made forward contract today when I made forward contract the rate is 75 the rate is 75 that means what sir to purchase one if I purchase the dollar from the market today if I purchase the dollar from the market market today to purchase $1 how much I have to give 75 is Bank giving me 75 rate or they putting me chuna they're putting me chuna how much are they charging me 80 rupees that means how much extra are they charging me for $1 they are charging me 5 rupees extra and I made the contract for $1 or $155,000 $155,000 that means 75,000 rupes for me is going for that bank commission for taking the risk bank is earning commission is it okay but I don't mind because I know that my loss Will will not exceed how much my loss will not exceed how much 75,000 because now I don't have to worry about Forex fluctuation at all I just have to pay this extra some commission to the banker I don't mind doing that the such a contract only is what we refer to as forward contract everybody clear good now the next type of question is they will give you forward contract data we need to find out how much is the loss due to this forward contract because will the banker enter into this contract at market price or they will charge they'll put extra loss for us because of forward contract we'll end up making some losses that's what we need to find out in the next problem can we dive into that particular question okay look at this question raav limited purchased a plant plant means a property plan and Equipment okay for how much value US dollar one lakh so we have purchased the pp but we have not purchased it in Indian rupees we have purchased it in dollar how much dollar $1 lakh when did we buy first February payable after 3 months stop I have purchased PP but on a cash basis or credit basis credit basis when will I settle the vendor after after 3 months sir how much I have to give my vendor can I give him Indian rupees or I have to give them dollars dollars how much dollars I need to give them $1 lakh dollar I have to give them one lakh dollar correct okay will the dollar of fluctuation exchange rate be same or it will fluctuate fluctuate that risk as a businessman would I want to take or I don't want to take how can I cover that by getting into a contract called forward contract for how many months will I enter into a forward contract you tell me 3 months why because I have to pay my vendor when after 3 months so that's what they said here company entered into a forward contract for 3 months at what rate 49.1 per dollar that means the dollar rate is what now is fixed it's fixed at what rate 49.1 so the forward rate is how much $1 is equal to 4915 the banker has is the rate for me $1 I can purchase by paying How much rupees 4915 rupees so far good but check on that date the exchange rate on 1 February on the day I entered into a forward contract to purchase $1 if I I can purchase $1 from the market at what rate on the same day the day I enter into a forward contract if I had purchased the dollar $1 I can purchase just by paying 48.94 so that means what is your spot rate this we call it a spot rate okay what is the spot rate $1 is equal to 48 8.85 sir in the market May I can purchase $1 by paying 48.8539483 p is a loss for $1 purchase correct through this forward contract have I made the contract for $1 or $1 lakh so that means what is the contract value contract value is $1 lakh that means what is the total loss due to forward contract multiplication of these two will be how much sir 30,000 that's what we have written here also done people so the loss due to forward contract is 30,000 where will this loss go to pel account but stop sir loss will go to pel correct only but this fored contract it is for immediate or it's for 3 months three months Sir you made the for contract on first February correct that means the forward contract term is what February March and then April but my books gets closed on which date March that means the entire forward contract loss of 30,000 can I account it in current year only no sir this loss is for how many months this 30,000 is a loss for 3 months this 30,000 is a loss for 3 months so in that 3 months one month is April April comes in the current year or next year next year sir next next year loss can I book it current year only no that means how much is the loss for the current year only February and March so 30,000 is a loss for 3 months how much for 2 months 20,000 20,000 is a loss that I will account it in the current year and 10,000 is a loss that I will account it in the next year that one you need to call they'll keep changing the data but concept is the same they'll change the name and they'll change the value and they'll ask you a question instead of 3 months they may make it five months they may make it seven months you know what to do for all that that's all it is this is another type of question that usually gets asked from this particular topic move on people on right also everybody there no issues yes awesome next one H what is the next W of f go back to the rule again reiterate the rule for me tell me the rule again initially all transaction whether it is monetary or non-monetary item will be converted using transaction date spot all settlement transactions are recorded using settlement date SP in between this transaction and settlement if you have any balance and balance you'll check whether it relates to monetary item or nonmonetary all monetary items should be reconverted again using closing rate and that Forex gain or loss will go to PN non-monetary item depends on valuation how it is valued whether it is valued at cost or any other basis if it is valued at cost any way of converted using TDS sir use the same further conversion not necessary if you're valuing by chance at fair value then use the exchange rate on the day you found out fair value and reconvert and you will get some gain or loss correct this is the rule okay now there was a small problem relating to this rule that happened in the market I think it happened in 2003 is somewhere in that range okay the culprit was Reliance what happened was monetary item should be shown in your balance sheet using what rate closing rate and Forex gain loss where it should go P what Reliance started doing is monetary item gain or loss they did not transfer to pnl they started booking in other Reserve why because that particular Year may there was a huge exchange loss there was a huge exchange fluctuation and because of that many companies who were doing some foreign currency transaction suffered a huge losses they were actually doing business- wise they were doing good but the company was suffering losses only due to finally pnl you showed a loss why because because of this exchange fluctuation hence what they started doing was they started they booked this exchange gain loss not in P they booked it in another Reserve because of this the standard sets had to intervene and they had to bring one Amendment or one extra provision in the standard that we call it as para 4646 a exemption par 4646 a exemption what here the this is an optional exemption okay if the company wants to take they can take it otherwise not required listen to this then we'll apply it in one problem okay what this particular provision says is if you have any long-term foreign currency loan if you have any long-term foreign currency loan you have taken a loan but you have not taken the loan in Indian rupees you have taken the loan in foreign currency okay so if you taken a loan means you'll use it for some purpose so check so first of all loan is what item if you take $1 million worth of loan how much you have to repay 1 million I'm talking about principal not interest yes if you take principal of $1 million on or loan you have to repay 1 million only that means loan value fluctuating or fixed that means loan is what item monetary item so monetary item should be restated on the balance sheet date using closing rate and gain loss should ideally go where P account here one exception was or one exemption was introduced what the standard set or as1 provision insertion effect is if you have any long-term foreign currency loan check for what purpose that loan is utilized that loan is to buy a depreciable asset or a any other purpose whether that loan is used to buy some depreciable asset depreciable asset means some Machinery land Building or etc etc then if that loan is used to buy depreciable asset means then the exchange gain or loss exchange gain or loss on this on this monetary item don't transfer it to pendl account instead of transferring it to pendl company has an option not compulsory company has an option to capitalize to capitalize meaning instead of transferring exchange loss to pendl account they can add it to the cost of the asset in case they get an exchange gain instead of transferring exchange gain to pendl they can reduce it from the cost of the asset mean basically that exchange gain or loss can be capitalized and Company total option if they want exchange gain loss they can transfer it to pnl or they can add it to the cost of the asset or they can capitalize this fine people if the loan is used for to buy depreciable asset then exchange gain or loss you'll capitalize should the loan used should be used by depreciable asset only or it can be used for other purpose also you can use it for other purpose also meaning I can take a long-term foreign currency loan and buy a land land is a depreciable asset or non- depreciable non depreciable so if you're are using the loan long-term loan for any other purpose for any other purpose then this exchange gain or loss whatever is there on the monetary item no you book it in one Reserve you book it in one Reserve called fcmd foreign currency monetary item translation difference instead of transferring it to PN you book in one Reserve called fcmd foreign currency monetary item translation difference so what will happen to this fcmd you your loan will have a duration let's say loan duration is 5 years loan duration is 5 Years From fcmd it will be transferred to pnl over a period of years this is one optional exception or exemption given to the company this is applicable for everything or only long-term foreign currency loan if you have long-term foreign currency loan then this par 46 46a exemption is applicable to the company that's that's all it is for all others other monetary item it is not applicable this par 4646 exemption is only applicable for your long-term foreign currency low everybody understood this application of this next question can we review or can you make me happy tell me the rule once again what did we just Lear just now learn this is relating to what longterm foreign currency loan loan is what item monetary it monetary item should ideally be restated on balance sheet date using closing dat and da gain loss should go to P that is a basic rule do you have any exceptions to this rule yes what is that exception if you have a loan check for what purpose the loan is utilized that loan can be utilized for to buy a depreciable asset or any other purpose if the loan is used for depreciable asset purpose means exchange gain or loss what you'll do transfer it to pnl no you have an option to capitalize instead of transferring it to pnl you can adjust it from the cost of the asset carrying amount of the asset if it is used for any other purpose means exchange gain or loss you book it in one Reserve called fcmd foreign currency monetary item translation difference and will it stay in this fcmi TD forever no from fcmi TD it will be transferred to P over loan C duration not five years loan C duration my example loan card duration was 5 years hence 5 years if loan card duration is 10 years means from fcmd you will transfer it to P over 10 years like that okay s next question is that application a limited purchased a fixed asset sir fixed asset is what item fixed asset is a monetary item or a non-monetary item non-monetary item costing rupees 3,000 lakhs not dollars rupees 3,000 lakhs when did you buy 1st January 20 X1 and the same was fully financed by a foreign currency loan to buy PP we need money no how did we arrange that money by taking a loan by taking a loan on the same day and this loan we took it in what dollars okay payable in three equal three annual equal installments so can you repay this loan in one shot or you have to repay in three installments principal and interest whatever it is you have to pay in three equal installments okay that's what they're trying to say exchange rate where $1 is equal to 40 and 42.5 on 1st January and on 31st December because when did you buy the asset 1st January to buy the asset we need money no how do we arrange the arrange the money by taking a loan so on which day essentially have you taken the loan first January so basically 1 January is your tdsr transaction date spot rate sir if your year begins if they don't mention anything no if they give you January and December then the company is following April to March while year or calendar year calendar year that means they have given the rate on 31st December means the 31st December rate only we call it as closing rate so basically they have given tdsr and closing rate comfortable all right the first installment was paid on 31st December you took the loan on 1st January know and this loan was repayable in one shot or three installments three installment first installment due date was what 31st de on 31st December you have to pay one installment I mean this only we call it as this only we call it as settlement all the settlement should be recorded using what rate settlement date SP but ironically here settlement date and closing rate are different or same same you're closing your books on 31st December and settlement is also happening on 31st December so both are both are in this problem same fine you are required to State how the transaction should be accounted and you know did they ask you journal entry no how I say will answer like this okay but this first time when you do it you'll not understand but so for first time always present in journal entry understanding wise once you get your understanding right then try to express it in the pointers format okay all right let's see how it works sir you purchased how much worth of pp 3,000 LHS this money came through loan which day did you take the loan you take the loan on 1st January on 1st January what was the dollar rate on 1st January $1 was equal to 40 rupees How much rupees worth of fixed assets do you did you buy this is dollars this is rupees How much rupees worth of fixed assets did you buy 3,000 lakhs that means how much loan have you borrowed in dollars $1 is equal to 40 rupees correct and you have purchased a fixed asset worth 3,000 lakh rupees that means how much is your dollar loan X is equal to what 3,000 into 1 divid 40 if you do how much is that 75 lakh all these are in lakhs yes $75 lakh doll is the value of the loan everybody understood yes that much loan we have borrowed in foreign currency yes so when you when you take a loan what is a journal entry when you take a loan what is a journal entry bank account debit to Loan account it's a foreign currency loan so you can write bank account debit to foreign currency loan how much loan have you borrowed 75 lak dollar okay on the day you borrowed what was the dollar rate 40 rupees so if you do 75 into 40 obviously it will come to how much 3,000 yes no so because initially all transaction should be recorded using transaction date spot rate 3,000 in fact we don't have to convert here they only had converted and given to us which we have taken manageable okay sir how much loan have you borrowed totally 75 lakh there's 75 lakh can you repay in one shot after 3 years or every year you need to pay every year you need to repay and how many installments may you need to repay this three installments that means first installment amount is how much $25 lakh you need to repay at the end of first year is my statement right okay so there is a settlement there's a settlement what is a journal entry for loan repaid for loan taken the journal entry is bank to loan means for loan repaid it will be Loan account debit to bank account yes sir Loan account debit to bank account so this is a settlement this is a settlement all settlement should be recorded using what rate settlement dat yes so how much loan you have to repay $25 lakh $25 lakh when are you settling end of the year correct so at the end of the year what was $1 value $1 okay if you have to repay means you have to purchase dollars correct no if you have to repay loan means if you have to repay in dollar means first you have to purchase dollar so $1 you will have to purchase what what rate by paying how much Gandhi note 42.5 how much dollars you need to repay $25 lakh that means how much money will be deducted from your bank account for $1 you need to pay 22 42.5 for $25 lakh how much value one z uh you just present it in lakhs only so 25 25 into 42.5 if you do you'll get 10 162.5 lakhs all the numbers we presented in LX year you can mention like that okay sir that means how much money will be deducted from my bank account 10 162.5 correct okay sir if you have repaid the loan means will the loan balance be same or loan balance will reduce sir initially I was showing my Lo at what value 3,000 lakhs there's in Indian rupees entire 3,000 will get reduced or only one installment sir 3,000 have to repay in three installments 3,000 a lak I have to repay in three installments that means each installment value in Indian Rupees is how much 3,000 divided by three is how much th000 that means Loan in my books will get reduced to the extent of th000 correct no once more or okay comfortable so foreign currency Loan account debit 1,000 I thought I thought I have to repay this loan by giving away How much rupees 1,000 lakh but eventually when I settled I had to give 10625 that means I paid less or I paid more I thought I will pay, lakhs in Indian rupees but eventually the payment was 10 62.5 that means how much Gandhi note I paid extra 62.5 I mean this is a foreign exchange difference there is a foreign exchange difference yes ideally this foreign exchange difference should go to PN but but but but this is a loan and this loan you're repaying immediately or over 3 years I mean this is a long-term loan for long-term loan do you have that par 4646 a exemption yes that's the reason I'm not written here anywhere pnl I've just WR foreign exchange difference how much 62.5 arrived as balancing figure okay people you can calculate or simply get it as balancing figure d d done yeah so many people joined just now so many late laes today come on time P okay yeah any doubt no so this is the entry okay that's it that's it or one more part one more part what is one more part sir loan is a loan is a loan is a monetary item loan is a monetary item on the balance sheet date if monetary item has any balance what does as1 say monetary item should be restated using closing rate sir initially I have converted using what rate tdsr can I use tdsr or I have to convert it I have to converted I have to convert using what rate closing rate yes people so on when is your books getting closed books are getting closed on 31st December on 31st December what was your exchange rate 42.5 42.5 how much loan is still pending tell me in we we have to convert now so tell me in dollars so totally dollar value of the loan was 75 lakh in 75 lakh how much dollar have already repaid 25 already repaid so pending is how much $50 lakh $50 lakh yes people okay this $50 lakh I have to convert using closing rate what is my closing rate 50 4 .5 so $1 the value is it is 42.5 rupees so $50 lakh how much2 212 okay 2125 multiple ways to calculate or maybe I'll present it in an easy way okay or just check this see if this makes sense to you how much loan is still pending $50 lakh I have converted this using initially using what rate TD tdsr which is how much 40 initially initially I thought I can purchase $1 by paying 40 rupees okay but on at the end of the year closing rate has become 42.5 now to purchase $1 I have to give up how much 42.5 to purchase $1 I have to give 42.5 that means to purchase $1 how much extra rupees I have to give 2.5 rupees I have to give extra that means 2.5 Rupees is a loss for $1 2.5 Rupees is a loss for $1 do we have only $1 pending or we have $50 lakh pending so 50 lakh into multiply you how much you're going to get 120 125 yes so this is a this is the gain or loss loss loss means what will be the entry foreign exchange loss loss Will you credit or debit debit that loss only we call it as foreign exchange difference there a laan du to monitary item so we write foreign exchange difference account debit to foreign currency look any problem yes people yes people PKA people or if you want you can reconfirm also check the loan balance where in all you have credited loan check here your credited loan by how much 3,000 here your debited loan by how much 1,000 add where and all you have credited add where and all you have debited minus you do so 3,000 minus 1,000 is how much 2,000 again here here you credited by how much 125 add how much are you getting if you add the Box item and all how much are you getting 2 one 2 one 25 right loan is a monetary item loan is a monetary item what does as1 say monetary item should be shown in your balance sheet using closing rate how much loan is still pending $50 lakh what is a closing rate 42.5 multiply this what are you getting 2125 is the value not matching it came not you can calculate all this through multiple ways whichever way you are comfortable you can do it yes people now that is not the drama the drama here is you have two foreign exchange differences one due to settlement and one due to conversion you have got totally how much loss here on settlement it was 62.5 loss due to reconversion using closing rate you got have suffered another loss of 125 how much is the total loss 187.5 what to do do for this foreign exchange difference totally I've got a foreign exchange difference of 187.5 how 187.5 62.5 and 125 okay for this company has one option or two options company has one or two two what are those two options using normal Provisions they can transfer this foreign exchange difference relating to monetary item to PN using normal provision they can transfer this to P if they transfer to pendl the journal entry will be foreign exchange difference account has debit balance how do you transfer pnl account debit to Foreign Exchange def like that that is one option available with the company or or or they can use par 46 46a exemption using that par 46 46a exemption you can transfer this exchange difference to PN instead of transferring it to pendl you can adjust it with PP so the entry will be what instead of writing pendl account debit to Foreign Exchange difference you'll write PP account debit to Foreign Exchange difference okay sir that is what I said if there is exchange loss means you will add it to the cost of pp because when there is exchange loss PP you will PP will debit so due to exchange loss PP balance will increase that's what I've written here here able you able to see this if there is exchange loss means you'll add it to the cost of pp because you'll have to debit in entry if there is exchange gain means you may have to reduce it because the entry will be ult and this is compulsory or optional totally company Choice hence we have given both the treatment whatever company wants to do they can do if if they don't tell what as a company has chosen you give both the option and tell company can choose one of the above options like that if company says if the question says company has gone for par 46 option that means will you mention this or not required then in that case may you mention only this particular answer like that take a call based on how the question is framed that's it this is another type of topic which is usually comes from this particular topic yeah more or less the standard is over one last chintu pinu is there we will review that what is that is Sir till now we saw foreign currency transactions foreign currency transactions you can also have a foreign Branch you can also have a foreign Branch foreign subsidiary foreign associate foreign joint venture in that case may what to do okay that only we call it as first of all all that only we refer to as foreign operations foreign operations means if you have a branch subsidiary a joint venture or associate company outside India if you have any entity outside India that only we refer it to as foreign operation as far as as1 is concerned as1 is concerned foreign operations are of two types foreign operations are broadly categorized into integral foreign operation ifo or nonintegral foreign operation Neo it'll be either ifo or Neo integral or non- integral so how to find out whether it is integral or non- integral sir if it is integral foreign operation means though your branch is there outside India it is just like your extension of head office the branch may be there outside India suppose head office there there in bangaluru branch is there in us if it is an integral foreign operation means the only thing differentiating these two entities is location otherwise Bangalore entity and US branch is doing the same activity so branch is just an ex extension of head office just to give you an example check this so I think same example I'd given in my regular class also suppose in forces is there they have a head office in Bengaluru and they have a branch in US enforces is a software company in foris company is developing a new software they are working on a new software first 60% of software development will be done by the Bengaluru head office first 60% not full software first 60% of that software is will be developed by the Bengaluru head office balance 40% of software development will be done by us Branch now you tell me head office and Branch are they functioning what independently or it is just an extension it is just an extension this W scenario that means this Branch only then we refer it to as what sir integral foreign operation because branch is just an extension of our head office like that such scenario only we call it as integral foreign operation non-integral foreign operation means non-integral foreign operation means branch is doing one thing head office is doing something else are they working together or are they working independently independently like example let's modify let's say infosis head office is working on one software software number one they are developing 100% full software number one is developed by which entity which one head office another software called software 2 is developed by us Branch now tell me these two entities have to coordinate or they can function independently they can function independently if this is the case means then it becomes Neo Neo has in non integral foreign operations that's all yes people H this and all you not write in exams no when they ask you integral on integral you can't write this par and all I mean there must be some condition so they have given some condition if you want to call something as a non- integral foreign operation they've given you some not condition they've given you some indicators these are some parameters using this you'll find out whether it is an integral foreign operation or non-integral foreign operation in fact in uh this indicators are specifically given for non-integral okay what does that common sense now you tell me in this particular example May these two entities should be dependent on each other or they'll function independently that is a first condition if foreign operation is run autonomously autonomously means inde independently if foreign operation is running independently means then that is an indicator that this foreign operation is an integral one or a non-integral non-integral that's what is first one okay so in case if it's a non-integral foreign operation head office and Branch foreign Branch will they transact a lot with each other or very less transaction very less transaction that is the second one if you want to call an operation as a non-integral operation means the reporting entity that is a head office in India and this foreign operation will have very less transaction they'll not have too many transaction with each other okay third one in this particular example May will the US Branch depend on the head office for funding requirement or they'll arrange on their own if the foreign branch is arranging their own funds if they're arranging their own funds if they have enough money to fund their own operation or if they have shortage means they will borrow in local currency that is an IND indicator that it's a non-integral foreign operation meaning let's say us Branch needs $1 million $1 million amount they need a $1 million right now there are two options there are two options one US Branch can ask head office and say give me $1 million loan give me $1 million loan or us Branch can go to their US bank and take this loan themselves two options either they can ask the head office or they can take the loan from their Bank local bank if this Branch approaches their local bank and takes the money means then it is an indicator that are they dependent on head office or not dependent not dependent that means there is an indicator that there is a non- integral foreign operation if it's a non-integral foreign operation means that foreign operation first of all will have enough money to fund their operation or in case they have shortage means they will borrow in their own currency they will not ask head office they not dependent on head office for the funding requirement that is what the third indicator is trying to say yes people all right another indicator of foreign operation for non-integral foreign operation is if the sales are denoted in foreign currency only this us branch makes all their sales in dollars if us branch makes all their sales sales in dollars if they incurs all their cost in dollars then that is an indicator that it is a non- integral foreign operation if the majority of their sales are mainly in foreign currency if majority of their costs are in foreign currency means then that is an indicator that this is a NE straightforward question may not come if it comes you may have to replicate this not condition these are indicators you'll check and accordingly decode what it is whether if whether it is ifo or Neo yes people all right so why is this important why is this important is very simple sir if you have a branch in USA taking this example taking this particular example sir infosis head office which is there where in Bengaluru they are preparing their financial statements in what Indian rupees but this us branch is preparing their financial statements in dollars so when infosis prepares their financial statement can they ignore us Branch C data or they have to add it added but their head office data is in Indian rupees but Branch car data is in dollars straight away can we add unfortunately $1 has not become one rupees though one day we would like to see that happen but currently it is not so yes no I mean straight away can we add this or you have to convert this dollar US Branch dollar financial statement you have to convert it into INR if you have to convert means you need to know the rate that rate is dependent on whether you are an ifo or a that is the reason we need to know whether it is an integral foreign operation or non- integral foreign operation what is this sir or what is the exchange rate sir I have summarized here in foreign Branch also we have covered this we have used it there in fact if it is integral foreign operation if it is integral stop there only if it is integral foreign operation means only for the name sake only for the name sake that branch is there in us but it is as good as my own entity only correct or no that means you will treat this as a foreign currency transaction you'll treat it like for you'll treat it as fct fct means foreign currency transaction tell me foreign currency transaction means what you'll do all monetary items should be restated in the balance sheet dat using what what rate closing rate all monetary item will be restated using closing rate okay all non-monetary item depends depends on what how is the valuation done whether are they valued at cost or any other value if they valued at cost means you can use tdsr okay otherwise you will use if you Valu at fair value means use the exchange rate on the day you you found out fair value like that comfortable for all income and expenses because in the in in these sort of problems they will give you foreign Branch trial balance they'll give you trial balance in trial balance you have assets also liability also income also expense assets liability conversion we got it here asset and liability will either be a monetary item or a non-monetary item if you have income and expenses all income and expenses should be converted using closing rate income and expenses should be converted using closing or sorry my bad average date income and expenses using average date okay Z Now one second stop for monetary item you are using closing rate for income and expenses you are using average rate for non-monetary item maybe you'll use fair value rate or maybe you're using tdsr that means are you converting the trial balance using one exchange rate or different different different different will trial balance match sir all the components if you convert using one rate then trial balance perfectly will match for some components you using closing rate for some you are using tdsr for some you are using average rate that means the trial balance will not match there will be a difference this a difference only we refer it to as conversion of trial conversion of foreign operations exchange gain or loss that exchange gain or loss you'll transfer it to P account if it is a integral foreign operation that exchange gain loss will go off to p and so far okay any uh yes this is with respect to integral foreign operations suppose it is a non-integral foreign operation means if it's non-integral foreign operation means are we really interested in that foreign Branch or are they functioning independently if it is functioning independently they have said for all monetary and non-monetary item both you but using closing rate for income and expenses ideally we need we need transaction date rate but income and expenses there will be one transaction so many many transactions so practically this will not be applicable so for all our examination income and expenses we will use average rate only for monetary and non-monetary item both we will use closing rate for income and expenses we will use average rate are we using one rate or different different rate different different will trial balance match or there will be a difference difference that difference here we will park it in one Reserve that difference we will park it in one Reserve called fct fctr means foreign currency translation Reserve fctr we've done all this in foreign Branch if you remember so you'll exchange gain or loss you'll park it in one Reserve called fct Sir will this stay in fct forever no at some point of time you may sell your foreign subsidiary or foreign Branch the day you sell your foreign operation that day from fct it will be transferred off to P account till then it will stay in fct one Reserve that's why name of that Reserve is foreign currency translation Reserve that's it this is the rule this is applied in foreign Branch calculations okay you need to remember this foreign branch is also one of the popular questions in fact if it comes you should have a big smile because all you'll have to do is use this exchange rate and convert and transfer the balance either to pel account or to fctr in examination usually neoca trial balance conversion is popular not I'm not saying they can't ask this this is more popular that's what I'm trying to say we have done you can refer Branch car I think we have done two foreign Branch question you can refer that for more clarity on this yes people that's it with respect to accounting standard 11 then thank you hello people continuing our discussion on the marathon series now we'll be taking up accounting Standard 12 that talks about accounting for government grants so standard scope is very simple if you have received some incentive or some subsidies from the government how we should account them okay normally we pay tax to the government but but this time government is so nice to you they are giving you something okay so if you receive any amount from the government or any asset from the government how it should be accounted Co was a perfect example during covid almost every Central and every state government and central government gave some incentives to the farmers or to the general public to msmes etc etc so all such incentive if you receive from the government how to do the accounting okay that is one all right so the broad approaches as12 says that the grants can either be accounted under Capital approach or under income approach there are two broad approaches for accounting for government grant either a capital approach or income approach when will you use Capital approach standard says if the grants received are in the nature of promoter's contribution if the grants received are in the nature of promoter's contribution then you'll use Capital approach okay so what does this mean sir when you start a company who provides the funds to the companies when a company is just started who promotes the company promoter correct promoter so if the grant that you have received from the government if it is like promoters contribution if it is like promoter's contribution like government told you set up a factory in one remote area in one remote Village you open your factory I will give you 10 CR government is telling you open a factory in one remote Village I will give you 10 CR so normally who offers the funds for starting Factory promoters so here government is acting like your promoters so hence grants received from the government is in the nature of what promoter's contribution if the grants that you receive from the government if it is like promoter's contribution means then this grant no you have to show it in capital reserve this grant you have to show it as capital reserve suppose you received a grant of 10 CR rupees you received a grant of 10 CR simply you will pass the journal entry bank account debit 10 CR to capital reserve 10 CR rupees and where will capital reserve come in balance sheet under shareholders funds under shareholders funds specifically under reserves and service that's all you'll have to do under Capital approach okay people so entry is simply bank account debit to capital reserve can I move forward yes sir all right next is Sir if it is not a capital approach if it is not a capital approach then it automatically becomes income approach so they have defined this okay if it is not a capital Grant automatically it'll be accounted under income approach under income approach the grant will be transferred to pendl account because all incomes and all where will you transfer P so if you're are accounting under income approach means the grant received you will account it in P so where you will show under pendl in pendl there are two categories for incomes tell me what are those revenue from operations and other income this grant you can show it under other income this grant you can show it in your other income or you can reduce it from the related expense two ways of presentation is permissible in PN you will show all income related Grant you will show in pnl in pnl you'll show it separately as an other income or you'll reduce it from the related expense what is this related expense I'll take you through one question for now it can be on hold yes people these are the broad-based approaches for accounting for government grant can I move on to the next step okay again a small standard hardly four or five Concepts and we done oh okay we we got the link by 850 now okay I'll I'll remind the students only one topic I've covered accounting standard 11 is what I've covered that's don't worry that that video also will be available on YouTube okay and youth are experts in as1 in fact you can teach me yeah why do you want yes no okay coming back to the next thing sir sir when should we account government grant when should we account government gr because government will tell I'll give you grant they will give it immediately no they will KY like that I tell you yes no they will tell today I will give you but they may actually give it after 6 Months 8 months 9 months one year old yes so should we account to this government grant after we have actually received or when what that was a confusion so for that as2 I said I'll give you two recognition criterias okay if whichever day those two recognition criteria is satisfied go ahead and recognize so it is not based on a receip basis the accounting of government grant is based on recognition criteria what are the two recognition criteria and Common Sense approach so usually when governments give you give the company something will they give it at free of cost or they'll put some conditions they'll put some condition yes or no like if the government is giving you grant to open a factory means they may put a condition saying you should run this Factory for 10 years you should hire thousand employees every year for 5 years that managing director should not quit for 3 years like this they may put a lot of conditions yes or no so first recognition criteria is the company should have a reasonable assurance that they will fulfill the conditions the company should have a reasonable assurance that they will fulfill you don't have to suppose government told I will give you 10 lakh Rupees I will give you 10 lakh Rupees to train the employees to train employees for two years for two years government gave the grant of 10 lakh Rupees today only but is there any conditions attached here yes what is that condition we have to give training to the employees for two years two years I mean should we have to wait two years to do the accounting no if today only company is reasonably confident that they will give the training to employees over the period of 2 years company feels company is confident that they will train the employees you can pass the journal entry only so it's there should be a reasonable assurance that we will fulfill the conditions you don't have to wait till the time conditions are fulfilled the day you get reasonable assurance that reasonable confidence that we will fulfill the condition that is your first recognition criteria okay second one is it should not be a falto promise you know during elections all this will happen government will tell I will give you Indra Chandra everything they will tell and later on they will say m not only correct no that should not be the case you should have a reasonable assurance that you will receive the Grant from the government so you don't have to wait till the time you will you you receive the Grant on the day you get reasonable assurance that you will receive the grant so how can you prove that we have reasonable Assurance government sent you a mail an email you received from pmo Office congratulations you have been awarded a grant of 100 CR Rupees is that uh hope that message we get yes no ah yes sir C GA and all I will leave only sir I will directly go out out of the country I'll keep roaming sir yes sir Paka sir yeah what why why depended on someone else sir let's have the confidence that 100 CR we will make from our efforts because they say something that you get at free of cost there is no value to that okay that is true actually people right because see now I know I mean I'll tell you my okay if otherwise it'll go some since I've started maybe I'll just tell you quickly two minutes man initially people my life has gone in full circles usually and I don't use social media I like to don't share some things because I've done few crazy things this you know Karma what goes around comes around so I've done some crazy crazy things which I'm not particularly proud of so I don't want some undue influence to put on you that's the reason personally I don't share anything of my personal life I come I teach and I go I'm not on social media also you not getting information there also okay that is also there there but why am I putting this point was there was a point in time where I used to make a lot of easy money because in corporate where I did know the work was pretty chill used to go punch punch out used to enjoy that money also so that means there was not much care for that money I made it was good money only but it was just like okay it's coming I'm spending okay but now when I came to this teaching field right I had to start literally from zero Z huh because literally I in fact I've shared this also when I started my final coaching it was just one student with one I mean now there are probably more than thousand that's okay different issue okay but anyways that 1 to th000 now when I get that money right whenever we get a lot of money yeah now people will say oh so much money but now immediately when I get that money know my thought will process will go back to that day I went I started with one student that means I literally had absolutely in fact I started teaching because I didn't have money I became a teacher by fluke initially I started practice but look at that that's what they say everything happens for good my practice didn't click I have attended so many meetings I tell you and I'm good at communication I I thought in fact my partner and all thought okay this guy will make coros so forget car I was not even making like literally like I I sometimes I used to think should I take my bike forget car I was thinking should I take my bike or should I go in bus because I was thinking if I go in bikee maybe petrol 100 to 200 rupees oh G if I go in bus means 10 Rupees think will go in bus better because that was a problem okay that stage now when we get money now that particular memory will come back so this particular amount has a own charm it feels nice to spend it huh good my money right so that's the reason when you earn doesn't matter whether you earn one lakh rupees or one CR rupees when you put efforts and earn that it hits you on a different level only you you feel nice in spending you feel nice in overall earning you always feel that happy doesn't matter so that that that charm is something else only so that's what I would also suggest don't depend on someone else you put in your efforts money will come that's all I would suggest every profession has money don't worry some many students will say should I go into audit or should I go into taxation or direct tax or what should I choose and all choose whatever you want whatever you like whatever you have chosen give your 100% don't be like what I'll get and all sometimes know people the success will get delayed as I keep saying success can be delayed but if you are persistent it cannot be denied it'll come to you all right if since because I was persistent for some time I've seen some success I'm not saying I'm great I'm Bros I'm best and all but compared to where I was 3 or four years back and where I am complete U-turn be it financially be it uh emotionally be psychologically whatever grounds on every ground there is an improvement in me right so you will definitely see that but you should have that willingness to stick around during the bad times one or two attempts if you don't clear the examination many of them will be like should I write that giving up attitude no it's very easy to develop but sticking around attitude is a tough one and that helps you in the long run okay because this is not I know that in your especially in our profession field it's very easy to say sir it's not working out sir from CI I'll shift off to some foreign course maybe I'll clear better Easy attitude correct but after clearing what you'll do the same attitude will carry with your life also so in life may when you get immediately some problems then you'll immediately say it's not working out I'll shift so you'll have to keep hopping but at the end of the day when fin on the when you have to close your eyes no you know what I mean right that day there will be a lot of regrets I should have taken a little more risk I should have lived my life a little better it is okay after all one life what would have happened a big deal I would have earned a little more money or I would I would have earned little less but still I would have had more fulfilling life and that matters a lot so it is okay take some risk attempts does not matter as long as you have confidence in you you feel if you can make it means you'll make it maybe it'll take one or two years it's okay let your friend go go ahead no there is fun in catching up later on you know we always like from becoming Zero to Hero only there is fun right that's that's the movies we enjoy no all thousand CR movies are that only you are nothing suddenly you became this much that's rag to Rich a story only is what influences us so when you can get influenced by rack to Rich a story why can't you be that story yourself can try not in at least some every aspect means one aspect let's try Okay in education we'll try to grow from from rack to riches from zero we try to become a hero let's try to keep it one area not everything everything will become daunting right you can't take up too much emotionally it will become too much one area of your life you choose and take risks in that see what happens I'm pretty sure something good will come out okay that personally I can Advocate don't ask me how and all I not take to share further but anyways you that's extra topic should never go for it great great okay uh yes so uh coming back to the topic accounting Standard 12 so as12 when should you recognize government grant you should do the recognition of government grant based on the recognition criteria what are the two recognition criteria one The Entity should have a reasonable assurance that we will fulfill the condition and we should have a reasonable assurance that the grant you will receive the day both this recognition criteria satisfied that day you can go ahead and recognize the government grant in your books okay moving along next sometimes what the government will do is the they will not give you monetary grants they will give you non-monetary grant suppose government gave you cash or they put money into your bank account 10 lakh Rupees government give you 10 lakh Rupees cash or they put you put the money into bank account what sort of a grant is this monetary or a non-monetary sir if you receive money in your money through cash or Bank cash in hand cash at bank and all is what item monetary so that means this is mg this is a monetary Grant but suppose government told take land take land not cash they gave you directly land land is an example of monetary item or a non-monetary in this case may it becomes non-monetary Grant so if you receive non-monetary Grant directly what to do yes we have already covered this in ag 26 anybody remembers intangible asset received as government grant I told we had two options what are those to days back only at least okay regular cost I can understand five six months back understandable m only two days back no as 26 we studied correct sir we have two options either both the asset and the grant you can recorded first check in fact when you received a non-monetary grant first check have you received it at free of cost if you have received it at free of cost if you have received the grant at free of cost means you record the asset at nominal whatever Grant if you have received land at free of cost means you show land in your books at nominal value like 1 rupee 100 rupes th000 rupes Etc this is just for the sake of disclosure okay suppose you received not at free of cost but at concessional Value at a discounted price let's say land we received let's say plant and missionary from the government we did not receive cash we directly received plant and missionary plant and missionary is a monetary item or a non-monetary item I mean this becomes what non-monetary Grant the market value of this missionary is 10 CR but government told give me Just 2 CR enough give me only two right so that means here we have received it at free of cost or concessional value concessional value if you have received any non-monetary Grant at concessional value means record this at concessional Value itself recorded at concessional Value how much did you pay two what's the journal entry for planted missionary purchased at 2 CR plant and missionary account debit to bank account 22 rupes that's what you do so if you received it at nominal value means record if you received it at free of cost means recorded at nominal value if you have received it at discounted price means or concessional value means recorded at concessional value this is for this is for what monetary Grant or a non-monetary non-monetary grant directly received okay sir all right next one is sometimes what will happen a monetary Grant will be related to a specific asset a monetary Grant will be related to a specific asset like let's say government told if you buy missionary worth 10 CR now I want to export I want to export for me to export I need to buy a missionary a top class missionary I need to purchase the missionary a value is 10 government told if you export a quality product a topnotch product if you export if you buy this missionary if you buy this missionary I will give you a grant of one CR I will give you a grant of one CR said here is the government giving you missionary or is the government giving you monetary Grant here government is saying I will put one CR rupes into your bank account provided you buy a missionary worth 10 if you buy this missionary then only I will give you a grant so this this is this is a non-monetary grant or a monetary Grant only monetary Grant because did you receive missionary from the government or cash only you receive cash or bank money in your bank account so this is a monetary Grant but this monetary Grant is related to a specific asset if this is the case means standard gives you two options standard gives you two options one this grant whatever you have received no you can reduce it from the cost of the asset this we call it as asset cost reduction method or this grant you can account it under deferred income method two options are app well let's do a thing I've written the pointers let's apply it in one question and then maybe we'll have a better Clarity over it look at this particular question uh this one ah a limited purchase question number I think uh which one is this ah question number eight in our class notes same is there in your study material also IC study material as well uh actually IC study material question is very simple but we had taken the same question and solved from end to end so same thing we're going to do it here also check a limited purchase the machiner for 40 lakhs useful life 4 years residual value 8 lakhs government grant received is 16h Sir did they say we received missinary Worth 16 lakh or government grant received 16 lakh government grant received 16 lakh means this is a non-monetary grant or a monetary Grant it's a monetary Grant why did you receive this government grant because you purchased a mission I mean this grant is specifically related to a specific asset called machion this grant is related to a specific asset called missionary in this particular case so when Grant when a monetary Grant is related to a specific asset as12 gives the companies two options what are those two options one either you can follow asset cost reduction method or you can follow under deferred income method how both the accounting Works let's see show the journal entry to be passed at the time of refund of Grant in the third year and the value of fixed ass sir government when they give the grant means they'll put some conditions if you violate those condition means what will the government government they will ask the entities to refund the grant that is what has happened here so both we will solve in this particular case when a grant is received what treatment to be done and the V when if you violate any condition and if the grant gets refunded later on what to do here the refund has happened in which year in the third year that means for first two years any drama or no drama no drama all this emotional drama came only in the third year so let's do the accounting we'll follow both okay in fact they have asked in fact the requirement of this question is only at the time of refund what journal entry you will pass but we will ignore the requirements we will do full end to it just for our explanation or knowing sake so one one minute go back again tell me what is this grant again this is a monetary Grant related to a specific asset what are the two options available one is asset cost reduction method another one is deferred Grant method or deferred income method also you can call it okay so let's if you follow asset cost reduction method or you can simply call it as ACR also for our reference AC means asset cost reduction meth name itself is saying asset cost reduction okay all right one by one we will go sir what is the how much did you purchase the machinery for 40 lakh what's the journal entry for Machinery purchased planted Machinery to bank account 40 lakh 40 laks okay sir after you purchase the asset immediately how much Grant you got after you purchase the Machinery you got a grant of 16 go back to the method name what is the method name asset cost reduction that means when you receive the Grant the grant will be reduced from the cost of the asset that's hence the method name asset cost reduction the moment you receive the grant you'll reduce the Grant from the cost of the asset so asset has what balance debit balance how do you reduce it credit when you receive the grant money will go out or money will come in come in what is the journal entry then bank account debit how much 16 what will you credit PP account here PP is what missionary so when you receive the grant here you'll pass the journal entry bank account debit to missionary account how much 16 lakh 16 lakh this is a journal entry you will pass in the first year okay saru all this drama if they don't give the dates we can assume that all this is happening at year one beginning both both this transaction happened at year one beginning now your normal scenario so they have asked the journal entry at the time of refund refund happened in year one or year three year three we'll do the journal entry from year 1 till year three now first here any other drama nothing else you have used the asset if you have used the asset means will depreciation come what is the entry for depreciation depreciation account deit to missionary account okay calculate the depreciation so if they don't give you rate and all and if they give you useful life you will follow for depreciation which method straight line method under straight line method how do you calculate depreciation Perfect Don't Say original cost say carrying amount minus residual value divided by remaining life okay take a calculator sir you bought the asset for how much value 40 immediately after you got the uh after you purchase the asset you received Grant when you received the grant which what did you credit machiner because the method name is asset cost reduction so when you receive the grant cost of the asset will reduce so is the cost of the asset now 40 lakh or it will reduce by 16 lakh that means the cost or carrying amount of the asset is how much from 40 minus 16 if you do you'll get 24 lakh so the carrying amount of the asset is 24 lakh have they given residual value of this asset yes 8 lakh have they given useful life of the asset yes four years so resid value is 8 lakh divided by useful life four years so calculate how much is it 4 4 lakh for first year and second year depreciation is four lakh because drama happened only in the third year so for first two years the depreciation is 4 four lakh rupes comfortable people and this depreciation will be transferred where P so entry is p to depreciation P to depreciation for the four first two years that's all this is clear about okay sir now that's it or third year may some extra fitting what extra fitting in the third year the grant got refunded did they say Grant got refunded only to 5 lakh extent 7 lakh extent no they said Grant got refunded that means what refunded is full refund how much Grant did you receive initially 16 lakh entire 16 lakh you have to refund now so when you received the grant refund means whatever you have done before you need to undo when you received the grant what entry you passed in this particular method when you receive the grant the journal entry you passed is bank to Mission Bank to machinary now the re you're refunding when you're refunding means what will be the entry Ulta entry which will be what machinary account debit to bank account which year this entry will come the third year okay so Grant is getting refunded to the extend of 16 so hence missionary account will increase by 16 lakh okay people all right take your calculator everybody sir if you're debiting missionary means if you're debiting missionary means carrying amount will be same or carrying amount will change change how it will change by reduction or by increase carrying amount will rather increase and we know this the moment carrying amount or useful life or residual value if it changes will depreciation be same or depreciation also will change depreciation also will change okay all this drama happened in third year so let's first find out the carrying amount okay for initially when you take your calculator initially when you bought the asset how much was the value 40 LH when you received the grant you credited missionary by how much 16 so cost of the asset became 24 lakh oh yes then first here you depreciated the asset by 4 lakh so- 24 youus 4 you do 40 lakh minus 16 lakh if you do you'll get 24 lakh correct 24 lakh first year depreciation you reduce 4 lakh second year depreciation again you reduce 4 lakh so what is the carrying amount of the asset at the beginning of third year the carrying amount of the asset is 16 lakh okay s that's the carrying amount we have now we refunded the grant we refunded when you refunded the grant what entry you passed when you refunded the grant the entry will passes if you're confused means at least figure out one part when you refund the grand means money will come in or money will go out money will go out money will go out means you will credit bank and debit will be given to since it's asset cost reduction Method All The Adjustment will be done through PP so hence the entry will be missionary to bank right so when you refunded the grant the entry is missionary to bank since you debited missionary account missionary balance will be 16 lakh or it'll again increase by 16 it'll increase by 60 that means the Revis carrying amount will become how much 32 lakhs at the third year getting the Revis carrying amount after the grant has got refunded has become 32 lakhs so from 16 the carrying amount has become 32 so carrying amount has got revised so depri also will get revised so let's calculate how do you calculate depreciation carrying amount which is a revise carrying amount 32 minus resid value residual value any change or no change 8 lakh only divided by life or remaining life so when you bought the asset total life was four years now refund is and all is happening in third year beginning I mean 2 years is already over so in four years m 2 years is already over means remaining life is 2 years so calculate you'll get the revised depreciation how much 12 LH so third year entry for depreciation is same but the amount will be from 4 lakh it will become 12 lakh rupees that's amount okay people IA material don't pass the journal entry in this column or format they pass for each year journal entries one by one okay in case you have shortage of time you can go for this method this method will save you some time because you don't have to pass the same entry twice see here depreciation is coming twice by passing one entry you can update them that will save you some time but I say modules don't follow this your choice for what you want to do that but but but but do not forget the narration a journal entry should always be backed by a narration this is one this is the first method now you got to know okay now I'll go back to the Chart tell me in pointers what you learned or maybe review this in the interest of time so first of all what is at least the scenario it's a monetary Grant related to a specific fixed asset right right so in this case first option we saw what is that first option asset cost reduction method so if you follow asset cost reduction method visualize what happened when you receive the grant carrying amount will be same or it will reduce when you receive the grant the cost of the carrying amount of the asset will reduce because cost or carrying amount reduce depreciation also will reduce when you receive the grant these two will happen correct now if the grant gets refunded later when the grant gets refunded what will happen to your carrying amount from 16 lakh it became 32 lakh that means carrying amount increase so if the carrying amount increases means will depreciation be same now after the grand gets refunded depreciation also will increase that's what I've written as pointer okay make sense now can we review the other method the second method the company has a choice either they can go for this or they can also follow deferred government grant method or also known as deferred income method how this method Works same scenario we'll take the journal entry okay one by one how much did you purchase the asset for you purchase the asset for 40 lakh so now we following deferred government grant method or deferred income method what is the journal entry for missionary purchased machinary to bank 40 lakh 40 LH after buying the machinary you got Grant how much Grant did you get 16 lakh what is the method name deferred Grant method so when you receive the grant you'll pass the journal entry bank account debit will you credit missionary account no you will open One account called deferred Grant account you can also call it as deferred income also that is also fine so the entry will be bank account debit to deferred Grant account 6 L 16 lakh instead of reducing the Grant from the cost of the asset you park this grant in a specific account called deferred Grant account or deferred income account in this particular case yes people okay Zar yes sir all right now sir will this grant deferred Grant account be there in this account forever said no from deferred Grant it will be transferred to P from deferred Grant it will be transferred to pnl account over what stop this grant is related to asset this grant is related to an asset which is missionary machinary will stay in your organization for how many years four years that means deferred Grant also will be transferred from deferred Grant account to pel account over a period of 4 which is useful life or the useful life of the asset from deferred Grant you'll transfer it to P account what is the entry for that you have right now park the account in deferred Grant account you have to transfer from deferred Grant to PN so the entry will be what deferred Grant account debit to P the 16 lakh will be transferred to pel over four years why four years because useful of the planted missionary is 4 years so first year how much will you transfer 4 lakh second year how much 4 LH third year don't transfer because there a grant there or Grant got refunded refunded so drama is there hence we are passing the journal entry only for initially for two years yes people this is one sir if an asset is there means will the asset get depreciated yes what is the entry for asset depreciation depreciation account debit cannot calculation entry is depri to missionary account now calculate the depreciation originally you bought the asset for how much 40 lakh you received the grant but Grant did you adjust it from the cost of the asset or you put it in deferred Grant means the carrying amount of the asset is still how much 40 lakh minus residual value how much 8 lakh life how much 4 years that means the depri will be how much 8 lakh 8 lakh for 2 years okay so far good yes sir okay now third year may the grant got refunded when the grant gets refunded whatever you have done before you need to do Ulta reverse when you receive the grant what entry you passed bank account debit to deferred Grant account or deferred income account when the grant this grant when it gets refunded in third year entry will be Ulta what will be entry deferred Grant account debit to bank you'll credit bank by how much 16h that there is no problem you'll credit deferred Bank by 16 lakh but can you def can you debit deferred Grant by 16 lakh do we have 16 lakh balance in deferred Grant no check sir initially deferred Grant account had a credit balance of how much 16 then when you pass this entry here you debited deferred Grant and transfer to pnl how much in the first year 4 lakh that means from 16 lakh its balance will reduce by 4 lakh how much it is at the end of first year deferred government grant balance is only 12 second year again you transferred from deferred Grant to P how much 4 that means check where and all you have credited you add where and all you have debited you minus that means what is a balance in deferred Grant from 16 lakh - 4 lakh minus 4 lakh if you do balance in deferred Grant is only 8 L that means you can cancel deferred Grant only by debiting to the extent of 8 you have to refund refund how much 16 LH but balance available in deferred Grant is only correct that means the journal entry matching or balancing figure what is a balancing Figure 8 L the other balancing figure no you you'll transfer it to P account why because this deferred government grant went to which account P you know hence we use pnl as a balancing Figure 8 lakh in this case that's the entry for refund yes people now this we have to express in words or one minute or maybe one more we can finalize sir you tell me when you received the grant did you touch missionary account when you received the grant here did you touch missionary account no when you refunded the grant did you did you touch missionary account no that means will missionary carrying amount here get revised or no impact no that means depreciation for third year will change or same same so under defer income method depreciation will change due to refund or no impact carrying amount no impact so depreciation also no impact that's okay now third year also we can finish so this depreciation also is an expense it will be transferred off to pnl that's your ENT yes people okay that is what I tried to express in words here see if this makes sense if you follow deferred income method then the cost and depreciation is affected or not affected not affected because whenever when you receive the grant you'll park it in deferred Grant account right hence the cost of the asset or the carrying amount of the asset and depreciation when you receive the grant is not affected right whatever whatever Grant you have received you will park it in deferred Grant account and you'll transfer this what this deferred Grant is amortized to P over the useful the or from deferred Grant you'll transfer it to pendl over the useful life these two sentences make sense this is when you receive the grant when you receive next when the grant gets refunded what you have to do ult entry okay or one step back when you refund the grant the asset carrying amount change or no impact the cost and depreciation will change or no change in fact instead of cost you can write better suited carrying am carrying amount and depreciation of the asset will not be affected all right okay what is the entry you will pass at the time of refund deferred Gra government grant account debit to bank account for if there is any balancing figure for that you'll use P that's all it is okay s all right disclosure is not that very important so it is okay I think yeah conceptually we have covered everything so one or two more questions we have quickly we'll review that look at this and tell me the answer Santos limited one company they've received a grant of 8 CR from the government for setting up of a factory so setting who sets up the factory usually the promoters help the company in setting up the factory here government is giving you a grant to set up a factory means this is an income it's a monetary Grant only it's a monetary Grant only is this is this a income related Grant or a capital Grant it's a capital Grant all capital because this grants is in the nature of promoter's contribution so where should you show this grant as you should show this grant as a capital reserve because the entry will passes what bank account debit to capital reserve 8 CR yes this is what ideally you should do as per accounting Standard 12 but what did the company do check out of this grant out of this grant means out of this 8 CR company know brasis they distributed 2 CR as dividend chance pedance 2 CR rupes they gave it off to shareholder government told use this money and said Factory company saying no shareholders are important for me and they give 2 rupees dividend acceptable or violation violation okay that means you have to tell that if a grant is receive for specific purpose it has to be used for specific purpose here grants are in the nature of promoter's contributions so this grant should be shown under Capital but company distributed dividend hence as12 is violated G comfortable okay next also Santos limited received land land land land is a monetary Grant or a non-monetary land is a non-monetary grant and this land you received at free of cost if non-monetary grants are received at free of cost means will you ignore the accounting or show it at nominal value show it at nominal value one rupe 10 rupe whatever but what the company do company received Land from the state government but it has not recorded at all in the books has no money spent company saying I did not any spend any money I will not show the land in my books acceptable or not you have to compulsorily show this land at nominal value otherwise you'll be violating as12 Provisions okay sir sir one doubt sir who is government for this purpose sir for as12 purpose the government means central government state government also government bodies both local as well as International so if you're International mon AR fund if you receive Grant from them that is also government grant only if your electricity board or seage board or water board gives you some grant that is also government only for as2 application purpose okay this is over next which one uh oh this one maybe one one liner answer you tell Alps limited one company they received the following grants from the government from the current year 120 lakh received as subsidy from the central government government for setting up of an industrial undertaking I think I don't have to read this further what sort of a grant capital capital Grant because grants received in the nature of promoter contribution so where it will go capital reserve fine 15 lakh Grant received from central government for installation of if affluent treatment plant plant is a missionary so you have you received missionary or you have received 15 lakh rupees Grant I mean this is what sort of a grant monetary Grant but related to a a specific asset if monetary Grant is related to a specific asset we have one methods or two methods what are those either you can follow asset cost reduction method or you can follow deferred government grant method or deferred income method any of the two options it's a theory question you don't have to solve you just have to comment that these two methods is acceptable for the company third one 25 lakh rupees received from the state government fine for providing medical facilities one second stop 25 lakh rupees received means it's a monetary Grant who gave central government for what purpose 25 lakh rupees received from St state government for providing medical facilities to its workmen as an employees during pandemic during that covid time company has already given some medical help to medical facilities maybe some medicine or they settled hospital bills or whatever relating to their employees okay because company has done this government gave a grant of 25 LHS yes okay now you tell me it's a monetary Grant is it related to a specific asset is workman so to your employees you pay salary salary and all you show it as an asset in balance sheet or it's a expens it's a pnl related item yes no I mean this is a monetary Grant to be related to a specific asset or it's an income related Grant income related Grant yes or no because salary and all you not sh your balance sheet as an asset it goes to p and if salary goes to pnl means this grant also should go to P matching concept right matching concept that's what it says no expense and related uh income and its related expense should be accounted in the pnl in the same year that's what here also same thing since the salary expense of workman has gone to pnd this grant also should go to P but hang on is there any conditions here or no conditions in fact here conditions are already fulfilled because government told since you have already given facilities to your employees I am giving you grant any further conditions attached or no nothing mentioned I means in in a way you can infer that conditions are already fulfilled or in fact there are no conditions if there are no conditions means should we have to wait or it'll go to pel immediately it go to P immediately so this 25 lakh will be transferred to P immediately okay suppose government tells I will give you 25 lakh rupees you have to give the medical facilities now to employees for a period of 3 years getting the question government is telling I will give you 25 l Grant today you have to give medical facilities to the employees for three more years so conditions already fulfilled or there there so that means condition will last for how many years 3 years that means can you transfer this 25 L to this year pnl or over a period of 3 years over a period of 3 years here since the conditions are already fulfilled the entire amount will be transferred to P immediately if conditions are there means and if the conditions goes on for 5 years means then this 25 lakh will be transferred to P over a period of 5 years is this okay people like that okay okay okay G all right here conditions are already fulfilled so it will go after to pnl and in pnl where will you show this either you can show it under other income or in the chart I told you'll reduce it from the related expense related expense here means sir why did the government give you grant here because you did some some medical facilities you give it to your employees workmen correct that this only company will book it as salary know yes sir so either this grant you can show it as a separately in pendl under other income or you can reduce it from your salary that salary only salary expense only in pnl we call it as employee benefit expenditure either show it as other income or reduce it from your employee benefit expense that your salary and company has a this is a presentation and Company can choose whether they want to follow this approach or they want to go for this approach entity Choice that's it about this question this I think came in the previous paper for five marks one more we will do and then we'll wind up this particular topic ah company EXO they are running a charitable Hospital okay awesome Good Deed it incurs salary of doctors staff to the extent of 30 lakhs Hospital means obviously you need to pay salary to your doctors and staff how much is that 30 lakh perom great as as a support the local government grants a lumpsum payment of 90 lakh the local government has given the entity the charitable Hospital how much money 90 lakh in one lumsum to meet salary expense for a period of next charitable hospital no maybe they don't collect money from the patient but you can't ask the doctors and staff to work at free of cost they have their family to feed so Hospital though it is Charity Hospital they still have to pay salary to their staff so government thought you may not have enough money so take 90 lakh rupees I will give you 90 lakh rupees use this to pay the salary to your staff for a period of 5 years so here is it a monetary Grant first of all yes this monetary Grant is it related to any specific asset or it's related to an expense expense expense that means can you follow asset cost deduction method here or defer income at all no that but it's not related to a specific asset so that mean this is what this is an income related Grant income all income related Grant where it will go P okay have you already received this grant yes can you transfer do 90 lakh government grant received in first year pnl only or there are conditions conditions condition will last for how many years five years that means this 90 lakh will you transfer to current year pnl or it will be amortized over 5 years Beed over a period of 5 years because condition will last for 5 years so how to do the accounting is Our intention of this particular problem okay all right now you are required to pass necessary journal entries now don't write pointers the question says journal entry specifically entry only you need to pass under two circumstance when Grant is shown separately under other income because presentation two Choice are there no either Grant you can show in your pnl separately as an other income or this grant you can reduce it from your salary related expense here salary that's the second things it is deduct from the salary cost under both the case may what journal entry you will pass both the methods presentation method is followed very simple what are the journal entry for salary paid sir salary account debit to bank account 30 lakh 30 lakh how much Grand did you receive how much Grant did you receive 90 lakh so bank account debit 90 lakh can I write pendl account 90 lakh entire 90 lakh can I transfer to this year P or over 5 years I have to defer it that means I will treat this as a deferred income there you wrote same method deferred Grant account you wrote same thing you can call it as deferred government grant or simply you can call it as deferred ENT so when you receive the grant you'll pass the journal entry bank account debit to deferred income or deferred government grant 90 lakh okay and from deferred income account it will be transferred to pnl over a period of 5 what is a transfer entry deferred income account debit to pnl account in pnl you will show in first method you showing under other income hence I've written other income or simply write pendel it's fine from deferred income to pel over how many years five years that means this 90 in fact written here this 90 lakh will be transferred over 5 years means for first year how much will you transfer you need to pass the entry only for first year given okay hence only a first year entry is p here and people this is under this is under first method where the grant is shown separately as an other and the salary will be transferred to salary expense will be transferred to pel separately so the transfer entry will be P account debit to salary how much 30 lakh 30 lakh this is what you will do in the first method then salary you will show separately Grant income separately you'll do the accounting second method is the grant is reduced reduced from the related expense and the related expense here is salary in this method May what to do first is same what is the journal entry for salary paid salary to bank 30 lakh 30 L there's a small typo in this uh ICI solution you follow this so salary paid the entry salary to bank when you receive the grant what entry will you pass can you write buying to pendl can you transfer entire 90 lakh to this year pendl or 5 years that means whatever Grant you receive temporarily you will park it in deferred income account or deferred government grant account so bank account debit to deferred income 90 lakh 90 lakh okay sir now now now now now now read the line what are they doing this grant is adjusted against salary that means this defer from deferred income now will you transfer it to pendl or you'll adjust from salary so what is a transfer entry from deferred income you will adjust with salary account so that entry will be deferred income account debit to salary how much much this 90 lakh has to be deferred over 5 years so 90 lakh divided by 5 if you do 18 instead of transferring it to P you adjusted with salary that's all it is okay sir that means what is a salary expense though you paid a salary of 30 lakh rupees you adjusted how much deferred income from salary 18 lakh or you just check salary here you're debited by how much 30 lakh here you're credited salary by how much 18 lakh so what is a balance in salary account 12 L salary is an expense where will that expense go to so the transfer entry is P to salary 12 that's what it is this is the presentation the choice is yours in fact for all this we don't pass entries directly we'll adjust in no pnl but anyway since they asked the entry you can rout this particular or you can pass this particular entries anything more required or cool cool so that's it with the respect to accounting Standard 12 then thank you hello people let's continue our marathon series discussion now we'll be taking up accounting standard 16 that talks about borrowing cost okay borrowing cost means name is saying borrowing cost the cost incurred associated with the borrowings like when you take a loan obviously there will be some interest charges processing charges etc etc those we refer it to as borrowing cost normally we have seen that all in until our ban Golden Days may we have seen that all the interest charges and all we've been transferring to pendl all the interest charges processing charges we transfer it to pendl because it's an expense accounting standard 16 thesis is if borrowing cost if it is related to qualifying asset if the borrowing cost if it is specifically related to qualifying asset then this borrowing cost will not be transferred to pel rather it will be capitalized meaning it will be added to the cost of qualifying asset itself if it is not related to qualifying asset then this borrowing cost will be transferred to PA okay so only borrowing cost related to qualifying asset we need to do some extra treatment in the form of cash capitalization qualifying asset means what qualifying assets means they are those assets which takes substantial period of time to get ready immediately they are not ready they take some time to get ready now this AC will it take substantial period of time to get ready or immediately we can use AC TV iPad fridge or laptop all this will take time or immediately they're ready that means they are qualifying ass it no suppose you are constructing a building building will it be immediately ready or take some time take some time so those we refer to as qualifying asset sir how much time sir as16 generally assumes that 12 months is a substantial period of time so any asset which takes 12 months or more to get ready all those assets will become qualifying assets and if you have taken any loan to construct this or to buy this qualifying asset then that loan interest charges will not be transferred to pnl rather it will be added to the cost of qualifying asset itself rather it gets capitalized yes people that's all it is so some of the examples of qualifying assets is your PP like building under construction Machinery under construction okay or any intangibles asset also can be a qualifying asset even inventory also can be a a qualifying asset provided it takes substantial period of time suppose I'm a ship manufacturer so what is my business I manufacture the ship and I sell the cruise ship and all will be huge in will be I mean that will be quite big to manufacture one ship suppose I need two years time so when I get the order after I get the order I start manufacturing and it will take how much time to get ready two years to man that means the ship for me is PP or inventory since I manufacture and sell for a ship dealer or ship becomes an inventory so if I taken a loan ship is almost taking two years to get ready so that inventory also can be a or inventory rather will be a qualifying asset in this particular case yes people okay but your current assets like datar cash Bill receivable etc etc they are not qualifying asset for that matter investment also not a qualifying can we go on to the next one the next funa is second okay sir there are two types of B borrowing as far as a16 goes one is General borrowing and another one is specific borrowing right so specific borrowing means for what purpose this particular borrowing or loan is taken you are able to identify specific borrowing does not mean one loan one purpose if you take one loan and if you utilize it for three purpose doesn't matter are you able to identify the purpose yes as long as you are able to identify the purpose that loan becomes what sir specific Bor all right let's let's say an example over here we took a loan which carries interest rate of 10% to construct a building is building a qualifying asset is building construction of qualifying asset yes we took how much loan to construct this building 50 LH okay on this loan how much interest are we paying 10% so 50 lakh 10% if you calculate how much will be the interest 5 lakh rupees now this particular interest will you transfer it to SPL or added to the cost of building added to the cost of building because only because of this building only this interest came no that means this interest becomes like a Dack directly attributable cost hence we add this yes so now this particular loan for what purpose it got utilized building construction so that purpose is missing you are able to identify if you are able to identify it becomes your specific borrowing okay sir for specific borrowing is there any drama about capitalization or pretty straightforward straightforward whatever interest you pay you will capitalize yes or no all right that is one correct uh still CA final mode using SPL no problem you you got that no no now I'll not bother you correcting H pnl SPL on in the same anyway you will also come to c a fin loan I'm already looking at your C final students Ah that's that's motivating motivating huh okay now one one more pointer is Sir how much loan you took 50 lakh sir entire 50 lakh you will utilize for building construction in one shot no right you need obviously you might have taken the loan now but entire 50 lakh you will not use for construction immediately right maybe 10 lakh you need now another 10 lakh you may need after 3 months another 20 lakh you may need after 6 months money will be spent in stages because construction also will take some time that means will you keep the money idle or you'll invest this money suppose I got the money today only loan I bought it today only okay I don't need 40 lakh rupees for 6 months I only need out of this 50 lakh loan I need how much only 10 lakh I need immediately for construction balance 40 lakh I need only after months so will I keep this 40 lakh idle money with me or we will invest we'll invest if you invest you will get some what investment income if you have any investment income you need to reduce that so you cannot capitalize 5 lakhs suppose you invested some portion of this loan somewhere else and if you get some temporary investment income I've assumed in that problem uh in this in this example that in temporary investment income is how much 50,000 that means you will not capitalize 5 lakh the net borrowing cost will only be 450,000 that we will capitalize yes people this is the thing so in case there is a specific borrowing always watch out for this temporary investment income majority of the problem this will not be there if it is there we need to consider okay this is one aspect with respect to specific borrowing now there is another kind of borrowing called General borrowing General borrowing means multiple loans are there which are used for multiple purpose for what purpose the loan has got utilized you are not able to identify the purpose of utilization you are not able to identify like let's say the scenario like this we are constructing a building and we we need how much money have assumed 50 we have three loans we have three loans first is a bank loan which carries 10% interest rate loan amount is 20 12% debentures we have for 40 lakh 10 11% bank loan we have for 30 lakh so totally how much do we have 90 lakh but how much I need for construction 50 lakh this 50 LH came from which loan do you know the purpose or don't know don't know right because see if this 10 20 rupes if it is used for building construction means then this 20 lakh loan interest we will transfer it to pnl or you will capitalize capitalize but here do you know how much amount was utilized for building construction or you don't know that means how will you find out the interest cost and capitalize there is a drama here yes this only we call it as general borrowing as as6 says you don't worry you don't worry this 50 lakh came from which loan and all don't worry about the mapping all that you don't have to find out this amount came from which loan if you have General borrowing you find something called capitalization rate for class purpose we can call this a CR you find something called capitalization rate that is nothing but your average rate because you have one interest rate here or multiple multiple so find out something called capitalization rate use that for capitalization purpose we'll not use any of this rate we'll find something called capitalization rate and use that for capitalization purpose in this particular case we will solve a question on this little later yes people first I'll cover of all the concepts can I move on to the next one all right sir when will you start capitalization when will you start the capitalization borrowing cost we know that borrowing cost relating to qualifying asset we will capitalize the next question is when will you start the capitalization as per as6 borrowing cost of capitalization starts the day three conditions all the three conditions are satisfied anybody remembers what are those three conditions borrowing cost capitalization starts when three conditions are satisfied what are those one borrowing cost should be incurred second one expenditure on qualifying asset should have started third one activities relating to qualifying asset should have begun the day these three activities or these three conditions are satisfied that day you will start the capitalization okay just to give you an example suppose I took a loan on 1st April 2028 okay so if I take a loan means on 1st April that means interest also starts from 1st April I may pay the interest at the end of the month endend of the year or whatever but if I take the loan from 1 April means my loan starts acur on 1 April okay first condition for borrowing cost is if you want to commence the capitalization first one should be borrowing cost is being incurred so in this case may borrowing cost is being incurred from which date since you took the loan on 1st April first condition got satisfied on 1 April itself manageable okay second conditions is what expenditure on qualifying asset should started after taking the loan you'll keep the money idle or you will use it for qualifying asset you'll use it for qualifying asset now I have taken this loan to construct a building for building construction we have taken a loan is building construct building under construction a qualifying asset yes now I can't obviously construct the building I have to take up the help of an engineer architect or someone I appointed architect and I paid him the advance I paid him the I paid amount to the architect on which date 1 May that means what is this sir I have paid architect why this is for the construction of building that means expenditure on qualifying assets started on 1st April or it started on 1st May expenditure relating to this building construction starts when I pay the money to architect which is what first when will you start capitalization when two conditions are satisfied or all the three all the three what what is the third one activities relating to qualifying asset should have started architect told I'm busy okay I will start the planning obviously if you want to construct the building means first you have to plan architect told planning activity I'll start from 1st June physical construction I will start from 1st July planning I'll start planning from 1st June physical construction I will start from 1 July now third condition is third condition is activities relating to qualifying asset should have started activities started on 1st June or 1st July what is it first June July which one should we take so activities for this purpose includes planning activities activities does not mean physically you should start the construction even if you're doing some if if you want to take government approval for that you need to file some papers and all even those are also considered as activities for this purpose so that means third condition is getting satisfied on which date 1st June on which day all the three conditions are satisfied first condition got satisfied on 1 April only second one on 1 May third one is getting satisfied only on 1st June that means can I say on 1st June all three are satisfied that means borrowing cost capitalization ation though you paying the interest to the banker from 1 April though you are paying the interest to the banker on 1st April will you capitalize April month and may month borrowing cost or borrowing cost capitalization starts from June so a in this case May April and May month interest April and May month interest where it will go capitalization or P from June onwards from 1 June onwards this interest cost will be added to the cost of qualifying ass that's what is this commencement probation all about d g moan G okay next one is s suspension of capitalization to suspend something means putting an end or putting a comma suspending something means you must have seen movies no especially police police you're suspended down means he's he's what he's like resigned from the organization or temporarily for the time being it's taken off yes suspension of capitalization means for the time being we should stop the capitalization it's not the full stop it is just the time being stopped correct so when should you suspend the capitalization as per as16 as16 says if the activities on qualifying asset if it is interrupted or rather the active development of qualifying asset if it is interrupted then borrowing cost should be suspended simple example let's say you are constructing building you started the construction on 1st April everything went smooth till 30th June building car construction time is 3 years that means is this building a qualifying asset is this building a qualifying asset sir since it is three taking 3 years to get ready it is a qualifying asset you have taken the loan all the conditions got satisfied on 1st April only so from 1st April to 30th June everything went normal no problem that means this three period this three months interest what you'll do this this this three months or maybe first I'll give you full date of April to June everything went smooth from 1st July onwards to 31st August or maybe let's say 31st October October July August September October for 4 months no sir I stopped my construction due to strike labors went on strike there's some issue safety issue or whatever issue labors went on strike and I stopped the construction for 4 months okay then again from 1st November onwards till 31st onward everything went again smoothly that is what another five months okay this is the breakup of the interest period now you need to tell me what you will do for these period interest build is still under construction it is not getting ready I started the construction only in the current year the building of construction will go on for two more years so it's a qualifying asset on 1 April only all the conditions assume that it is satisfied okay now first three months borrowing cost what you first 3 months borrowing cost pnl or capitalize perfect capitalize what about this four months this four months delay is it a temporary delay no sir if you have stopped any construction due to strike fire flood earthquake specifically written you in the notes also if the construction here active development is going on or it has got interrupted the development of construction of the qualifying asset got interrupted I mean this four months borrowing cost you will not transfer or rather you'll not capitalize you'll transfer it to P because active work on the qualifying asset has got stopped so that means this four months borrowing cost you will suspend you'll suspend means this four months of borrowing cost you will not capitalize rather you'll transfer to P after that this 5 month months any drama or usual everything is going on smoothly smoothly that means this five months borrowing cost again you will capitalize this is the thing this is about your suspension of Provisions done people suppose sorry if you're constructing a building workers don't work on Sunday workers don't work on Sunday that means Sunday interest you transfer to P andela that is what sir that is what active active development is interrupted or it's a temporary delay sir if there is a temporary delay like due to Festival 3 days you stop the work Sunday you did not work all these are whats abnormal or normal for so if there is a temporary delay in work and all you don't have to suspend borrowing cost so if the construction is not happening on Sunday Sunday is interest cost no need to transfer to pnl all these are temporary delay capitalization will still continue okay that is what we mean there only if the active development if it is interrupted usually that we say that if the construction of qualifying asset if it is stopped due to fund shortage labor strike fire flood earthquake and all that then we say active development of qualifying asset has got interrupted and that period borrowing cost you'll transfer to P if it's a temporary delay again you'll have to analyze it on a Case toase basis if you feel for that contract this is a temporary delay then you don't have to suspend borrowing cost you can continue your normal capitalization as it is yes people okay that's about your suspension next one is cessation of capitalization sir to cessate something means what full stop putting a full stop right now here let us say in this same example my building construction is Will Go On for how many years three years sir I took a loan for 10 years I took a loan for 10 years to construct the building I've taken a loan my loan cut term is 10 years but my building construction is only for 3 years now the question is will I add 10 years interest cost to the cost of building or only 3 years only 3 years that's what as 16 says the moment qualifying asset is ready to use the moment qualifying asset becomes ready to use capitalization stops in this example May the building is ready to use in how many years three years by the end of third year capitalization stops so from year 1 to year three what you'll do for borrowing cost you'll capitalize from year 4 to year 10 whatever borrowing cost you have paid that will be capitalized or pel it'll be transferred to pendl in this particular example ignoring the suspension of course okay sir that's about your cessation provision disclosure is okay not that important now we have a few questions can we run them by we'll work on usually one popular question from this chapter is relating to General borrowing let's see how that particular General borrowing capitalization works you know the provision already Whenever there is a general borrowing we find what sir General borrowing first of all means what in general borrowing we have multiple loans which carries multiple interest rate and for what purpose each loan has got utilized are you able to identify not able to not able to so in this case should we have to identify that or not required not required standard a 16 simply says find out one average rate that only we call it here as capitalization rate okay keep that in mind and let's uh see how that calculation Works in this particular question I think this was RTP may24 question good question I think we have solved one or two questions like this in class also okay let's review this H began construction of a new building on 1st April 2022 it obtained a special loan of 6 lakh on uh 1st April 2022 at an interest rate of 12% to finance the construction of building so to construct the building only we have taken a special loan of 6 lakh that means the purpose of this loan is missing or you able to identify what is that what is the purpose to con this loan is used to construct a building so it is a general borrowing or specific borrowing it is a specific borrowing for specific borrowing is capitalization rate required or not required not required 6 lakh is the loan amount interest rate is 12% so 6 12 are 72 so looks like the borrowing cost relating to specific borrowing is 72,000 okay Z that's all or even temporary investment income we need to be aware of if suppose if you have used if if you have invested the six lakh somewhere and if you have earned some interest interest income temporary investment income can we add 72,000 or temporary investment income you need to reduce if they have given any temporary investment income you have to reduce this from the borrowing cost and only net borrowing cost relating to specific borrowing you should capitalized we'll see whether they've given or not generally if it is there they will not give all the information together they'll put information across different different par we'll see the compan is other to outstanding nonspecific loan non-specific loan means are you able to identify any specific purpose or we not able to means this other two loan indirectly they're telling it is a GB GB as in general Bor on 1st April 2022 okay we have one loan 30 lakh which carries interest rate of 14% another one 54 lakh of 16% the expenditure incurred on the building construction okay how all right do you think all the expenditure will be incurred in one go or in stages so you incurred the following expenditure totally for building construction you have spent 612,000 on 1st May you spent about 12 lakh 1st July 15 again 1st October 27 lakh 1st March 720,000 that way the amount got spent yes the building construction was completed by 1st April 2023 sir you started the construction uh uh 31st March 2023 correct no so building a construction started on 1st April 2022 ending date is 31st March 2023 that means the construction period is how many months 12 months almost one year so means is this building a qualifying asset yes this particular building is a qualifying asset so this particular building con instruction happened with the help of two loans one is a specific borrowing and another one is General borrowing we read the whole data we did not find the specific borrowing or any temporary investment income that is not there fine but we do have a general borrowing for that we need to find out one working note first called capitalization rate okay first let's find out that anybody remembers anybody remembers how to find out capitalization rate it's very simple average rate okay sir on this I'll show you again on this 30 lakh how much interest are you paying 14% so calculate this 134 50 to 5 LH this is what 520,000 420 no okay 420,000 okay 540,000 into 16% is how much 8 lakh 64,000 864 so this is the interest you are paying on these two loans because both the loan were outstanding on first April only correct now so what is the total interest you are pay 12 uh 1284 12 lakh $4,000 is the interest you're paying on both the loans what is the total loan amount 84 lakh sir on 12 lakh 84,000 is the interest you are paying on a loan balance of 84 LH what is the average rate interest rate you're pay how did you calculate that 12 lak 84,000 divided by 84 that is what is capitalization rate formula it is nothing but your borrowing cost divided by borrowings in fact here and all know in this problem it has no significance because the construction period is how many months you started the the construction on 1st April went on till 31st March that means whole year it is there yes but it's not actually borrowing cost actually tell me the formula here how did you find out this percentage 12 lakh you took 12 lakh 84,000 divided by the 84 this if you want to express in Formula what will you write it as no no the formula for this will be interest cost divided by loan amount into 100 instead of Interest cost here we call it as borrowing cost and it is not just borrowing cost here we say it is time weighted borrowing cost divided by time weighted borrowings time weighted borrowing cost divided by time weighted borrowings what is the significance of that is sometimes what happens see in this case me these two loans were there from the beginning sometimes the loan may be issued during the year loan may be issued during the year that means will you take full year interest or lesser car less so you'll have to assign the weights here in months okay so if the loan was there only for 6 months means you'll write will you take 420,000 or you'll do into 6x2 into 6x2 like that okay hence we always take here time weighted borrowing cost divided by time weed borrowing okay I have multiplied here time weights should we have to multiply or not required because anyway if you multiply also this anyway loan was there for the whole year yes that means interest also you'll pay for the whole year so if you want to calculate time weight here everywhere you have to multiply 12 by 12 in fact if you don't multiply also answer will be same see you also told answer is 15.29 only we got the same done but it is actually time weighted borrowing cost divided by time weighted borrowing so you'll have to assign the weights according to the data given this is the first working note to find out capitalization rate done okay next sir how much totally have you incurred for this building 612,000 if you add all this you'll get 612,000 did you spend the 612,000 in one shot or in stages stages and I told you here the you you have to ignore the weights or consider the weights consider the weights okay it's very simple sir how much did you spend on 1 May 12 lakh rupees okay think like this this amount came from your pocket or it came from loan this money came from company cash balance or loan loan so like visualize this if you take a 12 lakh rupees loan if you take a 12 lakh rupees loan on 1st May will you pay whole year interest or 11 months interest if you take 12 lakh rupes loan on 1st May means you will pay the interest only from 1st May to 31st March how many months is that 11 months that means how much is the weightage you will give for this you can't take the expense we have to find out something called time weighted expenditure because everything here is on the time weightage that means you will calculate how much weightage you will give for this 12 months or 11 months that means the time weighted expenditure for this will be what 12 lakh into 11 by 12 which is 11 lakh rupees for each thing you have to take you can also calculate directly also but I I prefer that you present in this format only better okay Z all right similarly tell me what is the next expenditure time weed expenditure if you take a loan of 15 lakh on 1 July will you pay the interest for whole year or 1 July to 31st March 1 July to 31st March is how many months 9 months that means for this 15 lakh how much weightage will you give 9 by 12 okay how much is 15 lakh 9 by 12 11 lakh 25,000 like this for each time when you spend the expenditure for for your capitalization rate okay because here it is not just it is not simple average here when we say here capitalization rate no it is not simple average it is weighted average it is weight average hence we have to assign the weights here okay for the next next when did you incur the expenditure 27 lakh when did you incur 1st October from 1st October to 31st March how many months 6 months so the weightage will be 27 lakh into 6 by 12 how much is that 13 L 50,000 last may you incur the expenditure of 720,000 when 1st March and the ending is 31st March how much weightage for this 1 by 12 so 720,000 into 1X 12 is how much 60,000 so if you add all this you'll get the total time weighted expenditure how much is that 3650 35,000 okay Z any problem because your why we do this is did you find the simple average for capitalization rate or weighted average weighted average that means see it's like your loan amount now is 36 lakh 35,000 you have to multiply the capitalization rate since this rate is based on weighted average even the expenditure also should be based on the weight otherwise the comparison will be wrong okay so now final borrowing cost capitalization okay sir here we have General borrowing or also specific borrowing how much was a specific borrowing given the specific borrowing was 6 lakh when did you take first April only how much interest rate are you paying 12% so what is for a specific borrowing should I have to worry about capitalization rate or not required not required so 6 lakh or 12% is how much 72,000 so the interest paid on the specific borrowing is 72,000 that's all or temporary investment income we have to reduce you have to reduce temporary investment income but is it there in this question no always when you're revising revise that along with that so in case they give it you know you should reduce that in this problem temporary investment income is zero that means relating to specific borrowing how much will you capitalize 72,000 any problem this is about specific borrowing we do also have a general borrowing so General borrowing we have two rates as for the question we have 14% And 16% will we use this or we will use capitalization rate we will use cap capitalization rate how much is capitalization rate 15.29% okay so how much what is the total expenditure you have what is the time weighted expenditure you have spent on building 36 lakh 35,000 okay sir sir this entire 36 lak 35,000 came from General borrowing or some also came from specific out of this 36 lak 35,000 you already have specific loan how much specific loan is there 6 lakh so out of 36 L 35,000 6 lakh came from specific borrowing balance is how much balance is 30 lakh 35,000 that came from what general Bor for General borrowing we have to use capitalization rate so it's like the loan amount is 30 lakh 35,000 now and on that the interest rate is weight capitalization rate of how much 15.29% so multiply the two you will get it how much 4 lakh 64052 that's how to calculate manageable everybody cool cool cool cool so relating to specific borrowing you'll capitalize this much relating to General borrowing you'll capitalize that much so totally how much will you capitalize 5 lakh 3652 that's the borrowing cost totally you will capitalize in the current year right if you want to pass the journal entry what journal entry you will pass for this in fact here they've asked also the journal entry okay and you don't have to pass many journal entry theyve asked only one journal entry why many journal entry because have you spent the money or construction of building in one shot or M stages so each time you have to spend you have to pass Jal entry no but is the question saying pass many entries or one entry one entry is good enough so totally how much did you spend towards building 612,000 what is the journal entry for this building account debit to bank account actually it is not building account debit it should be Capital work in progress because I told you is the building already ready or getting ready getting ready so ideally you should pass till the time building is ready you have to show this as a capital work in progress you should write building in progress but I think here the building was completed by 31st March no and since they're asking one entry instead of capital work in progress directly we can write building account debit how much 612,000 or even borrowing cost we have to capitalize 612,000 is a construction cost that anyway you will capitalize and borrowing cost also you will capitalize how much 536 so totally how much will you capitalize add these two 66 lakh or I think here only theyve done what is your calculator showing 66 lakh 5652 or maybe there may be slight round off that also okay fine so the entry is building account debit to bank account this entry your IDE have to pass separate entries but since the question said one entry so we'll directly pass like this manageable yes sir once more or need some time to review or got it online also cool people okay moving along if youve got it then we will carry on the next one okay this one is this is a easy question but this is also asked quite a few times from this particular topic this particular uh type of question not the very same question on 1st April 20 X1 amazing construction limited obtained a loan of 32 to be utilized as follows you have taken a loan of 32 CR and they only given that this loan is utilized for following purposes it is used for some 78 purposes One loan it is used for 78 purposes General borrowing specific borrowing what what did I say specific loan means what specific loan means it does not mean one loan one purpose as long as you are able to identify the purpose that purpose can be one purpose five purpose 8 10 doesn't matter as long as you are able to identify the purpose it is a specific borrowing here you took one loan of 32 CR and it is used for seven purpose but that's okay are you able to identify the purpose yes I mean this is loan is a what loan it's a specific borrowing for specific borrowing do we have any capitalization rate and all that drama no we just capitalize yes no but but but but that loan should be related to that borrowing cost should be related to qualifying because we have used for multiple purpose no maybe in that some purposes are qualifying ass said some are not so identify construction of a SE link Bridge we are constructing I think Bombay made is there no I think Bombay Le ceiling I think is what they refer H so construction of a ceiling a bridge we are constructing on the sea as simple as that okay across the two cities fine across two cities there is a c connecting so on that c we are construct a bridge so we can use that all right the work was held up totally for 1 month work was stopped for 1 month during the year due to high water levels so you tell me if you are constructing a bridge on an ocean obviously due to ocean current levels sometimes you'll get higher waves and all that time can you do the construction or you have to stop this is abnormal or expected that means what this one month borrowing cost should be suspend or it's a temporary delay it's a temporary DeLay So this one month borrowing cost will you transfer it to pnl or capitalization will continue capitalization will continue and moreover is this sea link or Sea Bridge construction will it happen will it get over immediately or it will take some time so if they don't give the period the sea link and all C bridge and all will take some time so this ideally be what it should be a qualifying ass it should be a qualifying asset so totally how much loan you took 32 in that how much did you spend for this Sea Bridge 25 all right great next you used some portion of the loan to purchase some equipments and missionaries they did not give the date correct no because qualifying for it to be a qualifying asset it should at least take 12 months or more all right did they say this equipment is taking 12 months or more nothing mentioned so you can write your assumption you can assume that sometimes what happens is you'll give an advance you want a missionary you gave Advance today the vendor is saying I will supply the goods after 14 months that means are you getting the asset now only or after 14 months that means immediately or it is taking some time to get ready is it a qualifying asset in that case yes but here they have not given any information but ICI assumes in these cases that they are not a qualifying asset just an assumption you can make other assumption it is valid or if you want to stick with ICI assumption for better approach you can do so so if they don't give the dates in these cases and all I say assumes that this is a not a qualifying asset so if it is not a qualifying asset then the borrowing cost will you capitalize or pendl P working capital sir working capital means to manage your day-to-day business to pay your credit to pay your rent to etc etc so is there any qualifying asset that comes because of working capital no so is this a qualifying asset compulsorily no purchase of vehicles again they have not given information it can be a qualifying asset but they have not given any information IC is assuming that this is not a qualifying asset is it compulsory you have to make that assumption in my view no for exam purpose if you want to stick to ICI better okay just a suggestion you call what you want to do advance for tools and cranes we have paid some advance to purchase some Crane or bulldozer again we don't know how long it will take I say a simple assumption again is not a qualifying asset purchase of technical Kno how technical know how is your intangible asset like if you want to produce a drink called Coca-Cola can you produce it or there is a specific formula for it specific formula if you say Coca-Cola give me that formula what will they say they will say h p only P all right but in case you want to produce one drink if the other party is ready to sell that formula that formula only becomes your technical Kno how okay it is your intangible asset basically sir can intangible asset become a qualifying asset yes provided it takes a substantial period of time here your purchased have they told it was taking substantial period of time no that means all this is assumed to be not a qualifying asset now check the last line total interest charged by the bank for the current year is 80 lakh sir how much loan did you take in totality 32 on this 32 lakh how much interest totally you are paying 80 lakh entire 80 lakh borrowing cost you will capitalize no only in borrowing cost relating to qualifying asset you will capitalize these are all qualifying asset or not a qualifying asset that means a borrowing cost relating to these you will transfer where P borrowing cost related to this you will do what capitalization that's what we need to calculate here but have they given specific borrowing cost for this or we have to find we have to proportionate and find it how very simple sir how much is the total loan total borrowing cost you paid 80 lakh 80 lakh is the borrowing cost for how much loan if the loan is 32 CR means the borrowing cost is 80 lakh how much was used for qualifying asset how much loan was used for qualifying asset 25 CR so if the loan is 25 CR means how much is a borrowing cost Pro yes now we have done two three questions like this in a regular class hope you remember yes so when you proportionate how much you going to get 25 crores into 80 lakh divided by 32 cror if you do you will get 60 250,000 okay this 62 lakh 50,000 borrowing cost is relating to qualifying asset hence what you'll do this borrowing cost will get Capital all other components borrowing cost are not qualifying asset hence they'll be transferred to one by one you need to calculate and figure it out same proportionate way maybe this proportionate you tell me let's see this one you calculate don't look at the solution 3 tell me how do you calculate how much is the borrowing cost relating to equipment alone h seven something okay or tell me the calculation I also don't know the answer so if the loan is loan and borrowing cost if the loan is 32 CR means the total interest is 80 lakh how much loan you use for equipment how much loan you use for equipment only 3 CR if the loan is 3 CR means how much is the borrowing cost when you pro rated how much is it 3 3 if you want to take it is 300 lakh 300 lakh into 80 lakh divided by 3,00 ,200 lakhs you can take it one and the same if you want to do the easy calculation how much it will become 7.5 lakhs H so that is the borrowing cost relating to the equipment that you'll transfer it to PN like that you have to calculate for all the things and proportionate it okay so only this 62 lakh 50,000 borrowing cost will get capitalized rest all borrowing cost will be transferred to p and you can present the solution and the same answer workings also you can show it here this is a good approach okay sir that's it with respect to this particular standard a 6 thank you hello people let's continue our marathon series discussion so we are now taking up accounting standard uh 19 so as 19 yeah again it's a big ticket topic but we don't have too much syllabus in our uh intermediate syllabus we have a lot more in CA final we in this topic generally some three to four types of questions are there examiner usually plays around in that particular questions only usually usually that's the key word okay watch out for that so let's start the revision as19 as19 talks about leases so in Le May there will be two parties who are those two parties lesser and Lessie lesser is the owner of the asset Lessie is the user of the asset suppose a limited who's the legal owner of the asset they leased plant and missionary for five years to be limited a who legally owns the asset gave the missionary on lease for how many years 5 years and how much lease rental is being charged 1 LH okay this is what is a definition of lease in lease May there will be two parties called lesser and Lessie lesser is the owner of the asset and Lessie is the user of the asset this lesie will get to will get right to use the asset forever or for a certain period of time this B limited being lessy they will get the right to use the asset in this particular case only for 5 years 5 years only we call it as lease term and lesie will get right to use this Machinery at free of cost or they have to pay lease rental they have to pay some amount how much is the amount here one lakh that one lakh only here we refer to as lease rental that's a definition of lease definition and all don't expect to turn up in exam just for our understanding we're doing it okay Z so in as9 certain terminologies will be used across first we will understand the terminology and see how to calculate them probably we'll know its calculation now then we will understand them little better when we apply it in the problem okay first terminology that gets used across here is minimum lease payment MLP stop full form of MLP is what minimum lease payment sir in lease Arrangement who will pay lesser will pay or lessi will pay Lessie will pay Lessie will pay what and all to the Lesser one is lease rental so minimum lease payment is given by the formula lease rental plus G RV lease rental plus grv grv as in guaranteed residual value what is this grv I think first one is comfortable for us because minimum lease payment means less is paying to the Lesser lease rental that I think we are comfortable one more fitting that gets added extra here is grv as an guaranteed residual value what is that is let's take the same example sir who is the owner of missionary here a limited a limited has given the Machinery on lease for how many years five years to whom lied now be limited crazy fellow Bas he's using the asset not getting it serviced asset should be used for 10 hours day he's saying only 5 years I have the use right right to use no 16 hours a day 20 hours a day and all he's using not our asset now our asset means oh nice friends asset means drop only for us that is with that intention or with that attitude be limited is using now you would tell me sir at the end of useful life if asset will have a residual value a limited thought this guy B limited will be little careful and a limited thought after 5 years when a limited sells the asset they will get a residual value of 50,000 but this B limited are they using the asset cautiously or recklessly I mean now you would tell me will the residual value be 50,000 or it may be lesser suppose it became zero because that so nicely a li B limited as used asset okay so resid value is how much zero assumption it can be anything for Simplicity sake I've assumed zero is it now fair for a limited no that means residual value how much residual value a limited will get will be dependent on B limited usage so in this case a limited will tell be limited boss you have to give me a guarantee you have to give me a guarantee that minimum I will get a residual value of 20,000 a limited is telling B limited minimum resid value I should get 20,000 it's a negotiation it could be any number so a has asked for how much guarantee from B 20,000 okay if B limited rejects means a limited will tell I will not give you the asset on lease be told no problem I will give you guarantee of how much 20,000 suppose after selling the asset after 5 years if a recovers zero means what will happen if by selling the asset if a recovers only zero means now B limited has to pay a limited how much 20,000 because B has given a guarantee of 20,000 can we escape or we have to pay we have to pay who's paying b i means this also should form part of your MLP because MLP is minimum lease payment who makes the payment Lessie lesi will only pay lease rental or also grv also grv hence MLP is given by the formula lease rental plus grv grv is not mandatory it's a negotiated number it could be anything grv could be 10,000 12,000 Z whatever that is agreement between lessar and ly if it is there that should be considered for your calculation okay sir why we calculate this in a bit we will see one next chart book chart poins may we will see so far MLP calculation clear okay sir all right sir why do you think lesser will charge lease rental from uh B limited why is a limited charging 1 lakh rupees from B limited because because because B limited is using the asset for 5 years that means lease rental is based on time correct no if you take the asset on lease for 3 years you will make the lease payment for 3 years correct so B's rental is a payment fixed based on time okay keep this point in mind suppose a limited also told B limited since anyway you are using my missionary you using my missioner after using the missionary what will be limited do what is the intention of B limited to take the asset on lease using this B limited B limited will produce some product after producing what they'll do they will sell a told how much of sales you make give me 10% of sales give me 10% of sales you have to give me a lease rental of 1 lakh also you have to give me a lease rental of 1 lakh also how much of sales D limited makes by using missionary of that 10% of sales B has to pay to a okay now you tell me is this number fixed or it is not fixed lease rental will vary or it will be fixed lease rental is a fixed payment based on time this particular 10% of sales is it based on is it based on time or it is not based on time it is not fixed also it is not fixed also it is not based on time also yes no that means should this 10% sales payment be considered as MLP or it should not be not be this only we call it as contingent rent this only we call it as contingent rent okay saru if it is contingent rent means you will not consider it as part of minimum lease payment for the person paying this contingent rent you'll that person will treat this as an expense for the person receiving contingent rent you will treat this as an income so that accounting contingent rent accounting will not come under as19 whatever the contingent rent simply you book it as income and expense depending on whether you are paying or whether you receiving if at all they give okay Z any problem or carry on okay this is done this is done this is done next one more terminology we will see just two minutes me give me first we will throw across the terminology then we will see its importance okay next one something we call it as gross investment we call it as gross investment stop go back to this example sir who has invested in this missionary who has invested in this missionary sir the person who has purchased missionary only would have invested the money correct no I means who has who's the legal owner of that missionary a limited correct so from a limited's perspective you think from a limited perspective you think now is a limited using this missionary or they've given it on lease they have given it on lease I means can a limited recover anything by using the missionary or they cannot since a is not using this missionary they cannot use this missionary but theyve already invested a has already invested money in in this missionary how is a limited recover going to recover that investment how is a limited going to recover from that investment through by leasing it out yes no through Lee through Lee what and all a limited want to recover tell me from a limited perspective tell me what and all a limited wants to recover by leasing this missionary one a limited wants to recover lease rental that's all or even grb grv that's all or even ugv also what is UV suppose the total resid in this example only what is I'll construct it here suppose the total residual value is 50,000 lesie gave a guarantee of only 20,000 leie gave a guarantee of only 20,000 what is the total resid value 50 entire 50 is guaranteed or only 20 on 20 how much is not guaranteed 30 that only we call it as ug unguaranteed residual value now think from a limited perspective from a limited perspective what and all a limited wants to recover do they want to recover lease rental yes how much is lease rental in this example 1 L perom and for how many years five years so that means totally it is how much 5 a limited wants to recover a limited is what here lesser lesser has purchased the in machinary that means they have made the investment so since they are not using the machiner rather they have let it out how and all what and all lesser wants to recover one they want to recover lease rental that's all or even grv grv how much is grv lesser wants to recover 20,000 yes people that's all or even U grv from lesser perspective we want to recover total residual value that total residual value only we have split now as grv and UV this grv and UV if you add what are you going to get this grv and UV if you add automatically you're going to get 50,000 what is that 50,000 if you want you can write a equation also resid value is nothing but grv plus u like this also you can write and s wants to recover only grv only UV or both both so along with the lease rental they want to recover grv and UV also yes people how much is this number now in this example me 5 lakh 50,000 yes sir this only we call it as an as9 termal enery gross investment gross investment yes tell me how how do you get gross investment once again lease rental lease rental or total lease rental total lease rental plus grv plus u in this example when you total you getting 550,000 so far okay now no no no lesser wants to recover this much will entire 550 car recovery happen immediately or over the lease term over the lease term in this example how much is the lease term 5 years that means this particular 550,000 will be recovered by the Lesser over a period of 5 Years sir are you doing lease car accounting after 5 years or no no that means can we take this value and do the accounting or we have to find out the present value we have to do the present value that present value this 550,000 now can I call it as gross investment is it okay yes if you find out the present value of gross investment suppose you got find out the present value of gross investment and you got it as 4 lakh assumption this only we call it as net investment this we refer to as net investment so that's what I've written here net investment is nothing but present value of gross investment people why all this is required I'll tell you but calculation numbers wise is looking all okay okay okay done sir is there any difference between this check these two number gross investment is how much 550 present value of that gross investment is how much 450 once again I'll write over here gross investment is how much 5 lakh 50,000 we found out the present value of this 550 how much did we get it as 4 lakh that present value of gross investment only we call it as net investment right what is the difference between these two this is the future value this is the present value what is the difference between these two 150,000 yes the difference between these two only we call it as ufi ufi means unearned Finance income unearned Finance income is gross investment minus net investment this is one kind of problem sometimes they ask Find Out gross investment and find out unearned Finance income you know how to find out all this yes no how simple how do you find gross investment once again to lease rental plus total guaranteed resident value total ug if you do that automatically you're going to get gross investment but we want gross investment or we want net investment also how do you find net investment gross investment is future value we have to find out the present value how do you find present value simply take the future cash flows multiply by the discount Factor discount Factor will be given to you in the question so in this problem I've assumed but in the question they will give you a discount Factor where you all have to calculate this the difference between present value and future value only is nothing but your time value of Monika for lesser it becomes your uned Finance income so that is your 150,000 that's one problem I hope I don't have to do this yeah some people want sometimes this also gets asked done done done done done work it next we will see I I think one or two pointers are there which I'll see it come back to it later huh now sir the accounting aspect till now we saw the terminologies right now coming to the accounting part as9 says before you start lease accounting before you start lease accounting you have to find out whether lease is an operating lease or lease is a finance lease you have to find lease is whether an operating lease or a finance lease if it is a finance lease they have given some conditions they have given certain conditions in fact five conditions are given if all the five condition fails if all the above if it fails then it becomes operating if any one of these condition get satisfied means automatically it becomes the finance lease accounting treatment for operating lease accounting treatment for finance lease are different hence lease you need to First find whether it is an operating lease or a finance lease before you start the accounting so they have given the conditions only for what lease Finance lease okay so let's test the conditions or see the conditions one by one first condition for it to be Finance leases if you want to call it as a finance lease present value of minimum lease payment I think now you're comfortable with the terminology present value of minimum lease payment will be equal to fair value of the asset present value of minimum lease payment will approximate the fair value of the asset okay now what is this or or maybe first I will start with this maybe there a second condition maybe a little better maybe for understanding purpose I'll come back to this in a bit next one I'll take it up so the second condition that they have given for finance leases Le a term Le a term will approximate to the useful life of the asset Le is a term will approximate to the useful life of the asset let's take a small example let us say x limited has leased a plant and missionary to Y limited for four years for four years this four years only we call it as lease term what asset they've given it on lease plant and missionary let's say useful life of the asset is also four years useful life of the asset is also 4 years now honestly check check inel who's the legal owner of the asset X limited but who is using the assets for its entire life and getting the benefit why limited yes if the here check what is the total useful life of the asset four years what is the least term four years what is a percentage out of the total useful life of four years lesi only is using asset for four years that means what is the percentage 100% if this percentage is 60% or more if this percentage is 60% or more it automatically becomes a finance it becomes a finance if it is a finance lease what to do again I'll tell you okay this is how you find out whether it is an operating lease or a finance lease what is the condition we just now tested once again tell me lease term will be approximating to the useful life of the asset it will not be exactly 100 percentage for your question sake me find out the percentage if that percentage is 60% or more then automatically You can conclude that it is a finance Le done now understanding how second calculation works okay go to the go back to the first calculation first condition for it to pay a finance leases present to value of minimum lease payment will approximate to the fair value of the asset will will be equal to the this is not fair value this is equal to the fair future value of this is the fair value of the asset okay sir all right now they will give you the fair value of the asset in the problem let's say fair value of the asset is 550,000 today's value of the asset is how much if you want to buy the asset today if you want to buy the asset today how much does it cost 550,000 okay now you also have to find out minimum lease payment tell me how do you find out minimum lease payment again go back minimum lease payment who will make the payment in this Arrangement lesie what in all payment lesie will make lease rental and and grv Lease rental and grv ugv lesser will pay less he will pay or no no lease payment con are only two components lease rental and G correct suppose you have taken the asset on lease for four years means all the four year lease payment let's see will make it immediately no lease term will be paid over a period of 4 years means lease term will be expressed on present value terms or future value terms future value terms you are doing the accounting in future or today today hence we have to find something called what sir present value of minimum lease pay to find out present value we take the help of discount Factor this I will apply to you in couple of questions don't need to worry but just sa right so find out the present value basically we need present value of lease rental plus we need present value of grp if you do that you will get present value of minimum lease payment let's say that is 5 lakh assumption let's say that is 5 lakh what is the the fair value of the asset 550,000 assum assume what is the present value of minimum lease payment I've assumed 5 LH so calculate the percentage out of 550,000 this constitutes 5 lakh express this in not in numbers but in percentage out of 5 a half lakh rupees present value of minimum lease payment represents 5 lakh give it to me in percentage how do you get it in percentage 5 lakh divided by 550,000 into 100 how much is it 91% or rather if you do 91% of 550,000 what are you going to get 91% of 550,000 if you do approximately you'll get 5 lakh so if this percentage if this percentage is 60% or more if this percentage is 60% or more then it is automatically Finance okay that is another conclusion this percentage the standard is not given but I'm just saying for based on the problems and things given okay calculate this if this percentage is 60% or more means automatically it becomes a finance lease what is the implication once more I will tell you the next chart book may have written all that so far whatever we have discussed make sense yes okay let's take one step back and revise everything standard name as 19 which talks about Lee in Le May there will be two parties who are those lesser and Lessie who's the legal owner of the asset lessar who's the user of the asset leie who get right to use the asset leie forever or over leas in fact forever they don't get over a certain period of time lesie will get right to use that certain period of time only we call it as lease term will lesie get to use asset for free of cost or has to make the payment make the payment that only we call it as lease payment then we looked at next component called minimum lease payment minim payment is always from lessar angle or lessi angle lessar will receive the money who will pay the money lessi angle so from think from lessi angle how do you get minimum lease payment lease rental Plus guaranteed residual value that addition will give you minimum lease payment that is one we saw then gross investment we saw who has made the investment investment is made in asset who has purchased the asset lessi or lar lar okay lar has purchased the asset means lar has made the investment and lar is using the machinary or asset or he has given it on lease given it on lease through lease what and all lesser wants to recover lease rental grv and ugv so lease rental plus grv plus UV if you do you'll get gross investment this recovery will happen immediately or over lease term least term is future value so find out the present value of this gross investment that only we call it as net investment the difference between gross investment and net investment only we call it as from lesser angle unearned Finance income ufi short form only for class that is one next we we have to we looked at that whenever there is a lease lease are broadly classified into operating lease or Finance for finance lease they' have given some conditions they've given five condition if any one condition satisfied means automatically it become Finance lease if all the five fails means it becomes operating Le condition number one we saw where present value of minimum since we are doing the accounting now everything should be taken on present value terms so present value of minimum lease payment should be equal to fair value this equal to or approximating approximating means 100% or 60 or more is good enough find out the percentage if 60% or more is good enough for us to conclude that it is a finance case that is first condition second condition Le term will approximate to the useful life of the asset the leas term will be more or less equal to the life of the asset okay 100% or 60% is good enough 60% or more is good enough for us to conclude that it is a finance lease okay third condition first two are numerical calculation based last three are just theoretical condition number three says if it is a finance lease means one of the feature of Finance leases asset will be automatically given to the lessi at the end of least asset will be transferred to the lessi at the end of at the end of Le on like here let's say here x limited gave the planted machiner to Y limited for how many years least four years after 5 years X to told y limited you only keep the asset you only keep the asset that means after after the lease asset is coming back to the Lesser or it is kept with lessi only if a lease all this agreement will call out okay if there is a any feature or clause in the agreement which says asset is transferred to the lessi at the end of lease term means such a clause is an indication that it is a finance that's the third one all this may not be there in the question but if it is there you can test and figure it out okay sir that is condition number three condition number four is slight alteration of the above condition this time around X limited is telling why limited I will not you can I will not give you the asset at the end of lease term but lesie has an option to purchase leie has an option to purchase or maybe let's build another example X limited leased a plant and missionary to Y limited useful life is 7 years useful life is 7 years least term is only 5 years least term is only five years tell me the percentage let's see first out of seven years lesie is using it for how many years five years that means what is a percentage out of seven years lesie is using it for 5 years means the percentage is 5 divided 7 into 100 is how much1 71 something I mean this itself is good enough for me to conclude that it is a finance lease yes that as per condition number two or whatever we are ignoring that and going forward not necessary all the five anyone is good enough now we are testing condition number four now asset can be used for how many years years but lease term is only 5 years now X limited told y Limited at the end of lease term meaning at the end of year at the end of lease term which is 5 years you have an option to buy the asset X limited is telling y limited after 5 years if you want you can buy the asset till now you have taken the asset on lease at the end of lease term that is year five lesie has an option to buy the asset X limited told the Y limited you can buy the asset at 150,000 you can purchase the asset by paying 150,000 let's say fair value of the asset at the end of year five is expected to be let's say 350,000 the value of the asset at the end of fifth year is expected to be how much 350 but lesie has an option to purchase it just by paying 150 that means from lesie angle it's a bad deal or a good deal good deal do you think lesie will reject the offer or he may accept the offer accept the offer that is your condition number four if lesie has an option to purchase the asset at a value significantly lower than fair if such a feature is there means that is a feature of a finance Fe once again what is it now again if Les he has an option to purchase the asset at a value higher than fair value or lower than fair lower than fair value is all these are not mandatory if at all such a clause is there in the lease agreement means then such a lease will automatically become Finance lease okay sir last condition is customized asset if it's a actual condition is asset is of a specialized nature where only lesi can use it without making any major modification that is the actual wordings okay or in simple language customized asset if it's a customized sir if it's a customized asset means can the lessar give this asset on lease to everybody or only to this specific lesi if it's a customized asset means everybody can use it or only lesi can use it only Lei can use it so if customized asset if it is given on lease means then such a lease automatically becomes Finance lease that's your all the five conditions okay people if all the five condition fails then only it will become operating lease for operating lease we don't have any separate condition any lease which is not a finance lease automatically becomes operating lease that's how to identify comfortable yes sir can I move on to the next next thing is online also give me a confirmation we'll apply problem don't worry in case uh you're having any reservations but I hope whatever we are seeing in fact all this we have done in detail h I mean I don't know how much of that detail you remember all right now why are we doing all this drama is for the sake of accounting for the sake of accounting sir if it is operating lease we do one sort of accounting if it is finance lease we do another set of accounting that is a reason it's important for us to find out whether the lease is an operating lease or a finance lease let's see the operating lease first operating lease so just stop as9 C drama if you have taken an asset on lease in your golden days bpan 11th 12th and all what entry you passed suppose I've taken an asset building on lease and I'm paying a lease rental of 2 lakh rupees perom what entry you used to pass if you have taken an asset on lease you are a lesi means what entry you would have passed lease rental account debit to bank account yes h 2 lakh 2 lakh and this lease rental is an expense expense you'll transfer to P so the entry would be P account debit to lease so lesi will pass this journal entry meaning lesie will treat this as an expense okay this is the entry for expense paid this is the expense for expense transfer if it if you are a lessar if you are a lessar what entry you would have passed lessar is making the payment or receiving the payment that means they would have passed the journal entry bank account debit to leas rental income and then lease rental income account debit to P yes so lessar would have accounted this as an income correct yes this is what you have done if it is operating lease if it is operating lease we do this particular accounting treatment if it is operating lease we do this particular whatever you just now said now that we will be doing it for what lease operating lease but one small catch is there as9 says that okay for Lessie if it is operating lease means lease rental you have to treat it as lesie will treat lease rental as an expense and lessar will treat lease rental as an income but this expense and income should be transferred to p andl on a straight line basis on a straight line basis meaning you have to transfer same expense to pnl every year whether it is an income or whether it is an expense you have to transfer same expense to pnl everywh okay zaru comfortable again this is not much tested in fact i' given you one example of this also you can refer to that example for the time being but I think the treatment is okay for you yes sir but simple if it is an operating Lee less R will treat it as an income less c will treat it as an expense and transfer that income expense to P account don't respect any that's all is this treatment for operating lease d d d g yes but but if it is finance lease if it is finance lease whole accounting will change whole accounting will change this is your substance over legal form accounting substance over legal form so what is a substance over legal form substance over legal form means reality is more important than legality reality is more important important than legality that accounting only we call it as substance over legal firm sir didn't understand sir no problem look at this sir let me give you an example useful life is 5 years useful life is a planted missionary is there whose useful life is 5 years leie has taken the asset on this asset on lease for a period of 5 years okay same example X limited has given a missionary on lease to Y limited for how many years five years and what is the useful life of the asset 5 years okay using this data You Are You can conclude that this is an operating lease or a finance lease this is an operating lease or Finance lease Finance lease how you on what basis did you conclude this you calculate sir out of what is a total use for life of the asset 5 years out of that how many years it's been let out 5 years that means what is the percentage 100 percentage If the percentage is 60% or more automatically it becomes what lease therefore this is what lease Finance lease yes sir what I mean means we have to do Finance Leisa accounting what Finance Liska accounting says is reality reality accounting not legality accounting sir in reality who's the owner of the asset carefully look at this example in Legally who's the owner of the asset X limited but reality May who's using the asset and getting all the benefit real legally who's the owner missionary is the asset given on lease who's the uh legal owner of the asset X limited is the legal on paper May X limited as the owner of the asset correct but the reality reality who's using the asset and getting all benefit the useful life of the asset is 5 years and least term is 5 years means why limited is using the asset and getting all the benefit means ideally who should show the asset ideally who should show the asset is X limited using the asset is X limited really interested in the asset or he's not interested sir asset life is 5 years and for entire five years is has leased out means is X really interested in the asset no who really interested in the asset by limited that means what as19 Sayes let let y limited only show the asset let y limited only show the asset but currently who's showing the asset X limited so X limited should cancel the asset in their books if it is what Le this Dr though X is a legal owner of the asset is he real really interested in the asset or not interested since X limited is not interested in the asset let them cancel the asset in their books and in reality May who is actually interested in using the asset and getting the benefit lesie so let lesie show the asset this is substance over legal form got it people now whole lot of questions will come what question sir if leie limited has to show the asset means they will show the asset at what value because has lesie purchased the asset or taken the asset only means you don't have any purchase value that means asset should be recorded at what value huh now leie will record the asset at present value of minimum lease payment that's where MLP calculation becomes necessary understood everybody so I limited will show the asset at present value of minimum lease payment or fair value of the asset whichever is whichever is lower you don't have to write it's all given in the chart book if it is a finance lease lesi will recognize the asset at present value of minimum lease payment or fair value of the asset whichever is L that's where MLP definition we saw initially okay zaru understood everybody yes yes yes yes yes okay go back go back go back or maybe I'll continue with this one sir did lesie get the right to use the asset at free of cost or lesie also has an obligation obl sir here lesie got an right to use the asset he only got the right or Lei also has an obligation what obligation leie has to pay Le lease rental lesie has to pay lease rental here how much is the lease term here 5 years means lesie has a liability to pay lease rental over a period of 5 years that means lesie will not only show the asset lesie will also record a liability called lease liability leie will also record a liability called lease liability so if it is finance lease leie will pass the journal entry asset account debit to Le liability manageable everybody coola s if leie is charge is accounting an asset means this asset should be depreciated ah yes if lesie is recording the asset means he also has to charge depreciation on the asset manageable this is the accounting required for finance Le we'll apply it in one problem also next we but listen to this so that the numbers you can understand a little better IDE you should you should in fact you should all this you should tell her almost two days we have spent only for this standard probably more than two days I don't remember okay all this drama big drama we have given h okay no problem forgotten means Mafi for you okay so this is for lesie this is for lesie okay tell me let's see how much you remember leaves are of two types what are those operating Lees and finance for operating Lees fancy accounting or simplistic simp what is that simplistic accounting lessar will treat Lee rental as an income lessi will treat lease rental paid as an expense expense and income accounting yes okay that is operating Le very straightforward however if it is a finance leas Finance lease is done over what what concept substance over legal form that simply means reality is more important than legality legally who's the owner of the asset lesser but in reality is lesser using the asset and getting the benefit or lessy less that means in real terms who is interested in the asset leie that means who should show the asset leie so lesie should record the asset leie should record the asset asset will be recorded at what value is lesie getting this asset at free of cost or he's making the payment making the payment that payment only we call it as MLP ml MLP payment all the payments of MLP leie is doing immediately or in future future but are we doing Accounting in future or now I means should we take MLP or should we take present value of MLP take present value of MLP got it so Lei will record the asset at present value of MLP or fair value of the asset whichever is low okay this is fun so leie will say asset account debit asset account debit did the lesie pay for this asset immediately or he's paying it over lease term lease that means lesie has an obligation also that obligation only we call it as lease liability done people since lesie showing the asset he will also charge depreciation of this asset n people okay one more we need to do for lease liability which I'll tell you in problem directly we'll take care this is for whom lessi there is also other party called Lar if it is finance Lee what should lar do first thing currently is lar showing the asset in his books yes because currently LSR is a legal owner no so is he showing that asset in his books yes but is he in reality May is he interested in the asset or not interested so the first thing lar will do is show the asset or cancel the asset he has to derecognize the asset or cancel the asset if asset is shown at Book value or carrying amount means cancellation also will be done at Book value correct what is lar really interested here lar is interested in the asset or lar is interested in recovery of lease rental lesser is interested in the recovery right what and all lesser wants to recover tell me what and all lesser wants to recover lease rental guaranteed residual value unguaranteed resid that only you call it as grv right this recovery will happen immediately or in future future are we doing Accounting in future or now I mean should we take gross investment or should we take net investment lar should record lease receivable okay at what value net investment that's a reason we discussed about net investment lar will cancel the asset at Book value and he has to recognize Lee receivable to the extent of what value net investment suppose net investment is 1 lakh carrying amount of the asset is 80,000 by assumption is a journal entry matching or there is a balancing figure that balancing figure is a gain or loss you'll transfer it to P okay people this is your your lar accounting currently the way situation stands ICI is not preferring to ask lessar accounting lessar books treatment they are not asking in fact in study material I don't think so we have one question also we have solved both for operating lease and finance Le for end to end treatment we have done for lar and lesi both but Les ICI has favoritism towards lesi accounting treatment for lessi is what generally they prefer to ask so far less ARA treatment I've seen very very less number of times it has come can't not that it can't come it has just come a little less number of times but if it comes what to do I think you're comfortable yes everybody this is the treatment lessar has to do immediately okay Beyond this there's an extra treatment we we'll see why they won't ask that is their problem Ma okay I don't know even in CA final also they prefer lessi accounting more more question is coming from CA final also from lessi angle lesser angle maybe they thought that it is simple treatment and they left it I don't know whatever I don't know that is their choice maybe in your attempt they may change this principle from lesy they may choose less or who knows there is always a first time as far as IC is concerned correct no so suddenly suddenly things will change yesterday midnight I think they published them CA final exam from 3: to 2 all of us were sleeping then we got a tin tin tin notification final two two three and all that's what ICA like to do full surprises IC okay this is the treatment sir any doubt you have in the discussion that we have made so far we will apply all this whatever we have done we'll apply it in the next question but you need to know the provision if you don't know this you'll not be able to move your finger also in this exam these sort of questions if you know the provision tu tu tu tu things will go because it is just finding value okay so these things are important to remember so same thing we continue in C final sir no sir different sir see a finalist better sir they have even better approach more realistic approach theyve used sir what sir not the right time to discuss okay some other day we will discuss if you want it okay or I've done CF fin Marathon there you can watch if you are interested anyway don't waste your time watch this this Marathon you watch that is sufficient okay now let's review how the accounting works now Les C limited took a machiner on lease from lar and the fair value of the asset is 7 Okay one minute is fair value of the asset relevant just now we discussed what in case of Finance lease in case of Finance lease first of all to find out present value to find out whether it is a finance lease what do we do present value of minimum lease payment we compare it with fair if that percentage is 60% or more automatically it becomes a fin for that we need fair value for second for accounting if it is a finance lease lesie will show the asset at present value of minimum lease payment or fair value whichever is lower okay generally present value of MLP only will be lower just same okay zaru all right for those we need it so they have given we will see this life of the machine as well as Le term is 3 years automatically concluded what so Le term 3 years useful life also 3 years so percentage is 100 percentage if it 100% means obviously should we have to test further or good enough what is it what is the conclusion therefore this is a finance lease great at the end of each year lesie pays 3 lakh rupees Le rent lesi is paying a lease rental of 3 lakh Rupees to the Lesser every year lesie has guaranteed a residual value of 22,000 so what is this grv guaranteed residual value given by the lessi to the Lesser how much value 22,000 on the expiry of lease to the Lesser grv payment and all will be made immediately or at the end of lease term end of lease term if it is required correct only if lar doesn't get the money lesie has to pay this money okay all right however lar estimates that the residual value of the asset is only 15 chance pedance so residual value of the asset itself was how much 15,000 but how much Lessie gave guarantee 22 so all these are negotiated number right if Lessie has given higher and guaranteed value mean that's okay we take that right don't take 50 no how much is the actual guarantee given by the less C to the Lesser 22,000 so that we'll take it as guaranteed desal value okay Zar sir all right I implicit rate of return is IR we need discount factor for present value calculation we need a discount Factor first priority for Discount Factor we take it as IR irr is internal rate of return you can call it or you can also call it as implicit rate of return sometimes they also call it as effective interest rate okay e we call it in C final sometimes if they copy some question from there that you might see that's the reason I'm asking you no only sometimes that has happened percentage no sometimes C final question they'll copy paste because some are similar so there if you see e and all e is nothing but again discount rate what is a discount Factor here sir 15 percentage okay and the present value factors of 15% such nice question they only given the discount Factor okay how do you get discount Factor 1 / 1 + I whole power n i here is for how much percentage 15 percentage so 1 divided by 1.15 you do how much you're getting 1 divided by 1.15 you must be getting 869 so they only given first year discount Factor at 15% is 869 second year 756 third year 657 3 years they've given why because the least term is also three years okay at the end of first second year and third year respectively check here calculate the value of missionary to be considered by the lesi and now you don't be a baspa and conclude test Finance lease condition and conclude sir question itself is saying what calculate the value of missionary to be considered by lesie Sir when will lesie show the Machinery in their books if it is operating leas or Finance Le question is only saying how much missionary value lesi has to show means question already knows that it is what lease Finance lease should we have to find find out whether it is finance lease or not that condition you don't have to test because they are not asked if they ask suggest the accounting treatment suggest the accounting treatment then you will first find whether it is an operating lease or Finance lease and then give the treatment here since they have directly said how much value missionary will be showed by the LC the conclusion is that automatically it is a finance lease you don't have to write that conclusion or prove it for that matter okay all right and finance charges each year what is this finance charges we will see okay now first thing you already know it is a finance lease given all right in case of Finance lease what will the lesi do what will the lesi do leie will have to show the asset at what value present value of minimum lease payment or fair value of the asset whichever is low correct so fair value of the asset they only given in the question to be 7 that component is already there the only thing we have to find out is what present value of minimum lease payment how do you get minimum lease payment minimum lease payment is nothing but your Le Le rental plus NG that means you have to find out the present value of Le rental and you have to find out present value of gr if you do that automatically you'll get present value of minimum lease payment how much is a lease rental every year how much is the lease rental lesie has to pay to the Lesser every year 3 LH how much is grv 22,000 so every year the lessi has to pay the Lesser a lease rental of 3 lakh GV will be paid every year or once once that to when at the beginning of the lease term or end of the Le when is the least ending third year so third year may there will be a guaranteed residual value of 22,000 if you want you can combine these two also your choice okay showing separately is better I'll tell you the next method okay sir this payment of three lakh when will the lessi make this three lakh payment lesie will make at the end of first year this three lakh payment lesie will make at the end of second year this one at the end of these two at the end of third year that means all these are present value or future value are we doing Accounting in future or no that means we need to find out its present value for that we need a discount factor missing given how much discount Factor 15% and you don't calculate the discount Factor when they have given they have given decimal decimals how many decimals three decimals when they give you the discount Factor take exactly the same decimals not an inch here and there okay discount factor is how much 869 756 and 657 have copied correct this is a future value from future value if you multiply discount Factor you'll get present value so the total present value is how much 699 054 like this one way you can calculate or another shortcut way if you just check is lease rental changing every year or same every year same every year that means all sir if you take each year discount Factor separately each year discount Factor if you take separately we call it as PV if present value interest Factor now mathematically if this number is same means what only you have to do is add these three Square discount Factor these three you add quickly add 869 756 and 657 these three you add how much are you getting 2.82 2. 282 instead of calculating three times this is nothing but we call it as PV AF how much is the lease rental every year 3 lakh just multiply take the PVF and multiply 3 lakh if you multiply what are you going to get you'll get 6 lak 84600 6 lakh 84600 either you can do it like this shortcut or you can go individually if you add all this what you going to get add these three for me if you add these three this value quickly if you add these three also you should get 6 lakh 84 600 only okay tell me calculating three times is better or calculating one line is better that's what I put up here okay if the lease rental is same every year means use PVF if there is five years called lease rental means all the five years Square discount Factor you add and multiply by the lease rental perom automatically you'll get present value in one lineer otherwise if you feel this approach table approach works for better for you means do it this way your call I feel this will take a little extra time this is better okay here simply you have to find out present value of Lee rental and present value of grv Lee rental is same every year so which is three lakh I took PVA for 3 years automatically you got this present value in grv you will pay every year or once once which year third year correct third a discount factor is how much 657 so multiply automatically you'll get present then G this is present value of minimum lease payment calculation pair value of the asset is already 7 lakh leie will record the asset at what value present value of minimum lease payment or fair value whichever is lower which is the lower among these two 699 054 so asset will be recorded by the lesi initially at 69954 by passing one journal entry make me happy what journal entry I also should smile P please yeah what are the entry you'll pass asset account the moment when the Lessie takes the asset on finance lease here lesie will pass the entry asset account debit to lease liability account at year one beginning the moment asset is taken on lease this is the entry correct done people okay stop people sir this is future value accounting or present value ACC present value accounting stop how much payment you have shown here here check how much lease liability has lesi shown 6 lak 99 054 but is lesie expected to make this payment or higher payment sir every year lesie has to make a payment of three lakh for how many years three years and he also has to pay a grv of how much 22,000 that means what is a total payment 9 lakh 22,000 is a total payment this 9 lakh 22,000 is present value or future value future value but since we are doing the accounting now did we take this future value or we took present value present value but actual liability for the Lessie is $699 or 922 922 that means there is a difference the difference between present value and future value for the Lesser you booked it as unearned Finance income for L you will book it as finance charges for L you'll book it as finance charges okay or the understanding here is in case of Finance lease or listen to this explanation in case of Finance lease who's really interested in the asset who is really interested in the asset lesie that's the reason lesie showed the asset sir correct but is lesie making the asset payment immediately or over a period of time how much time 3 years that means payment is made immediately or there is a delay when you make a delay in the payment will the other party accept the same payment or interest charges so let see will have to book the delay in payment as a interest charges L lar will book it as an interest income that only there you call it as unearned Finance income got it here it's a finance charges what is the difference between these two $6.99 and 9 22,000 difference you tell me how much is that difference I think I've calculated that also here somewhere okay what is the difference sir you have accounted a liability at 6 lakh 9954 but total Le total payment Les is making is 922 so the difference is how much 2 lakh 229 that the Lessie should book it as a finance charges that is what is the requirement of the question question they are asking you the finance charges okay but but but but but but but this finance charges is it's a finance charges for every year or total total this is the total finance charges but in the question did they ask you total finance charges or each year finance charges each year finance charges sir can you book this 2 l22 946 as finance charges in first year only no this is a finance charges not for one year this is a finance charges for the Le term what is the Lee term years three years so that mean this is the total finance charges pakka but this is for 3 years now we have to find out what is each year finance charges then people that is given by this particular table hope you remember this table no remember okay no problem that also we will see okay yes so total finance charges is 6 2 lak2 to 946 how it works very simple now lesie it's like in finance Le me you're treating that lesie has purchased the asset in finance Le May you're treating like Les he has purchased the asset but payment you're making now or you're making a delay delay how much liability how the stable works so initially lesie has showed how much liability in their books 6 lakh 99054 how this table works what is the opening balance of liability 6 lakh 9954 okay treat it like this you have taken a loan of 6 lakh 99054 now you are taking a loan of 6 L99 054 now you'll repay this loan over a period of 3 years that means will there be will you have to pay any interest yes if you take a loan of 6 lakh 9954 means you have to pay interest what is that interest they have given what is the interest rate they've given in the question 15% so on this liability since you are settling this liability over a period of 3 years on this liability you have to book finance charges at what rate 15% how is that given 69954 15% you calculate one maybe one you calculate everybody next we will see 699 054 15% if you do how much are you getting 1 L4 858 that is the interest charges for the lesie for the first year okay so it's like this lesie has taken a loan of $6.99 on this loan how much interest we have to pay in the first year 104 in the first year did lesie make any payment in the first year did lesie make any payment yes every year lesie has to make a lease payment of how much 3 LH so next is the payment column first year how much payment made 3 l so when you make the payment liability balance will be same or liability balance will reduce when you make the payment when you repay payment is repayment of loan when you repay the loan loan balance will be same or it will reduce that means how do you get closing balance it's like this you took a loan of $6.99 on that loan you have to pay an interest of 104 that means how much is loan Balan Now quickly tell you took a loan of $6.99 on this you have to pay this much interest means totally how much you need to repay this you'll minus or this you'll add add add these two 699 054 + 104 8588 8 lak 3,000 you have to pay entire 8 8 lakh something you repaid or only 3 lakh you repaid only 3 lakh you repaid that means what is the closing balance of the loan 5 5392 that's what I've expressed here as equation loan closing balance is given by 2 + 3 minus 4 okay zaru okay this we call it as ACM table remember this table this will come in almost a all majority of the topic in C finally this one this table is like almost many many topics me this will come so remember this better okay Zar all right understood everybody so what is the closing balance of the loan now 503 912 first year closing balance will become second year car opening repeat the same process now the loan balance is 503 if loan balance is 503 means you will pay the interest at what rate 15% calculate 15% interest on this that's what I've written in the table as 3 is equal to column number two multiplied by 15% so take this value and multiply 15% how much is that 75 587 got it second year again did you make a payment yes second year again Lei made a payment of three lakh so loan balance will be same or loan balance will reduce how do you calculate closing balance these two car addition minus this yes so that is 279 499 second year closing will become third year opening fine third year liability should have any closing balance or it should become zero why leas term is there for more than three years or Lee will get over by the end of third year if Le is getting over by the end of third year means asset should be there or asset should be fully depreciated asset should be fully depreciated should the liability be there or it should be repaid that means liability of closing balance should become how much three LH liability of closing balance should become how much zero correct correct last year third year how much payment Les he made he made 3 lakh rupees for lease payment 22,000 for grv so total payment is how much 322 last year may due to interest me you may get a slight round off error this is not exactly 15% it is actually 15.01 in all that decimal that would have rounded off so hence last year if you calculate interest how much are you getting tell 279 499 into 15% you do quickly 279 499 15% if you do you getting 40 41,9 you're getting but you have to adjust the round of difference will be there in the last year adjust how to adjust simple 322 minus 279 you do these two numbers you minus how much are you getting this one and this one both minus you do obviously for 42501 that you'll book it as interest charges for third year there's a slight round of error okay 50 rupes 100 rupes 500 rupes depending on the bigger the number bigger the round last year you'll get the round of error finally the closing balance of Lee liability should be there or it should become zero it should become zero this is the accoun done people this is what they asked what is finance charges for each year if you total them up how much are you getting triple to 946 that we already know initially we accounted lease liability at $6.99 but the total payment we are making is 922 the difference between this is how much tri2 so total finance charges we already knew but they ask each year finance charges that this particular table gives done saru journal entry usually they don't ask but anyways we will quickly review it in case they ask done okay first journal entry already passed what does that repeat to me once again asset account deit to lease liability now lease liability is like a loan lease liability is like a loan on the loan you have to book interest charges that only we're calling it here as finance charges what is the journal entry what is the journal entry for interest charges don't write interest charges to bank because are we paying here interest charges or are we paying lease payment lease payment that means for finance charges or interest charges the journal entry here is interest charges account debit to lease liability perfect the journal entry for finance charges is finance charges account deit to lease each year of finance charges is given here 104 75 and 4 to that's what I've copied here done people yes when you make the payment liability balance will be same or it will reduce reduce what is the journal entry for payment made when you make the payment lease liability balance will reduce lease liability has credit balance how do you reduce it debit so the journal entry for lease payment is lease liability to bank first year 3 lakh second year three lakh last year including residual value 3 lakh 22,000 that's all okay s now this asset will be there in the Lea books forever or it will get depreciated ated over what period lease term what is the lease term here 3 years so$ 69954 you charge depreciation over a period of 3 years what is the journal entry for depri depri to asset account asset value is $699 054 you depreciate it over a period of 3 years this is the depreciation for 3 years got it sir that means lesi has two expenses here what are the two expenses depreciation and finance charges both the expenses will be transferred to that is a transfer entry they have not asked just for your reference what they asked in this particular question was only initially at what value will you record the asset and what is the finance charges this is all as a requirement of this question if you put this it is sufficient this is for entry for better Clarity for you I hope now Finance leis of full clarity of got okay now if you know this accounting for lesie for lessar accounting also you know can you make me happy use this entry as a reference and tell me the journal entry for lessar for finance lease first in finance lease is lar interested in the asset or not interested lar will cancel the asset means he will credit what asset asset account at what value carrying out what is he really interested in recovering the lease rental that means he will say lease receivable account debit at what value since we are doing the account now we will do we will use gross investment or net investment the difference between these two will transfer it off to okay sir for Less see it was lease liability means for lessar it will be lease rece on lease liability lease liability means you have taken a loan lease liability means you have taken a loan lease receivable means you have given a loan on the loan taken you will book finance charges on loan given you will book Finance income same table same table you have to put from the Lesser angle so but instead of finance charges it will be Finance income same opening balance you will take instead of finance charges you'll substitute with Finance income instead of payment you'll substitute with receip okay now when you for finance charges what is the journal entry finance charges to lease liability correct for lesi it is finance charges for lessar it is finance income income will be debited or credited what is the journal entry for finance income here you're using lease liability there you use lease receivable so the entry will be lease receivable to finance income okay all right and that lease receivable that Finance income will be transferred off to T since lessar has canceled the asset will depreciation entry come not asked but if they ask can you manage same table wherever LL is there substitute with LR wherever finance charges is there substitute with Finance income okay sir sometimes instead of ir in in this problem sometimes instead of ir they'll also give borrowing rate they'll also give borrowing that is a discount Factor first priority for Discount factor is IR okay if irr is missing then you'll take borrowing rate instead of ir they also can give borrowing rate that simply discount factor I hope now is accounting completely okay for everyone okay can we review the next question okay oh this one I think this one you can answer this is an RTP May 24 question surj limited wishes to obtain a missionary costing actually this should have been fair value but no problem we mafy the Institute okay the fair value or the cost of the asset is how much 30 lakh by the way of lease surj wants to obtain the asset means Lessie is the person who wants to take the asset on lease okay so surj here is the Lessie if they give that sentence surj here refers to Lessie the effective life of the missionary is how much 14 years so the total useful life is 14 years but the company requires it only for 3 years stop total life 14 but leie wants to use it only for three what is a percentage out of 14 L is using asset only for 3 years so what is a percentage 21.4% looks like a finance lease no don't conclude it is a operating lease because for finance lease there is one condition or five you have to test all the five practically you'll be able to test only one or two but just say have to test all the five if all the five fails then it will become operating first condition has definitely failed correct okay let's go further uh it enters into an agreement with star limited for a lease rental of how much three lakh payable in aers aers means you are paying the lease rental at the end of the year okay if you're paying lease rental at the end of the year they say that lease rental is payable in ear years that's what it means and implicit rate of return is 15% you know what is this this 15% is nothing but discount Factor the cheaper Chief accountant is not sure about the treatment of lease he's not sure whether it is an operating lease or a finance lease use annuity Factor at 15% as 2.28 PV AF PV 15% for 3 years pvaf is given to be 2.28 sir when will we use pvaf when Lee rental fluctuates or same and same Lee rental how much is lease rental here 3 okay now how is this relevant tell me the conditions of Finance lease quickly first present value of Finance lease is that if you want to conclude it as Finance lease the first condition is present value of minimum lease payment will approximate to fair value that's that is given to be 30 lakh present value of MLP we need to calculate MLP means what Lee rental plus grv grv there or not there grv mandatory or negotiated number negotiated here grv is zero right but lease rental is there yes how much lease rental three lakh you will pay a lease rental of 3 lakh rupees every year for how many years three years that means this 9 lakh Rupees is a total payment which is the future value we have to just find out the present value of this and is lease rental changing or same same should we use PV if or PVF so find out the present value of lease payment then 3 lakh multiplied by PVF you do 3 lakh 2.28 if you multiply how much are you going to get 6 lak 84,000 now so present value of minimum lease payment is 684 what is the fair value of the asset that's a typo they have given actually cost it should be fair value but no problem what is the fair value of the asset 30 LH find out the percentage out of 30 lakh out of 30 lakh lesie is making a payment of only 684 find out the percentage what percentage 22.8 do the percentage cross 60 or more no so condition two also P third condition asset is transferred to the lesi at the end of lease term told or not told not told so failed fourth one lesie has an option to purchase the asset at a value significantly lower than fair value told or not told not told specialized asset customized asset mention no that means all the condition fail therefore what operating if it is operating Leal big smile your golden Des teachers you can remember what did your 11th grade 12th grade teachers told when you pay the lease rental the journal entry is Lee rental to bank and that Lee rental you transfer it to P every year Lee rental is 3 that simple treatment manageable fancy treatment not required for operating lease okay this is another type of question that can come one more type of question usually gets asked from this particular chapter that we will read and this we can sum up this particular topic so what is this the next topic this is important has come quite a few times sale and Lease back sale and Lease back first we will sell the asset after selling same asset we will take it back on lease hence the name sale and Lease back okay I have told you this we we do this arrangement to use asset as a base and raise money it's like a more like a finance Arrangement which I told now I'll not go too much into the details of all that okay first you sell when you sell you will get the money okay and then later you want the asset so you take the same asset back on lease so in case of sale and Lease back what we have to do now usually sir in sale and Lease back Arrangement you want to know a little more or this is okay the explanation wise enough right I mean I'll concentrate more towards the what is relevant for examination than going into the meaning of things because they not ask you explaining the meaning of sale and leas okay they will give you a scenario and ask you to say one particular treatment what treatment that's what we about to review now now sir you have sold the asset and you have taken the asset back on lease now lease accounting is simple or it is based on the type of lease based based on the type of lease so whenever you take the asset back on lease first find out whether that lease is an operating Lee or Finance Le if it is finance lease very simple if you have made any profit or loss through this transaction that profit or loss will be deferred over the leas okay because when you sell the asset let's say carrying amount of the asset is or maybe one example only we'll tell off why a limited sold one planted machinery for 10 lakh Rupees okay let us say carrying amount of the asset is 7 lakh fair value of the asset is 9 lakh three data I've given you okay a limited sold the asset to B limited for what value 10 lakh Rupees the currently a limited is showing the asset in their books at what value 7 lakh but the on the date of sale the fair value of the asset was n okay N9 lakh worth in a way the market value of the asset is n but we negotiated and sold it for 10 lakh Rupees that's the arrangement theyve made okay so that means a limited is the seller and B limited is the buyer purchaser so what is the topic name sale and Lease back so a has sold the asset after selling the asset we will keep quite or we will take the same asset back on lease first we will sell and then take the same asset back on lease a limited will take the same asset back on lease that means a will become the less C A will become the less C who gave the asset back on lease now B gave the who's Sir after selling asset belongs to whom after selling asset belongs to B limited now B limited gave the same asset back on Le it to a limited that means be buyer has become what here less buyer has become lesser seller has become less C correct now accounting of lessar and less is based on whether it is an operating lease or a finance lease so first you need to check whether the sale and Lease back results into an operating lease or Finance lease if it is finance lease what as19 says is any profit or loss that you have made because of this transaction you can't recognize it immediately you have to defer it over the lease term let's say lease term is 5 years a limit took the same asset back on lease for 5 years what is profit here simple sir how much is the carrying amount of the asset 7 lakh how much did a limited sell this asset for no no how much did they actually sell the asset for 10 LH fair value may be n lakh but what at what price did they sell the asset for 10 lakh that means how much is a profit made 7 lakh is a carrying amount or Book value of the asset it was sold for 10 means the profit made is 3 lakh rupees so in case it is a finance lease means the profit made which is here 3 lakh will be recognized immediately or it will be deferred over least time this profit will be booked in Pendle over a period of 4 years okay Zar all right excuse me all I've told you the logic of this also I'll not go into too much of that for the time being and this is not important for examination 99% this will not come unless they're asking for a one marker or a two marker McQ examiner's favorite is this operating lease you have done a sale and Lease back Arrangement that leases what kind of a lease operating lease here there are three rules it's a not a calculation question plain rules and oneliner answer the way they give the question is usually they ask you five scenarios for that you need to tell the treatment for profit because of sale and Lease back you would have made some profit or you would have made some loss that profit or loss should we book it immediately or should we defer it that's all it is okay one11 liner answer but good question usually has comes a lot of times now what is the rules is first check what is a sale value and fair value same is a sale value and fair value same if a sale value and fair value is same means any profit or loss that you have made due to this transaction you'll book it immediately first rule if the selling price and the fair value of the asset if it is same means profit or loss you'll book it immediately that is one first we will read and then we'll apply second case if the sale value is lesser than fair value it's a negotiation could be any number if the sale value is lesser than fair value means if you made any profit means book The Prof it immediately loss also you can book it immediately provided it should not be compensated by the future reduction in lease payments or lease rental I'll tell you what this is numbers next if sale value is greater than fair value three equations sale value equal to fair value sale value lesser than fair value s value greater than fair value if the sale value if it is greater than fair value means then profit up to fair value you'll book it immediately beyond that whatever profit you have you'll defer it over the least so nothing understood sir forgotten sir complete H I know 3 333 problems we have done now you're saying and all okay I no issues we'll take up this question this question came in Jan 21 I'm pretty sure it has come in lot more other attempts also okay review this no problem a limited sold the missionary who carrying amount of wdb is how much 40 lakhs so the book value of the asset or the carrying amount of the asset is 40 lakh but how much did we sell this for B limited 50 lakh that means did we make any profit yes 40 lakh is a carrying amount of the asset we sold it for 50 lakh looks like we made a profit of 10 lakhs okay first and the same missionary was leased back by B limited to a limited after selling we took the same asset back on lease and this lease is what leas they've given operating lease so three rules okay first rule what did I say first check is the sale value and fair value same theyve given five or five or six different different cases here all these are independent cases okay no accounting just one one liner answer selling price did we already know how much is selling price 50 LH it is equal to fair that means have you done any cook up or proper sir value of the fair value on the date of sale the fair value of the asset is 50 lakh and you actually sold it for 50 that means any drama or proper proper that means profit or loss should be defer or immediately if the sale value is equal to fair value means whatever profit or whatever loss you have made through this transaction you'll book it immediately here it is loss or profit profit to get profit what and all you'll compare carrying amount with selling price carrying amount is 40 sale value is 50 so how much profit you made 10 lakh profit that you'll book it immediately that's all you need to write as one lineer answer 10 lakh of profit should be booked immediately in PN that's all one one case man if you write the answer properly one one Mark you'll get that's all it is first one is done okay look at the second one selling price is how much 50 lakhs they modified okay take this data selling price is still 50 but fair value now has become how much 60 lakh that means which equation sale value is equal to fair value or S value is sale value is lesser than fair value you have sold it at fair value or below the fair value below the fair value standard is giving you the benefit of Doubt here sir suppose you need the money urgently now I want to sell my iPad but I need the money today only normally by selling the iPad let's say I can make 20,000 rupees I can sell it for 20,000 but I need this iPad to be sold within the next 1 hour that means will I sell it for 20 or I I settle for a lower price lower price yes so that means the standard is giving you the benefit of Doubt here though the fair value of the asset is how much 60 but you sold it for how much value 50 LH maybe you need the money desperately that's the reason probably you have sold it at a lesser price hence the standard is saying if the sale value is lesser than fair value if you made any profit that profit can be booked immediately okay here check did you make profit or do you did you make loss so to get profit or or loss what are the two things you'll compare to get profit or loss two things you'll compare is carrying amount and sale value what is the carrying amount of the asset 40 lakh how much did you sell it actually for 50 that means how much is the profit you made 10 lakh that profit 10 lakh you have to wait or book it immediately book it immediately though the sale value is lesser than fair value standard is giving you the benefit of doubt that maybe you are in urgency that's the reason you sold it at a lower price so hence profit or loss you can book it immediately yes okay this scenario is also done next case fair value is how much 45 lakhs selling price is 38 that means you have made a sale at a higher than fair value or lower sale value is lesser than fair value same as above equation if the sale value is lesser than fair value means as is 19 is giving you the benefit of doubt maybe you were in urgency that's the reason you sold the asset at fair value or below the fair value below the fair value first fine through the sale did you end up making profit or did you end up making loss loss how much is the selling price 38 what is the book value of the it 40 lakh 40 lakh is the book value you sold it for 38 means you made profit or you made loss how much loss 2 lakh loss standard says loss also you can book it immediately loss also you can book it immediately but that loss should not get compensated in future loss should not got compensated in future like here who has sold the asset a limited to B limited now a limited has sold the asset at its fair value or lower than fair value lower than fair value after selling a has taken the ass back on lease that means a has to make lease payment a has to make lease payment yes no yes yes or no yes sir correct a limited is a seller they sold the asset to B limited after selling the asset a limited has taken the same asset back on lease when you take the same asset back on lease a limited has to make lease payment to the B limited now let's say a limited told B limited fair value of the asset fair value of the asset is let's say 50 LH I've taken a different an example fair value of the asset is 50 lakh I will sell it to you right now only for 45 lakh I'll sell it only for 45 LH that means did we make the sale at fair value or lower lower lower let's say actual lease rental of that value lease rental of that missionary is 2 lakh per per the correct lease rental for that asset is how much 2 lakh perom a told boss did I sell it to you at fair value or lower lower that means I will not give you 2 lakh rupees lease rental I'll only pay you 7 170,000 lease payment for 5 years that means is a limited letting go of this or it is getting compensated by selling it at lower than fair value a limited made a loss correct was that loss let go or it got adjusted adjust it got compensated how through Le rental are we paying 2 lakh rupees as lease rental or lesser lesser that means this loss which the A- limited made got compensated through future lease rental that is what standard is saying if you make the sale at lower than fair value profit or loss you can book it immediately but that loss should not get compensated if you are compensating the Le if you are compensating the loss means compensation is done how if your loss is getting compensated means that compensation is getting adjusted with what lease rental lease rental are you paying it immediately or over lease ter over Le ter so if your loss is getting compensated means law don't book the loss immediately lease the term five years means the lease rental will go on for how many years five years in that me this loss has to be deferred over least ter because loss is getting adjusted with least term loss you cannot book it immediately loss has to be booked over least okay have they told in this problem that loss is getting adjusted no I means you'll write the answer loss can be booked immediately provided it is not getting compensated by the future lease rental this subjective answer you'll WR that's all it is okay understood understood P tell me in sentence what do you learn let's see 5 minutes quickly tell I don't have much time first scenario which scenario they're doing H sale value is greater than fair value or lesser than fair value sale value is lesser than fair value okay all right that means have you sold it at fair price or lower price lower price now this is the first scenario now you'll compare profit or loss to get profit or loss what are the two things you'll compare you'll compare the carrying amount with sale value if sale value is lesser than than fair value means profit can you book it immediately yes loss also can you book it immediately yes but this loss should not be compensated compensated through what Le if suppose the question says loss is compensated through lease rental then loss Will you book it immediately or you will defer defer over what leas that's all it is here they've not told that it is compensated hence loss we will also book it immediately that's done sir next case sir fair value is how much all are separate separate cases fair value how much 40 sale value is 50 L Pak jug sir asset value itself is 40 lakh will anybody sell it for 50 no so if sale value is great here which which scenario sale value lesser than fair value or sale value greater than fair value if sale value is greater than fair value what a is 19 Sayes profit up to fair value book it immediately beyond that whatever profit you have you defer it over least so ideally what is the fair value of the asset that means ideally you should have sold it for what value 40 lakh so Book value of the asset is how much 40 lakh if you sell it for 40 lakh means how much profit you would have made zero that means profit up to fair value is how much Z because ideally you should have sold this asset for only 40 Book value is also 40 that means profit up to fair value is how much zero but in reality have you made any profit in this transaction yes Book value is 40 lakh but you sold sold it for how much 50 lakh what is the total profit you made in this transaction the total profit you made in this transaction is 10 lakh profit up to fair value is zero profit up to fair value you can book it immediately any balanc profit you have to defer over least so here entire 10 lakh of profit you'll recognize immediately or defer it we'll defer it over the least n people yes okay next scenario check this fair value is 46 lakh fair value is 46 sale value is 50 lakh s if fair value is 46 lakh means IDE you should have sold the asset for 46 okay if you had listen to the sentence carefully if you had sold it for 46 you would have made any profit huh yes Book value of the asset is how much 40 if you had sold it for 46 lakh means you would have made how much profit that 6 lakh Rupees is the profit up to Fair Val that is there any jard in that or proper so profit up to fair value which is 6 lakh in this case you can book it immediately but did you actually make only L profit here or more check check how much is the actual profit you made carrying amount of the asset is 40 but you actually sold it for 50 that means what is a total profit you made here in this transaction total profit you made is 10 lakh in this 10 lakh profit profit up to fair value which is 6 lak you'll book it immediately balance 4 lakh you'll defit over the least that's all this is yes okay next scenario Book value of the asset is 40 lakh fair value is 35 stop there only sir the market value value of the asset is how much 35 lakh you are showing the asset in your books at what value 40 lakh before I go to India 19 concept there is one concept what is it yes correct perfect impairment sir the recoverable amount of the asset is how much 35 lakh but you showing the asset at what value 40 lakh carrying amount is 40 lakh recoverable amount is only 35 lakh I means before you do as9 treatment first you need to book an impairment loss of how much 5H so recoverable amount is higher of two things no sir NSP and value in use if they don't give value in use you will take what NSP itself as recoverable okay so NSP means what Market selling price meaning market value minus selling expense selling expense is not there market value of the asset is how much 35 so that only I've taken it as recoverable amount here recoverable amount is 35 lakh carrying amount is 40 lakh so carrying amount is carrying amount is greater than recoverable amount that means you have to book what sir empowerment loss how much empowerment loss 5 lakh when you book empowerment loss carrying amount will be same or it'll get revised it'll get revised and it will become how much 35 LHS okay sir now the revised carrying amount is 35 LH revised carrying amount is 35 lakh market value is also 35 lakh but how much did you sell it for 39 lakh okay carrying amount revise carrying amount is 35 lakh the fair value of the asset is also 35 LH that means you should have ideally sold this asset for 35 lakh correct okay if you had sold the asset for 35 lakh means how much profit you would have made zero but actually you sold the asset for how much value 39 lakh so how much is the total profit you made in this problem 4 lakh rupees profit you actually made what is a profit up to fair value if you had sold it at 35 means the profit you would have made is only zero that means profit up to fair value is zero that means entire 4 lak profit will you recognize immediately or definite def along with booking empowerment loss that's all you need to write here empowerment loss 5 lakh you need to book immediately and four lakh of profit you'll defer it over the least that is a two sentence that they're looking for here that's you don't have to calculate in all show just final answer in wordings if you express that is more than enough so this is another type of question that gets asked in this particular topic so with this as9 revision we have done thank you for your time and patience hello people so let's start our revision on as15 employee benefits okay so this particular standard C Target is is if company has given any benefits to the employees like salary perquisites whatever whatever benefits if the company gives to the employees how the benefit should be accounted that's all is as15 scope now as far as as15 is concerned employee benefits are put into four categories one is shortterm employee benefits uh second one is post employment benefits or retirement benefits third one is uh retire termination benefits fourth one is other long-term employee benefits so first benefits you have to put them into these four categories accordingly the accounting treatments are recommended those are types of employee benefits next so though the standard says employee benefits it's not necessary you'll have to pay the benefits to employees alone if company gives benefits to employee then directly it is employ employee benefits suppose employee tells I am here because of my Wi-Fi because of my wife so don't give salary to don't put salary into my account put salary into my wife's account such a nice such a nice husband yes no yeah so if the company transfers husband salary to wife's account that is also considered as employee benefits so employee benefits need not be paid to the employees it can be paid to their dependents also like mother or father or children or wife or husband or whatever that is also considered as employee benefits or if the employee has become spiritual if he tells I will work he's telling the company I will come and work for you my salary you put put into trupti talaan trust I will work but give salary to TTD that that is also considered as employee benefits only because it is paid off to their beneficiary employee benefits can be paid directly to the employees or to their dependents or for that matter to their beneficiaries anyone can be considered sir G okay sir uh who is considered as an emplo employee for this purpose for as15 purpose everybody is considered as an employee whether they are full-time whether they are part-time whether they are interns doesn't matter even directors and management personel also considered as employees for this particular purpose okay that is one now getting into the first category what is the first category of employee benefits shortterm employee benefits first type of employee benefits is short-term employment or employee benefits for class purpose we used to call this as step shortterm employee benefits means they are those benefits which are payable within 12 months short-term employment benefits are those benefits which are payable within 12 months not 12 months from the date of service 12 months from the end of Current financial year in which the service is rendered so you have to count the 12 months not from the service date but from the end of current year let's say employee gave the service on 1st January okay obviously whe the employee give the service at free of cost or he will charge we have as a we have to pay him some benefit so you will not count 12 months from this particular date let us say uh this particular service Falls in this particular year current year is 1st April 2013 to 31st March 2014 the service given Falls within this particular year that means current year balance sheet current year ending date is what 31st March 2014 count 12 months from 31st March 2014 if you count to 12 months from 31st March 2014 what are you getting 3 was March 2025 suppose this service benefit is 1 lakh if the service benefit is 1 lakh if company feels they will settle this one lakh within 31st March 2025 then all that benefits will be accounted at step short-term employment benefits means those they are those benefits which are to be settled within 12 months not 12 months from the date of service 12 months from the end of Current financial year under which the service is rendered so you have to count 12 months from the end of Current financial year and if benefits are expected to be settled within this 12 months then it becomes a step if not it becomes something else okay that's the meaning yes people all right now you tell me is time value of money effect affect material here or immaterial since the settlement is going to happen within 12 months normally we say what if the settlement is going Beyond 12 months then the time value effect is material you have to use discount factor and do present value accounting and all that here the settlement is going Beyond 12 months or usually less than 12 months means is discounting required or no discounting for short-term employment benefits discounting is not required okay so accounting is what we simply follow expense and liability accounting so what is the journal entry for salary paid salary to bank suppose salary is outstanding what entry you will pass salary account debit to outstanding salary outstanding salary is a liability that's what we mean by expense liability accounting if you have paid means you'll write salary to bank if you have not yet paid means salary to outstanding exp outstanding salary which becomes your liability that only we simply call it as expense and liability accounting okay people that's all next one important aspect not that important is the leaves portion one there are some of the examples of short-term employment benefits could be your bonus salary perquisites all this you'll delay Beyond 12 months or settle settle settle usually you'll settle off March month salary or perquisites you'll pay within April only month only right at best you may delay for four to 5 months correct no will it go beyond 12 months no so they are all some examples of shortterm employee benefits and leaves are also an example or paid leave also is an example of a short-term employee benefits now every if you work in one company along with the our national public holidays Saturday Sunday and public holidays you also get some time off annual leave sick leave and all that only we call it as paid leaves okay so for paid paid leaves we'll have to do some accounting what is that sir whenever you have some paid leave first you need to check whether these are nonaccumulating leaves or accumulating leaves non-accumulating leaves means what for non-accumulating leaves no accounting is required non-accumulating leaves means if employee utilizes their leaves well and good awesome good for them if they don't utilize means chuma that leave will get lapsed that leave will just get laps employee will not be able to take this leave carry forward or not nor they will get some extra money so for this no accounting is required an accounting is required only for accumulating paid leaves all leaves are paid leaves only all right if it is accumulating paid leaves what you do you need to check accumulating leaves are further drilled down or categorized into Westing leave and non vesting leave vesting leave another name is uncashable leave non vesting leave another name is non enable leave okay let's understand this little better let us say all the employees let's say this is a limited a limited has this following leave scheme every year employees is eligible to take 10 days leave other than Saturday Sunday Republic Day public holiday extra how many days leave every employee can take 10 days if employee takes 10 days leave will salary be cut or no salary cut no salary cut that's the reason we say paid leaves okay he'll be given a leave also he'll be given for that 10 days salary also hence it is paid leave correct if it takes Beyond 10 days salary will be cut like that okay so let's say number of leaves eligible uh for the employees is how much I assume 10 but an employee so nice employee he took only 7 Days he's eligible for how much 10 but availed is only how much eligible is 10 taken is only seven how much leave balance is still available three okay now if it is accumulating leave if it is accumulating accumulating leave will be of two types Westing and non Westing Westing another name is incable non Westing another name is non-cashable so if it is Westing leave if it is Westing leave what will happen is 3 days employee did not take leave no that means employee will get extra salary for 3 Days other than his normal salary he will get extra salary for 3 Days 3 days extra salary he will get if that is the feature means such a we call it as wasting Le suppose employee salary is 15 lakh an employee salary is 15 lakh will he get only 15 LH no 15 lakh plus 3 days salary let us say or maybe I'll take this only I anyway worked it out why take 15 lakh okay here let's say salary of a particular employee is 30 lakh perom number of working days in a year is 300 because there are some Saturdays Sundays public holidays and all no eliminating all that how many days employees are are expected to work 300 for 300 working days how much salary company is giving 30 30 lakh now means what is a salary for one day for 30 lakh is a salary for 300 days means for one day the salary is 10,000 so every day the salary is 10,000 clear how many days leave the employee did not utilize 3 days one day a salary is how much 10,000 for 3 Days how much will be the salary 30,000 that means will the employee get only 30 lakh salary or extra he will get 30 lakhs salary other than that he will also get three days salary extra how much is three days of salary 30,000 that means in the current year he will get 30 lakh 30,000 such a leave only is what we call it as uncashable leave or investing leave so if any leave balance is there means employee can encash that leave he can he'll get extra salary manageable people now you tell me if company is paying any extra salary means should they account it or ignore it should how much extra is paid 30,000 this and all know we call it as instead of salary and all we call it as employee benefit expenditure instead of writing salary account debit to bank he will write employee benefit expenditure account debit so tell me the journal entry for this 30,000 employ employee benefit expenditure account debit first we will make the provision because if employee has not taken leave means immediately we will pay off this 30,000 or we will one or two weeks later we will pay one or two weeks so first make the provision and then settle the provision so for Westing leave the journal entry you will passes employee benefit expense account debit to provision for leave encashment how much is that provision for leave encashment here 30,000 you keep you only make the provision or also settle on the settlement date you'll pass the entry provision for leave encashment account deit to these are the two entries you will pass for uncashable leave or wasting leave done sir okay there is another kind of accumulating leave which is non Westing leave non- Westing LEF another name is non- incash so if it is non uncashable same example how many days eligible 10 how much availed seven how much balance is there three if it is non Westing leave or if it is non-cashable leave what the company will say is I will not give you 3 days extra salary we will not give you any 3 days just because you have not taken 3 days leave we will not give you three days extra salary company will say this leave you can carry it forward to the next year this year you have not taken no I'll allow you to carry this leave forward to the next year so how many years can you carry forward company policy maybe for one year maybe for 5 years maybe forever we don't know if the employee does not take leave means will he get extra salary no he will rather be eligible to carry this leave forward to the next year and utilize the next year if you want okay sir all right now here ideally is company paying any extra amount in in non vesting case may is a company paying extra amount or no extra amount no extra am ideally if you just check is extra accounting required or not required not required but but but this is matching concept what is that sir in the first year in the first in this particular year employee worked lesser or employee worked more sir he was eligible to take 10 days leave he only took seven that means how much more he worked 3 days sir if an employee works for the company in the current year more means the more the employee works it is a beneficial for the company if employee Works more means in the current year company would have earned more right that means that's the reason this as now excuse me S 15 says that you need to make the provision you need to make the provision for how many days how many how much Le balance is that 3 days so you need to make the provision for this 3 days salary how much is salary per day 10,000 for how much leave balance is there three that means what is the total 30,000 so make the provision you make the provision in the current year but this will this provision be settled no this is a matching concept so current year he would have worked more but in the next year he will work more or he will work less because he will utilize next year he'll only take 10 days Sal 10 days leave or even this three days also three days last year leave also he will utilize I mean next year he will work more or he will work less work less I mean next year you will book more expense or lesser expense so the current year since the employee has worked more you book higher expense so the journal entry you will make is employee benefit expense account debit to provision for leave encashment but this provision will be settled or reversed rever make the provision in the current year and reverse it in the next year that's all it is okay so like if you do the accounting here for year One what will happen is what is his salary in this example his salary is 30 lakh in year one will we book only salary as an expense or even we'll make provision how many days of provision we'll make 3 days salary what a salary per day 10,000 that means you will make an extra provision for leave encashment how much 30,000 that means the total employee benefit in the first year you will book is how much 30 lakh 30,000 got it this is in first year in the second year may let's say salary is 30 lakh only it didn't increase let's assume that it is 30 lakh okay in the second year may you'll make the provision or you'll reverse the provision reverse the provision sir what is the journal entry to create provision here employee benefit expense account debit to to provision next year when you reverse it the same entry or Ulta entry Ulta entry what is Ulta entry provision to employee benefit expenditure so employee benefit expenditure is an expense expense has what balance debit balance if you credit it its balance will reduce so next year you will reduce your expense by how much 30,000 next year how much expense you will book 29 70,000 for both the year put together if you add the expense how much is a net expense 60 lakh what was a salary for 2 years 60 lakh this is the ACC since in the first year he worked more you should book more expense because company got more benefit that's a matching concept correct no in the second year he worked less means company will get less benefit that's the reason you book less expense so in non vesting leave may you make the provision and will you settle the provision or reverse the provision make the provision in one year and reverse the provision in the next year that's all this is concept of non- Westing Le yes people we worked out two three questions based on this it was not there in study material but we have worked it out but I hope you know that but I and moreover uh this this whatever we have discussed is are we comfortable with that yes sir okay this is the drama about first type of employee benefits which is short-term employee benefits can we get to the second one second one is the post employment benefits or also known as retirement benefits post employment benefits or also another name is retirement benefits so these are those benefits which are payable after retirement after retirement okay so post employment benefits are broadly classified into two things either post employment benefits will be a DCP plan Define contribution plan or it will be a DDP plan that is defined benefit post employment benefits either will be a DCP or it will be a DBP plan correct correct correct correct okay sir what is the meaning of this DCP plan means what name itself is saying defined contribution plan if you want to call something as a defined contribution plan then employer will have an obligation employer will have an obligation only to contribute money to the plan employer will have an obligation only to contribute money to the plan like PF Provident fund what is company headache or responsibility company's share of PF they have to give it to the PF Authority correct no employee share also and Company share also company will pull it and give it to the PF Authority yes that's how it works correct now you tell me company their share let's say company's a share of PF was 10,000 rupees for the month of let's say May and Company remitted this to PF authorities company gave this money to PF authorities now after retirement Company employee wants to withdraw this PF they want to withdraw the PF PF authorities are not giving the money PF authorities are not releasing the money can the employee come to the company and say you give my money back can the employee come to the company and say PF authorities is not giving the money so you give the money back to the company no what will the company say boss my obligation was to pay the money to the PF authorities and I have contributed to plan afterwards what happened to your PF plan you have to take it up with the PF authorities what happens later on is between the employee and PF authorities will company intervene or they will they will back out they'll back out such a plan only we call it as defined contribution plan where company will have an obligation just to contribute money to the plan after that what happens it is not company headache yes people so for DCP plan now you tell me PF and all now you will delay Beyond 12 months company share of PF will they de will they delay Beyond 12 months and all or each month they'll go on remitting each month that means you'll do what accounting expense and liability accounting like step so the entry will be same employee benefit expense account debit to provision for DCP to provision for DCP when it is settled when it is settled provision for DCP account to bank that's all it is so make the provision and here you can reverse the provision or actually you have to settle actually s so the entry will be employee benefit expense account debit to provision for DCP later on when you settle it will be provision for DCP to bank account that's all it is okay all right there is no actoral risk and there is no investment risk in DCB plan what is this I'll tell you in a bit okay this is the accounting treatment pretty straightforward this is not that popular in examination at best one or two marks may they may ask next there is another type of post employment benefits called defined benefit plan or for class purpose we can call this as a DBP plan name it is saying Define The Benefit Plan okay example is gratuity one of the example is gratuity let's say sir you know no income tax calculation of gratuity what is that 15 by 26 into last da salary into number of completed years of service okay let us say let's say company wants to give gratuity to the EMP employees based on income tax calculations which is this yes okay 15 by 26 into what last on salary okay last dra salary is PKA number or we have to estimate last drawn salary means salary at the time of retirement let's say an employee is expected to retire after 10 years okay that means company will know what is the employee salary after 10 years PKA away or they have to estimate estimate company thought one particular employee last R salary will be 1 lakh they thought based on whatever their calculation they thought it to be 1 lakh and the company thought he will serve in the organization for 5 years let's assume five okay and Company fails one particular employee will retire after 5 years after 5 years his salary is going to be 1 lakh rupees and gratuities paid based on this calculation 15 by 26 into last da salary into number of completed years of service which is five so initially company thought the gratuity liability is going to be how much 2 lakh 90,000 easy later on that particular employee worked so much hard I tell you he got promotion after promotion after promotion his last on salary became two and a half company thought how much it's going to be one but finally it turned out to be how much 2 and a half and after 5 years like expected he retired that means we have to settle gratuity now so what will be the gratuity amount now 15 by 26 now the last down salary is 1 lakh or actually it is 2 and a half 2 and a half into five years he serves how much is a gr liability 72 okay can the company tell the employee hey Ma I estimated 290 is going to be the liability I will only give you 290 what will the employee tell boss this is the way you need to pay gratuity to me because that's what we have agreed so please give me how much 720 that means now no no no company has an obligation just to contribute or pay the whole benefit company has an obligation to settle the whole benefit which in this example is 721 such a plan only we call it as Define Benefit Plan here company will have an obligation not just contribute to but to settle the whole of benefit in case of DBP plan there will be actoral risk there will be investment risk in case of DBP plan there will be both actoral as well as investment risk what is this actual real risk this one only sir initially company thought how much is going to be the liability 290 how much it turned out to be 720 I mean liability increase no because our estimate we thought L done Sal estimate is going to be one but it turned out to be 2.5 yes actal risk here refers to the risk that the actual liability may be more than expected actual risk means the risk that the actual liability may be more than expected initially company thought the liability is going to be how much 290 later it turned out to be how much did the liability increase yes this liability increase risk only we call it as actorial risk does liability increase risk only we call it as real risk in case of dbb plan does a company have that risk yes because they have to settle the whole benefit but in case of DCP plan will company have this headache no after contributing money to the PF PF value may increase PF value May reduce will company bother or no bother no bother so in case of act in case of DCP plan there will be no actoral risk none all right in case of DBP plan there will also be something called investment risk what is this investment risk sir what is the gratuity liability here we have calculated 720 this is the gratuity liability for all the employee or one employee like this company may have hundreds and thousands of employee that means all these are small liabilities or quite big quite big now gratuity companies has to settle when employee retires when the employee will retire Can Company say with certainty or they can only estimate estimate suppose 100 employees retired today only 100 employees retired today can the company say I will not pay your gratuity or we have to settle have settle they have to settle that means you do sir 7 LH 21,00 is how much almost 7 CR All Right company will give 7 CR rupees Cash idola correct but they have to settle company does not have 7 crores in their bank account nor they have so much of cash what to do problematic case hence what the companies do in these cases is they will go on buying Investments they'll go on buying Investments periodically every month every quarter or every year they'll go on investing the money maybe 10 lakh 15 lakh like this they'll go on investing that we call it as plan assets we call it as plan assets investment instead of just calling it as investment we just we here we give a fancy name called planets okay now when the employee retires when the employee retires we already have invested the money in some investment that investment only what are we calling it as plan assets when employees retire will we keep this plan assets or we will s when an employee retire we will sell the plan assets when the company sells the plan assets what will the company receive money that money will be paid to the retiring employees this is how normally the settlement Works done people okay sir when you're buying an investment called plan assets company will expect some return Yes is it necessary whatever return we expected that only we will get or we may get more or less more or less we thought we will get 10% but we only got 7% right that is your investment risk investment risk here refers to the risk that the actual return that you get on your investment may be lower than expected we expected 10 but we achieved only seven so that risk who has here who made the investment here company that means company will have this investment risk in case of what defined benefit whilea plan in case of DCP plan and all company will buy Plan assets on company obligation is just to contribute money to PF that means is there any plan asset required or not required that means will company have any investment risk or no investment risk so here actural risk and investment risk is not there here actal risk and investment RK both are there done people now come back to this example how much is a gratuity liability companies expecting 7 lak2 so when will this gratuity liability be settled on the on the after the retirement retirement happened when 5 years okay just because you are paying 7 lakh 21,000 after after 5 years is it fifth year expense or all the five years expense years you will pay gratuity only if the company serves for 5 years you may settle this in the fifth year you may settle this in the fifth year but it is not fifth year expense it is expense for all the 5 years that means you should book the expense every year how to book the expense in case of DBP plan in case of DCP plan accounting is very simple employee benefit expense account debit to provision for DCP then provision for DCP to buy but in case of DBP plan it's a Paka number or all these are estimates estimates and moreover can you book the expense on the settlement date or every year every year which for this they've recommended a method called PM method projected unit credit method or projected unit cost method also sometimes it is referred to how this particular method Works let's understand with the help of a small question mean I don't know whether it is it'll be asked or not one question on this was there in your currently it is there in a study material only one question is there this one same question I've taken again from this topic there are actually three to four types of question usually the question revolve around that only that three to four if you're comfortable then ideally this topic should be sorted okay so let's see what we can learn from this question employee rashan joined the company XY Z in the year 20 X1 awesome the annual ents of russan is 14 lakh 9,210 his annual salary is how much 14 lak9 210 current salary is this much company also has a policy of giving lumpsum payment of 25% of last drawn annual salary how much of is this employee last run salary of that they will multiply 25% for each completed years of service okay that means company has an obligation just to contribute money into the plan or pay the whole benefit pay the whole benefit how much how much of is their last on salary 25% of that multiplied by the number of years of service you need to do and that whole benefit company should settle so this is a DCP or a DBP plan this is a defined benefit plan okay all right uh okay 25 25% of the last on annual salary of the employee for each completed years of service if employee Rees after completing minimum 5 years of service so we will give this benefit only to those employees who gives a minimum service of 5 years salary of ran is expected to grow by 10% every year currently his salary is how much $490 he is expected to retire after minimum service of how many years 5 years that means after five years his salary will be same or it'll grow every year they are saying his salary will increase by 10% okay company has inducted russan at the beginning of the year it is expected that he will complete a minimum 5 years before retiring company feels this guy will give that much service I mean should we settle this benefit is company expecting that they will pay this benefit to russan yes okay thus he will get five yearly increment why five year increment every year your salary will increase by how much 10% how many years is expected to serve five years that means your salary will be same or it'll Increase five times it'll Increase five times to how much extent 10% that means what is his last on salary tell me will it be sa currently his last Dawn salary is 1490 210 currently is this salary what is we want what benefit is based on current salary or last on salary and last on salary means salary at the time of retirement when will he retire after 5 years his salary will be same every year or it will increase increase by how much 10% so add take this number and add 10% five times finally you'll get how much some 23 lakhs some you'll get that you'll round it off to 24 LH this is his last drawn salary correct okay come back what else they told what is the um uh what is the amount company should charge in their pendl account every year though the settlement when is the company settling this benefit fifth year retirement year retirement year is expected to be fifth year so settlement year settlement will be probably done in the fifth year but can you account the expense entire expense in the fifth year or all the five years you have to book the expense for all the five years because only if he gives five years service then only he'll get this benefit yes no okay now now uh okay also calculate the current service cost okay interest cost to be charged and the discount rate of 8% few things they're asking discount at 8% PV if they only given but in they've given in the reverse order if you do 1 divided by 1.08 for first year you'll get 926 if you want you can check also then go on pressing equals to button you'll get it they've not given an ascending order they've given it in the descending Ulta order they've given this is first year discount Factor year one 926 this 857 is the second year sir if they give you discount Factor will you calculate or take the same same exact if they've given three decimals means you will take three decimals only all right now you need to calculate this is a DBP plan for DBP plan we have to do something called pucm accounting projected unit credit method or projected unit cost method accounting so projected PM method assumes or we'll have to follow some steps first step is you'll have to calculate the total projected cost or total benefit total benefit so benefit is based on last on salary you already calculated last on salary how much is that 24 LH are we going to give 24 lakh to this employee or it is based on this the benefit is 25% of last on salary take your calculator how much is last on salary we got 24 24 lakh 24 lakh 25% you and this benefit is once or for each year of service each year of service how many years of service is expected to give five so into five you 24 lakh is his last on salary 25% of last da salary for each of the 5e service if you do 30 lakh rupees so company is feeling that after fifth year we have to pay to this russan named employee 30 lakh of benefit that's a first step in PM find out the total benefit that only we call it as total projected cost none okay sir is this the benefit for one year or 5 years next step is to find out benefit per anom that only we call it as projected unit cost you can call it as benefit per anom or you can call it as projected unit cost how much is that 30 lakh is a benefit for one year or 5 years five years so for each year how much is a benefit 6 lakh rupees Okay g this is the third step or third working any review required or carry on carry on okay sir can we book six lakh as a expense every year can the company book 6 lakh as a expense every year no sir why because this 6 lakh Rupees is not the present value it is the future value how sir 30 lakh when will you settle after 5 years I mean this is definitely future value okay how did you get the 6 lakh 30 lakh divided by 5 so how do you get present value by taking future value and multiplying by the discount Factor did we multiply any discount Factor here no 30 lakh is the benefit you will pay after fifth year for each year the benefit is how much 6 lakh rupees I mean this is also expressed on present value terms or future value terms future value terms only just that we have expressed it on year on-ear basis so far good that means can we recognize this as an expense no no why sir here time value effect is immaterial or material settlement happen will happen within 12 months or Beyond 12 months whenever a settlement is going Beyond 12 months we say time value of money is material that means we have to book the expense on future value terms or present value terms present value terms that only we call it as current service cost at present present value of that benefit only we call it as a current service cost understood fancy name but that's what it means Okay g now we just have to find out the present value that you already know no how do you find present value you take the future value and multiply by the discount Factor first year so for first year how much is a benefit we already calculated for each year how much is a benefit six lakh so we carefully observe this we are in the first year what is the benefit for first year 6 lakh the benefit may be six lakh but are you going to settle the six lakh now or fifth year ending fifth year ending you will settle this benefit correct so you are in which year now first year you are in first year ending you are on first year ending settlement will be made on fifth year ending count from first year ending to fifth year ending if you count how many years we are at the end of first year settlement will be made at the end of fifth year that means first year in a way you can ignore for calculation purpose so it'll be what year 2 year three year four year five how many years are there four years I mean this settlement will happen after four years that means you will use which which year discount Factor first year second year third year or fourth year fourth year should we have to you can calculate also what is the discount Factor given 8% right so 1 divided 1.08 you do press equals to button four times because you may theyve given an Ulta order so may you you may be confused which discount factor to take so actually you can calculate that way you'll get to know 1 divided 1.08 you do press equals to button four times what are you getting you should be getting this number don't take that number number 73 instead of 735 you can uh instead of taking four decimals they have given in the question three decimals no we will take this okay sir so 6 lakh is the 6 lakh Rupees is the future value multiplied by PVF or rather PV if at 8% for fourth year why fourth year why fourth year we are at the end of first year you will do the settlement at the end of fifth year from from first year ending to fifth year ending if you count the period total is four years hence you'll use fourth year discount Factor at 8% n people if you do that you'll get this much value now is this future value or present value present value can we do the accounting at present value yes another explanation so immediately when rashan joins will the company have obligation why we count from year ending and not year beginning is immediately when employee joins will company have an obligation to pay this benefit or only when he serves as in when he serves the company obligation will go on increasing immediately when rashan joins will the company have obligation no hence we always start the counting from year ending date hence from year one ending to we count it till the settlement date which is Year Five ending like this you'll have to go on doing it yes people same calculation next also sir is the benefit attributable only for one year or five years what is the benefit next year also benefit every year is how much six lakh only now we are in which which ending we are in the second year ending now we are in the second year ending this 6 lakh will be settled this 6 lakh will be settled now now or fifth year ending so count you are in the second year ending now settlement will be made in fifth year ending from here to here if you count how many years years that mean now you will take the discount factor for fourth year or third year so now you will take PV if at 8% for third year so one divided by 1.08 press equals to button three times your calculator should be showing 794 so multiply 6 lakh into 794 if you do you'll get the present value this is the number you'll book the expense for this particular value Okay g same goes for the next now we are in the third year ending now we are in the third year third year also benefit is how much every year benefit is 6 lakh only so we are in the third year ending count from third year ending to fifth year if you fifth year ending if you count how many years two years so take PV if at 8% for second two years you'll get 857 so the present value is 5 l4200 done again same fourth year we are at the end of fourth year benefit for fourth year is also 6 lakh we are in fourth year ending benefit will be settled at fifth year ending from fourth year ending to fifth year ending how many years one year so we do 1 divided by 1.08 how much is the discount Factor 926 this is the present value done G for fifth year you are in which year fifth year ending settlement is expected to happen on which date fifth year ending I mean this six lakh is on future value terms or already present value already present value should we have to find it no so if it is all this we call it as for year zero for year zero the discount factor is always one or you don't have to find out the present value simply you can write present value directly as 6 6 lakh rup okay Zar this is the current service cost that they asked you in the question that is what they asked manageable uh tell me the journal entry for this tell me the journal entry for this current service cost current service cost is an expense expense should be credited or debited debited so the entry you will passes current service cost account debit okay you can also write employee benefit expense that's fine but here since we have many breakups so we will write like this current service cost account debit okay first year how much is current service cost 441,000 are you going to settle this 441 immediately you'll book it in first year right but will you settle in first year or fifth year year that means settlement is happening later that means you you have to make a provision so the entry will be what current service cost account debit to provision for DBP because this is a defined benefit plan or you can also call it as defined benefit obligation dbo you can write provision for DBP or you can call it as provision for defined benefit obligation what is the first year first year current service cost is 441 second year 476 third year this much so this particular amount is used for this particular journal entry easy sir everybody cool sir okay sir add this sir provision for dbo these numbers you are able to see now add all of this because every year you have credited provision account so add all this number for me tell me how much you get quickly do it and this these boxed number quickly you add how much are you getting huh t t t t t uh 25 lakh 87200 is the number you're getting correct when you add everything you're getting 25 lakh 87200 that means the total provision you are showing in your books at what value 25 lakh 87200 yes but are you going to settle the provision at 25 lakh or you already know sir how much is the benefit you are expected to settle check your first working note the total benefit or total projected cost is 30h you settled the provision at 30 lakh but currently you made provision in your books only for 25 why because you made the provision at future value or present value present value you already know this the difference between present value and future value is time value of money interest charges and finance charges and how to calculate the finance charges also you know you learned it in Lees topic tell me that table what table uh AC table amorti cost table we call it okay not AMC that's okay no problem but what is the table format year opening balance finance charges payment and then you wrote the closing balance so we have to put that table and get finance charges each year okay the difference between 30 lakh and 25 L 87200 will be your total finance charges for how many years 5 years correct this is the present value 30 lakh is the future value the difference between present value and future value will become your time value of money interest charges now we need to calculate each year finance charges that you will given you'll be calculating with the help of a table can we review that table okay so that I've prepared it here check that is what they asked in the question also if you want to read the requirement they said how much company should charge in its pnl account every year okay that we'll see and they also ask how much current service cost did we calculate current service cost already yeah they also asked interest cost to be charged every year that only we are about to solve it as a table okay that table format check here where it went by here okay year opening balance interest charges interest charges are discount Factor what is the discount Factor here 8% so you'll book finance charges or interest charges at 8% here I'll not have payment why because am I making the payment every year no payment I'll make at the time of retirement and retirement date is expected to be fifth year but actual retirement can happen in sth year also 10th year also so that means when this payment will be made only when actually employee retires which we don't know pakka hence instead of payment we substitute one with the current service cost payment column we don't bring it in here and then lastly the closing balance let's review this I'll tell you why current service cost in a bit so first year sir when will you book this current service cost First of all tell me what is a current year service cost entry current service cost in the first year is 441 what is the entry you passed for this current service cost account debit to provision for DB when did you book this entry year one beginning or year one ending year ending that means provision for dbo opening balance is how much zero because you passed the entry only in the first year so opening balance of provision for dbo is zero okay or another explanation provision for dbo is a liability immediately when the employee joins will the liability get created no as in when the employee gives a service EMP liability balance will go on increase yes no that's the reason initially when the employee joins liability value is zero that is one or entry itself we pass it at the end of the year hence opening balance is zero so if opening balance is zero means the interest on this also is zero correct okay next current service cost how much is the current service cost for the first year current service cost is 441 bring that in here okay bring that in here so closing balance of provision is all these three addition this is not payment this is current service cost so add these three how much you're going to get 4 lak ,000 that is provision for DB closing balance for first year so we should not reduce this because in the finance charges what did you do payment you reduce is this payment or current service cost current service cost so don't minus this add this so adding all these three you'll get closing balance how much 441 why do we add it is simple what is the entry for current service cost what is the entry for current service cost current service cost to provision for dbo here closing balance means provision for dbo closing balance opening balance means provision for DB car opening balance because in le le me you you calculated leas liability in opening balance and closing balance here what is the name of the liability the name of the liability is provision for debut so opening balance here refers to provision for DB opening closing here refers to provision for DB closing current service cost entry once again what is it current service cost to provision for D so because of current service cost you credited provision debut provision is a liability liability has credit balance again if you credit what will happen balance will increase so due to current service cost provision for dbo balance will increase that's the reason we add another explanation when the employee initially joins what is the liability C value Z as and when the employee serves obligation will be same or obligation will go on increasing that's a reason if first year company comp yes sir means obligation will increase it'll increase by how much 441 hence we add this okay sir so hence provision for DB closing balance in first year is how much 441 first year closing will become next year opening now on words you can continue the calculation this is 441 on this you have to calculate interest at 8% 441 8% is how much 35 28 second year again did employees serve yes what is second year current service cost current service cost copy off from this table second year third year fourth year fifth year cop copy of done then you will minus this or add add adding all this you'll get second year closing like that you go on continuing at the end of fifth year the balance should become 30 lakh why 30 lakh because the total benefit is also 30 LH if it doesn't match somewhere you have done something wrong so before you can check there done people now looking at this table you can pass entries what is the entry you can pass tell me finance charges entry you already passed it in lease tell me what is the entry you passed in finance charges finance charges account debit to lease liability here liability name is lease liability or provision for Deb so what is the entry interest charges or finance charges to provision for de that you'll get it from this table first year interest is zero second year third year four fourth year this is the interest okay that I've copied here manageable clear okay the current service cost also passed interest charges also passed sir current service cost and interest charges both are expenses where it will be transferred next is a transfer entry both have done a compound entry done people then when this liability is settled when this liability is settled entry will be provision for dbo to bank when will this get settled fifth year ah no settlement will happen on the retirement date company is expecting that the retirement will happen in the fifth year but actual retirement can happen in 7th 8th 10th year also hence payment entry we don't pass it here because we don't know the exact retirement date just for sample purpose I've given this and Sir this is is your dbo dbo plan PM only main important working note is the this one current service cost there if you don't do mistake rest everything can be taken care okay this is clear next I'll move forward what is the next one this is done this is done okay H next is actorial assumptions sir now no we calculated we used what method for DVP plan P PM projected unit credit method okay now all these are Paka numbers or estimates estimates now remember that gratuity example tell me how did we calculate gratuity 15 by 26 into last on salary into number of years of service sir this last on salary Paka number or you can only estimate this number of years of service Paka number or you only need to estimate estimate all this estimates only we call it as actorial assumptions these estimates only we call it as actorial assumtion so all the estimates will be same or it may change it may change if it assumption changes means your will your liability be same or liability Also may change Li means if this assumption changes means you will get some gain or loss correct if liability value increases means it's a for a company perspective if a liability increases means it's a loss or a gain if Li ability increases means loss liability reduces means gain so if actal assumption changes means you will get some gain or loss that only we call it as actal gain or loss that has to be transferred to P immediately this is one popular question for two Mark they'll give you on the question okay we got some Surplus blah blah blah they will say actal assumption is required for provision for dbo as well as it is required for plan assets because on plan assets may you you're expecting some return actual return may be more or maybe less so on plan assets also you may get some actoral gain or loss doesn't matter actoral gain or loss whether you get it on provision for dbo or whether you get it on plan assets but that actal gain or loss will be transferred to pel immediately this one point you remember uh for your I mean application purpose done sir uh like this sir you you in this know it's very easy to do all this accounting in classroom practically this accounting is very complicated the reason being sir we have to take a lot of assumption like last drawn salary how will you estimate sir last drawn salary will be based on employee performance if employee performs well he'll get higher hikes he'll get increment his salary will be more if it doesn't perform well that means you have to keep that in mind employee of performance suppose employee performed Well Company performed badly companies companies will give good increment or they will not give means all this is influenced by Company empy employee performance company performance country performance economical performance yes or no world now everybody is saying that I mean Global slow down mown and all because of that Russia Ukraine war and blah blah blah stock market is taking a big beating yes or no correct now if whole stock market if it is under loss Will company gives good increment or they will keep money keep money that means all this also influences your last on salary that means all this you need to keep in mind well estimating so theoretically very easy to say practically difficult to implement okay and even number of years of service Also let's say let's take this example one employee has joined a government company at the age of 25 and government company May nobody takes retirement voluntarily have to push them out okay now because they say right so an employee joined at the age of 25 let's say government retirement age is 60 that means how many years will this employees serve expected to serve from the age 25 to age 60 how many years 35 okay but country mortality table says death rate table says at the age of 55 employees SK the dep rate of a particular region says that when an employee hits the the age of let's say 58 he'll go to kaas that means will the employee he may want to work till 60 but what is country death rate saying at 58 Only You Damar you d means will will will your employment be considered no that means how many years of service 25 to 58 how many years of service 33 so that means will you take 35 years for calculation purpose or 33 33 that means this you ignoring or considering this I means what all this assumption also matters so practically how we do it is there are somebody called actual they are expertise in this field they do the estimates they will give a report based on that report we will book the expense because neither the company nor the chared accountants have all this expertise in this area yes these days now C are also taking a valuation course to do this assignment because this is good good money because nobody will question your work you can Aram say Bill $50,000 one lak and all okay every company needs this so extra assignment for you so many people many CS are taking up these sort of assignments also okay anyways that's uh I'll not go into that aspect now but the funa is you need a lot of assumption that only we need a lot of estimates that only we call it as actoral assumption estimates can change if estimates changes you may end up getting some gain or loss that only we call it as actal gain or loss to be transferred to p and immediately okay s next to these two or these three three types of problem three things chapter over okay in case you're wondering Papa already 110 so you're wondering when the class will get over how when they will get sap and all no so that's what is this let's see actual return on plan asss um or maybe what I'll do one second I'll just check the problem and decide the order wait give me a minute so this you already know actal gain or loss on actal gain or loss Will you defer it or book it to pel immediately this is the RTP May 24 question one liner answer you have to book it in pnl immediately company is saying we will defer we will defer acceptable not acceptable not acceptable that's how you have to write and not go into story next okay this one we will go on okay fine no problem oh fine we'll review this and come back to this question ah this particular one more question sir in the question they will say find out actual return on plan assets they'll ask you to find out okay this is easy but our stud material presents this in a statement format I also recommend you to present in statement format how do you get actual return on plan assets is take the plan assets closing balance take the plan assets closing balance it will be given to you in the question add benefits paid minus contributions you do minus plan assets opening balance you do that balancing figure only or that final number only we call it as actual return on plan ass this is a format to get it how this works let's understand with the help of one question review this question on 1 April I'll present first in Ledger format because in case you forget the formula you can re can construct your own formulas with the help of Ledger the formula has come through Ledger here H so check this as on 1st April the fair value of plan asset is 1 lakh sir on 1 April means this is plan assets closing or opening opening so let's prepare plan assets Ledger plan asset is an investment investment opening balance you'll put it on the credit side or debit side so I'll write two balance brought down how much one L this they have only given okay tick next in respect of pension plan okay fine pension is also a defined benefit plan gratuity pension and all is are defined benefit plans that's okay on 30th September plan paid out benefits of 19,000 sir paid out benefits means when will you pay the benefits When employee retires when employe retires correct that's the that's the time you will pay the benefit but will the company pay the benefits out of that cash balance or by selling Investments sir first of all we have purchased the Investments to settle this liability only correct no so all when the settlement happens will the company use their cash balance no will they use their bank balance no they will sell the investment so benefit paid here refers means what to pay the benefits worth 19,000 you need to have 19,000 how will you get this 19,000 how will you get this 19,000 do you already have plan assets yes will you keep it or will you sell it so indirect direct ly they're saying we sold plan assets worth how much 19,000 what is the journal entry for plan asset sold plan asset sold 19,000 what is the journal entry Bank to plan assets when you post this in plan asset Ledger you'll write it as what buy Bank 19,000 that is nothing but your benefits paid easy next it received inward inward contribution worth 49,000 sir this plan assets and all is a onetime investment or recurring you'll go on investing you'll go on selling the investment all these are recurring so contribution means additional investment purchased additional investment purchased worth how much what is the journal entry for investment purchased investment to buy that investment only we calling it as plan so entry will be plan assets to bank so the posting will be what plan assets to bank 49 there's nothing but your contributions clear okay next check what they told on 31st March 20x to 31st March means opening or closing closing the value of plan assets on 31st March is 150 they have given plan assets closing balance where will plan assets closing balance come buy balance car 150 manageable so whatever have ticked only add that these two have ticked if you add how much is it 169 this side also should be 169 if you add these two you getting 169 or only 149 14 that is a balancing figure how much balancing figure 20,000 sir if you make an investment you'll also get some return so the the 20,000 is actual return that you have got it as a man okay easy now this you know I presents in not in Ledger format but they present in statement format ideally I would recommend you present it in statement only now you have to get this as balancing figure how do you get that whatever comes on the other side you add these two you minus correct now that's how you'll get balancing figure that's what is expressed as formula tell me the formula now what is this take the plan assets closing balance to that you add what benefits contributions U will minus opening balance you will minus that's what we have written in the chart here plan assets got closing balance benefits you add contribution you minus but opening balance you minus you'll get actual return you present in this format only in case you forget the format present it in oh prepare a small Ledger and reconstruct your formula that way clear okay one second that is not the only thing they ask one more is there here one second where is it huh okay this is clear all right and the present value of dbo is 147 that's not required leave actal losses on obligation is 600 that is also fine leave the company made the following estimates based on Market studies and underlying prevailing prices so if you made an investment means you'll expect some return no they have given they've kept some parameters and identified the return all this drama they have given we don't need all the drama what is the final value 10.25% that means company expecting the return on plan assets how much that's what they've given here also expected return on plan asset is how much 10.25 percentage they are expecting this much return okay this is expected actual will be same or actual may be different different so if the actual is more than expected means it is actal gain if you achieve less than less than expected means it becomes actorial loss whether it is actorial gain or actal loss goes off to pnl immediate actual return you already got how much is actual return you generated 20,000 expected return is what we are about to find out is it okay that's a two requirements the question they will ask you to find out actual return Ledger done already we also need to find out what sir expected return how simple take your calculator sir how much was the plan assets opening balance one L how much return are you expecting 10.25% this plan assets opening balance was 1 lakh correct you had this money from the beginning so from the beginning this one lakh investment you have if whole year if you have invested means how much return will you get there's a return 10.25% so 1 lak 25% 10.25% you do how much you getting 10,250 on that 1 lakh opening Balance company is expecting a return of 10,250 yes sir correct correct correct okay sir we just have one lakh or we invested more how much more you invested 49 but hang on did you only invest more or did you also sell how much investment you sold 19 this this settlement and this contribution is on the same day correct that means oh though you have invested 49,000 in that how much you use for settlement 9 that means net net may how much money is remaining with you 30,000 is a money remaining with you correct because out of this 49,000 19,000 you have to use for settlement so how much money is really available for investment 30,000 correct now this 30,000 when did you invest 30th September 20 X1 sir our year begins on April it ends on March did you invest this 30,000 for the whole year or only 6 months 6 months what are those 6 months you invested the money on 30th September 20 X1 and our year is ending on 31st March 20 X2 if you count that this is 6 months correct or no so if you invest for 6 months will you get whole year return of 10 and a half 10.25% no you'll get only how much return six 6 months return yes or no so that means how much should be the return how much should be the return quickly calculate on this 30,000 the return should be 10 30,000 into 10.25% into 6x2 correct correct how much is that this is what you should you are doing 30,000 into 10.25% 10.25% is a return for the whole year but we invested this 30,000 only for 6 months how much is this 1537 okay I'll make it as 1537 it's okay no issues or 1538 that's fine now no your answer is right your answer is Right provided compounding is is in uh the interest is being paid on a simple average basis but there is also called compounding interest ICI assumes that if there is nothing mentioned they assume that the compounding is happening on a half yearly basis for their problem in study material question so make the same assumption if they say interest is paid on a simple interest basis if the interest is paid on simple interest basis what you have just now calculated right Sol like this only both are asked in the I think in the previous attempt they asked simple interest spes in one of the previous attempt they asked compound interest basis okay fair enough if it is simple interest question will mention question will mention so you will do it like this correct but here have they mentioned anything no if question does not mention anything ICI study material is assuming compounding okay you can actually write your assumption in my view both answers are right you should get marks but the person evaluating is not a accounts teacher he will check only suggested answer your answer he will not understand the assumption he cleared or he or she cleared his examination 15 20 years back they will not remember all this forget the concept they'll not even remember accounting standard name and number also if someone is they in taxation field means why will they worry about accounting standards that is not relevant for them no you ask them tax tuck tuck tuck they will tell they don't need accounting standard so that's the reason as much as possible better to stick with IC assumption what does assumption ICI make compounding happens on a half yearly basis okay I I tell you I'll just 2 minutes quickly I'll tell you again then I'll tell you one shortcut way so if compounding happens on half yearly basis means how it works let's take a small example 100 rupees we have invested in a particular bank and bank is giving how much return 10% but compounding is happening on a halfly basis now how it works how much interest you'll get for 6 months because compounding is happening half yearly means 6 six months the compounding is happening first 6 months May how much will be the interest you invested how much 100 how much return bank is giving 10% 10% is a return for the whole year here how we are calculating the interest for how many months 6 months that means you'll write into 6 by2 so first 6 months how much return you'll get five clear okay next when you calculate the next interest will the interest be calculated on 100 rupees no it's a compounding effect no compounding means what on interest also you will get interest so next time when Banks calculate the interest they will not calculate the interest on invested amount of 100 they will take 100 and they will add 5 rupees also that means next interest will be calculated on 105 this how compounding Works yes people one05 will be the interest calcul interest calculation amount for the next 6 months how much is the interest rate bank is paying 10% now the interest will be calculated for another 6 months how much is the interest 5.25 got it so totally how much interest did you get in the current year 10.25 how much did you invest 100 how much return you got or how much uh yeah how much return in amount you got 10.25 what is the return percentage what is the return percentage 10.25 percentage correct no by investing 100 rupees you got a return of 10.25 this return percentage if you have to calculate means how much how will you calculate like a GP percentage how do you calculate GP percentage GP by sales into 100 same way if you have to calculate the return percentage means return amount divided by the investment invested amount into 100 how much return you got 10.25 how much amount you invested 100 so what is the return percentage 10.25% that's what they've given here in the problem okay G yes sir okay but hang on what is the interest you received only for the first 6 months 5 rupees how much did you invest 100 rupees how much return You Got 5 rupees Express this in percentage for me on 100 rupees investment you have got a return of 5 rupees how do you get the return percentage return amount divided by investment amount into 100 return amount is five investment amount is how much 100 so how much return percentage you got 5% means indirectly what I'm trying to say if you invest for only 6 months how much return you'll get 5% if you invest only for 6 months you'll get how much interest rate 5% next calculate for the next 6 months how much is the interest rate how much did you get 5.25 you got a return of 5.25 how much did you actually invest 100 rupees how much is the return percentage 5.25 yes sir why why is this relevant sir this 30,000 rupees this 30,000 rupees how 30,000 sir how much Plan asset did you purchase 49 in that how much you use for settlement 19 how much money is available for investment 30,000 this 30,000 you invested for whole year or 6 months if you invest for 6 months the return is how much 5% the return is 5% that means the return you'll get is 30,000 into 5% which is how much 1,500 and not 1538 got it because compounding is happening on a half yearly basis easy so how do we know it is percentage five because now I told you all this you are able to recollect in exam how do you know whether it is five and not six can be four also simple trick what is the rate they have given 10.25 it's compounding half yearly know divide by two 10.25 divid by two you do round it off to the lowest number what is the lowest number okay now simple whatever interest rate they have given divide by two low round it after the lowest number because nobody will ask you logic they only want you to no everybody will check only whether have you taken the right percentage or not so if the compounding happens on half yearly basis then the return on this 30,000 you'll calculate at the rate of 5% I hope everyone got this that means the return is how much 1,500 once more or okay pakka that means how much is the return these are all expected no how much is the expected return adding these two the expected return is 11,550 okay zaru your you are expecting how much 11,000 but you achieved how much 20,000 that means you achieved more return means loss or gain gains the difference between this 11,250 and 20,000 the difference between actual return and expected return is actal gain or actal loss in this case it's a case of actorial gain yes people that's it with respect to this one more type of question if you need one or two minutes I'll wait or if you're through I'll go for the next type okay we'll go yeah mind is saying we'll go but I'm saying we'll go to the next problem ah so this is done this part is done next the last aspect is presentation presentation means what components relating to employee benefits you will show in pnl what components you will show it in balance sheet one or two is there relevant for our question we will take it out okay few things you already know sir current service cost where it will go or rather this I'm talking about what and all goes to P current service cost is a cost where it will go to P that you already know interest cost we already booked interest charges where it will go expected return on plan assets where it will go P actal gain or loss on plan assets where it will go actual gain or loss on provision for dbo where it will go P correct now written till here I think we've already covered any questions in this so far no there is one more thing called past service cost past service cost sir past service cost means plan amendments plan amendments sir company has a pension plan or a gradu plan should they keep that plan as it is or can they modify they can modify yes if company performance is good means they would like to pay same benefit or more benefit more benefit if company performance is bad means same benefit or they would like to reduce it reduce it like here check initially company had a plans to pay gratuity at last drawn salary 5% how much of is last drawn annual salary of that they will take 5% this was the existing benefit okay now company performed really well now the company is saying anyway we have performed well due to our employees instead of 5% of last Dawn salary let's calculate the benefit at 20% on last on salary possible these sort of changes can you make yes correct this only we call it as past service cost any changes if you make it to your defined benefit plan that only we refer to as what sir past service cost done done done done sir take this example and tell me if you make this changes if you make this changes provision for dbo is a liability liability same or increased or reduced what do you think because of this liability balance three options same increased r ined increased obviously earlier you were paying the benefit at 5% now you are paying the benefit based on 20% means are you giving same benefit or higher benefit higher benefit correct that means provision for dbo balance you should keep it same or you have to increase increase yes provision for dbo has what balance provision for dbo is a liability it have what balance credit balance how do you increase something which has credit balance credit it again right it is getting increased only due to Amendment that Amendment only we call it as what past service cost that means the entry for this is past service cost account debit to provision for DB okay sir I have assumed that benefit increased by 500 for Simplicity purpose benefit can increase by 500 1 lakh 5 lakh 5 whatever amount so for pass service cost this is a journal entry okay sir suppose if benefit reduces means ult entry usually it'll be sir if any company reduces benefits what will happen to the moral of the employees they will they will stay around or they will quit quit so practically what will happen benefit will get reduced or probably increased most cases may it will be benefit increase only reduction case rare not that it can't happen it is just that pretty rare in our examination also increase case only most probably they'll test yes people now now no no no where should pass service cost ideally go to like current service cost pass service cost also should go to P but sometimes what happens is their company will put some conditions company will will put some here company is giving same benefit or higher benefit higher sir if company is giving higher benefit means can they put some extra condition okay extra condition is there sir let's say to get this extra benefit employees should have minimum served four years employees should have minimum served four years only those employees who have served four years will get this extra benefit at what rate 20% like that they put a condition There Will Be Few employees who would have already completed four years there will be few employees who have not completed four years those employees who have fulfilled the conditions we call them as wested pass service cost those employees who have already completed the conditions that means should they have to wait or they will get the benefit they'll get the benefit that we call it as wested pass service cost if condition is not there if condition is not there or if condition is already fulfilled then that past service cost is referred to as past service cost either can be a wested past service cost or unwed PSC can be either a wested or it can be unwed if condition is not there if condition is not there then we call it as wested pass service cost or if condition is already fulfilled condition is already fulfilled then we say it is wested pass service cost if condition is not yet fulfilled means we call it as unwed pass service cost done people yes sir so you need to find out in this 500 pass service cost how much how much is wested how much is unwed you don't have to find it'll be given to you in the question it'll be given to you in the question let us say wested pass service cost is 100 wested PSC is 100 once again tell me again pass service cost means what first PSC means what PSC meaning pass full form meaning psci I know means pass service cost what does it mean amendments or Chang made to the plan only changes made to the dbo only we call it as past service cost okay when changes are made to the plan if higher benefits are given means can the employee put some extra conditions yes if conditions are not there if conditions are not there then we call it as what all the pass service cost becomes wested pass service cost if conditions are already fulfilled then also it becomes what wested pass service cost if some employees have not fulfilled the condition then we call it as unvested pass service cost okay in this case my total pass service cost is how much I've assumed 500 wested PSC I've assumed as how much 100 S vested pass service cost means condition is already fulfilled if condition is already fulfilled means should we wait or it can be transferred to P immediately wested pass service cost is transferred to pnl immediately so what is the journal entry to transfer pass service cost to PN you have debited pass service cost how do you transfer it credited so the transfer entry is what P andl to parel entire PSC will you transfer or only the wested portion only the wested portion how much is wested portion here 100 so that means you'll write PN Del to pass service cost wested how much portion 100 got it how much was PSC total balance 500 how much did you transfer it to P 100 how much balance PSC still has 400 that is wested or unvested so keep this in mind unvested pass service cost balance is 400 what sort of balance it has debit balance 400 clear I'll talk about this what to do in a bit another 5 minutes okay with you so far so what is the funa now again we are discussing what goes to pnl Total PSC goes to pendl or wested PSC that's what I've written here PSC also will go to pendl but only to the extent of amortized portion or you can also call it as wested portion understood okay and this okay this this is done last aspect is curtailment gain or loss sir past service cost means plan changes plan Amendment curtailment means plan closure curtailment means plan getting closed you are shutting down the plan you're cancelling the plan if you you're not modifying the plan you are canceling the plan if you cancel any defined benefit plan C plan that we call it as curtailment and whenever you do the curtailment okay or let's take the small example suppose one company had one division in that division May let's say that there are 100 employees okay that division employees company had gratuity plan whichever employee serves 5 years will get uh or maybe let's take it as pension plan because I think gratuity is mandatory okay company has some pension plan whichever employee serves 5 years and then retires the company is planning to give them some pension okay fine now now this plan company already had but this particular division is making heavy losses and those employees are lazy fellows they're not working properly company is motivating them work I'm happy they're like I'm chilled in life Netflix and chill is their policy okay they are chilling now you tell me company gave warnings after warnings after warnings they are not sudar FY what will the company do last result will they keep this plan or cancel that we call it as what curtailment okay but usually curtailments I tell curtailment can come with the settlement or without settlement curtailment could be with the settlement or without settlement with the settlement means now when you cancelling a plan will will you cancel the plan just like that or you'll pay some compensation you'll pay some compensation yes or no if you are paying if you're canceling the plan and giving some compensation ah here take 10 lakh Rupees I'm canceling your plan take 10 lakh Rupees don't ask any more benefit that to we call it as curtailment with the settlement curtailment with settlement more stricter companies is saying to hell with you I will cancel the plan I will not give you even a single penny I will give you zero rupees this is what did you cancel the plan yes then it is curtailment any settlement is run or no settlement without this is called curtailment without settlement usually there will be some settlements not mandatory these are again company choice so let's look at it here so one plan got canceled when you plan when you cancel the plan only we call it as curtailment curtailment could be with settlement or without settlement with settl option let's quickly see suppose on the day you cancelled the plan dbo provision for DB balance was 70 lakh provision for dbo account had a balance of 70 LH that means ideally how much you should settle if provision for dbo balance on the cancellation date to 70 means you should settle 70 LH company told take 60 lakh don't ask anything more don't ask anything more instead of settling 70 company settled how much 60 a liability got settled a liability got settled at what value 60 LH but what was a liability value instead of settling it at 70 a liability has got settled at 60 means for the company's perspective this is a loss gain what is it it's a gain this only we call it as curtailment gain this only we call it as curtailment gain it could be other way around also let's say liability value was 70 lakh company paid 75 lakh that means company paid extra 5 lakh this we call it as curtailment loss doesn't matter whether it is a gain or a curtailment loss that will be transferred to pnl immediately that's another component that will go off to pendl account relating to this plan yes s these are the presentation aspects in pendl this is not tested at CA inter level we have good good questions on this in CF finally you'll learn with entries there in fact though I think I have explained the entries anyways on few entries have explained few things are not there here okay no problem but anyway this will carry over to the next level as IND is 19 employee benefits but majority will roll over what you're learning here will be kind of rolled over with extra Concepts so far good this is the presentation in pnl next the presentation in balance sheet okay stop visualize in balance sheet may you show assets and liability relating to define the benefit plan there is one asset one liability tell me what are those one is provision for dbo that's a liability then just now we learn just now we learn just just just just leave that one more correct other than that plan assets plan assets correct unvested PS is also right but main thing I was looking for is provision for dbo is one liability in one liability asset is plan assets okay correct these are two now what as 15 says is anyway these are relating to the same benefit no as5 says instead of showing separate separate asset separate separate liability you net them off you net them off you will not show both assets and liability you will net off that's what you will do in balance sheet in balance sheet you will take provision for dbo you'll take provision for dbo let's say provision for dbo has a credit balance of th000 assumption okay this is a liability correct now all right only liability we'll have or we'll also have an asset asset asset called what plan assets let's say plan asset closing balance is 500 plan assets will have a credit balance or it'll have debit balance debit balance so you'll net off these two you'll net off these two but only these two are remaining or one more sir past service cost here was how much 500 how much was vested past service cost you transferred to P 100 how much unvested is there 400 that means this unvested pass service cost has what balance debit balance so write that again here that's what I've written here so there are three components associated with this DB plan in my example okay pass service cost is mandatory or not required only if made changes to the plan PSC will come otherwise PSC will come or it will not come it will not come so this is we don't know but first one and the last one plan assets and provision for dbo compulsorily will be there so instead of showing this as a separate liability and these two separately on the asset side we will knock we will adjust them which is more total of assets is how much those components which has debit balance what is their total 900 those components which has credit balance what is their total th which is more liability only is more by how much 100 that 100 you will show it as net dbo in balance sheet on the liability side if assets are more means you will show the Surplus on the asset side like that so net off all this and show the netted number in the balance sheet either on the liability side or asset side if it is liability means you'll write net dbo in balance sheet like that what final people this is the presentation aspect in yeah done next to one more question is there hang on somebody's close their books so don't lose them uh one question is there this is also a little popular just now we discussed curtailment just now we discussed curtailment curtailment means what cancellation curtailment can come with the settlement without settlement keep that in mind read this question Rockstar limited discontinues a business segment when division only there shutting down if the division is gone means employee benefit plan of the division will be there or that also gone that also gone under this agreement employees union the employees of discontinued segment will earn no further benefit that is this is curtailment without settlement so though only clearly told that we have done a curtailment and this is curtailment without settlement all these are goalie we don't want they've explained all that neither you have the time nor I have the time to go through that leave okay 101 goalies they'll give you should take the right numbers in exam check Rockstar limited share of unamortized service cost relating to obligation is 10% believe that he'll come to this check this these are the four pointers immediately before curtailment immediately before cancellation gross obligation gross obligation means provision for dbo how much provision for dbo balance before curtailment dbo balance was 6,000 stop sir if you have cancelled one plan means will you pay the same benefit now or the benefit is cancelled if that benefit is canceled means provision for dbo will have the same balance or it will reduce it reduce yes no because some One Division defined benefit plan you have cancel okay before curtailment liability value was 6,000 since now you have cancelled one plan will you pay that benefit or not paid not paid so that means provision for dbo balance will reduce okay zaru all right by how much that's what they have given over here as a 10% somewhere they have told okay or maybe they'll tell it in the next also the fair value of plan assets is estimated to be 5,100 this is plan assets balance they've given and unamortized pass service cost is 180 in balance sheet will we show all the three separately or we net off we net off unamortized pass service cost will have what balance debit balance plan assets will have what balance dbo will have what balance credit balance okay now check the curtailment curtailment reduces obligation by 600 because you cancel the plan will your obligation be 6,000 or it'll Reduce by 600 because the 10% of the gross obligation is getting reduced indirectly this is what they're trying to say okay okay now now what is a requirement is you need to find out basically curtailment gain or loss and that's what they are asking calculate the gain or loss from curtailment and also the liability after curtailment to be shown in the balance sheet finally what number you will show in the balance sheet after curtailment and how much is curtailment gain or containment loss so let's calculate very simple three things in balance sheet will you show three things separately or you'll knock off knock off what are those three things provision for dbo unamortized PSC plan assets yes so before curtailment what was their balance DB balance 6,000 plan asset 5,100 unamortized PSC 180 that's what we have written here 6,180 and 5,100 before curtailment what was the Which is higher sir liability balance is 6,000 asset balance these two you add how much is it these two are assets no these two you add how much is it 5280 that means which is more which is more assets are more or liabilities only liability is only more how much is the liability more by 720 so that means before curtailment you used to show your liability at 720 this was before curtailment yes now you canceled means will the same value hold good or it will get revised get revised so after curtailment what will happen after curtailment will your dbo be 6,000 or it reduce by 600 they only told in the question that dbo due to curtailment will reduce by 600 that means DB balance will become 5,400 yes people PSC also sir PSC means changes made to the plan extra benefit sir if one division is getting closed means will you give that extra benefit to that division employees or not required not required that means PSC will be same or that will also reduce that will also reduce you need to Pro rate that how simple so how much was dbo before 6,000 how much was PSC before 180 so if dbo is 6,000 means PSC is 180 now after curtailment dbo has become provision for dbo has become 6,000 , or 5,400 if this has become 5,400 means what is pro pass service cost proportionate proportionate how much is that 162 done people or you can also do it the other way around how much did you curtail the plan by 10% correct no that means 180 minus 10% you do how much are you going to get 180 minus 10% you do obviously you'll get 162 like that also you can calculate but sometimes the percentage they may not give hence Pro ration method is better suited according to me yes work now no no no no no in the first line only they told what this is a curtailment without settlement this has an impact on what sir if you are settling means you have to pay money money will come out of cash balance bank balance or out of plan assets if you want to settle means you have to sell plan assets are you settling here or no settlement no now means will your plan asset balance change after curtailment or same because this is with settlement or or no or without settlement no settlement or without settlement here hence P plan assets balance will still be after curtailment also same if that told with settlement then settlement value let's say was 400 then plan asset will be same or it will reduce red from 5,100 it'll Reduce by 400 here since there is no settlement balance will be same now calculate what is the value of the liability liability only is more if you knock off you're getting how much liability 138 correct this is the requirement of the question after curtailment what is the final liability value 138 this 138 only is what you'll show in your balance sheet answer to the first requirement is done check the next one sir before curtailment how much was the liability 720 after curtailment it has become 138 that means it has reduced increased what from 720 the net liability has become 138 liability of balance has reduced that's a loss a gain gain so that difference is curtailment gain how much is that 582 that will go off to P easy that's all of with respect to this question with this second type of employee benefits fully we have completed not F second type of employee benefits we have completed that is post employment benefit so what about third and fourth third and fourth nothing termination benefit termination benefit termination can be voluntary or forceful meaning employee can quit quit voluntarily or company can fire him doesn't matter both are considered as termination and termination benefits only yes accounting for termination benefits very simple either you'll use pucm method or step method you tell me when you'll go for step if termin sir if you terminate one employee will you terminate them just like that or you'll pay some money and send let's say you told the employee take 10 lakh Rupees you have been fired take 10 lakh Rupees and don't come to office from tomorrow this 10 lakh only is what termination benefit now when you terminate the employees you'll have to do some settlement if the settlement is expected to happen within 12 months from the balance sheet date then you'll account it like what step okay entry will be employee benefit expense account debit to provision you can make and then provision account debit to bank right if this termination benefits C settlement is expected to go beyond 12 months from the end of current year then you will use PM method just now you know p CM accounting that you will follow I means is there any separate accounting here or not required not required either you'll account it like step or you'll go for post employment benefits like PM method that's all then sir any doubt or carry on that's all you need to know this is not that important next last category that is other long-term employee benefits so other long-term employment benefits is a residual category it is a residual category meaning if you can't fit into other categories it will come into this category like example company told the employees work in my Organization for 5 years and take 7 lakh if you work in my Organization for 5 years continuously I will give you how much payment 7 lakh now is it short-term employment benefits are you paying this now or after 5 years so is it step no is it post employment benefits is employee retiring here or still there so is it post employment benefits no is it termination benefit are you terminating the employee no but in that case may it will come into this particular sidal category that's all okay how is the accounting same PM same method projected unit credit method you use and do the account that's all it is okay Z that means with this this particular standard is completed thank you yes hello people so continuing our discussion in the marathon Series so now we'll be revising accounting standard 20 with the help of our chartbook as2 talks about earnings per share all right as far as as20 is concerned two types of eps company is supposed to report one is basic EPs and another one is diloted EPS both those basic APS and diluted APS company has to report in their pendl account after profit after tax they have to report BS and deps so how do you get this basic APS basic APS is simply given by the formula earnings attributable to equity shareholders divided by weighted average number of equity shares that only we used to call it as e divided by WS okay so this is not profit how do you get is earnings attributable to equity shareholders means is profit after tax available to equity shareholders no take profit after tax and if there is any preference dividend reduce preference dividend and if there is any preference dividend dividend distribution tax it is abolished by chance if they give reduce that also then you'll get particular number called te and one more pointer you need to remember about your preference dividend is whenever the company has issued preference shares check whether the preference Shares are in the nature of cumulative or non-cumulative if it is cumulative preference shares means can the company escape from paying the dividend or they have to pay they have to pay if current year if they suffer a loss means next year when they make the profit along with next year's dividend they also have to clear previous year dividend aers as well hence if preference Shares are in the nature of cumulative preference shares means you will compulsorily deduct preference dividend even if question says dividend is declared or not declared doesn't matter this dividend should be compulsorily deducted to get is that is one however if it is a non-cumulative preference shares then you'll deduct preference dividend only if the question says that dividend has been declared otherwise dividend declaration is not necessary that's one point you need to keep in mind for ishka calculation next one is wains wains is what EPS is what earnings per share so ideally earnings per share how should you calculate earnings divided by number of shares so will we take number of shares as in the denominator or weighted average number of equity shares you have to take the weights because when the company receives the money based on that the earnings will differ if the shares are issued on the first day of the current year means then the company will receive on money on the first day only this money can be utilized for the whole year if the company has issued the shares in January means the money as company has received and utilized only for how many months three months that is January February and March hence we don't take the number of shares we always take the weighted average number of equity shares in the denominator and to calculate this weighted average number of equity shares we have two approach one is the individual approach and other one is the cumulative approach both we have done let's take a small scenario let's say current year is 1 April 2024 to 31st March 2025 this is our current year on the 1st April 2024 only company issued 1 lakh shares how many shares one lakh shares then again 6 months later that is on 1st October they issued another 50,000 shares okay now are the shares issued on the same date no two times the shares have been issued and issued on the different dates now how do you calculate weights one if you work out on the individual approach this one lakh shares when was it issued starting day of the year that means this one lakh shares was there for the whole year that means the weightage you'll assign is how much 12 by 12 here the weights are given in months okay usually the weights are given in months if they give you odd date suppose Shares are issued on 17th October 19th October like this means then you'll assign the weights in days instead of denominator being 12 you'll take the denominator as 360 like that but usually in majority of the problem weights will be assigned in months since this shares was there for the whole year the weightage you will assign is 12 x 12 what about 50,000 shares was it there for the whole year no this 50,000 shares was issued only on 1 October so count October November December January February March so this 50,000 shares was there only for the 6 months hence the weightage you will assign is 6 by2 that way you will get the weighted average number of equity shares to be 1ak 125,000 shares for your EPS calculation this approach if you use for weights means we call this as individual approach you can also use something called cumulative approach in cumulative approach how it works is from the first transaction date count to the next transaction date from the first transaction to the next transaction first transaction happened on which date 1st April next transaction is happening on which date 1st October count from here to here how many months 6 months that means company had one lakh shares for how many months 6 months company had one lakh shares for six mon months hence it is 1 lakh into 6x2 after 1st October company will have totally 1 lakh shares see cumulative approach means total approach on from 1st October onwards company has 1 lakh shares in totality or company has 150,000 shares 150,000 shares now start counting from 1 October to the next transaction any other transaction is happening or no other transaction no other transaction means from year to end of the year from 1 October to end of the year you count how many months 6 months that means from from 1 October onwards company has 150,000 shares till the end of the year so from 1st October to 31st March the weightage is 6x2 that way also if you do you'll get the same answer you free to choose individual approach or cumulative approach answer will any which way be same this is how you calculate the wains for EPS calculation purpose any confusion no all right EPS is a very straightforward uh concept okay they hardly like four to five types of concepts are there and four to five types of questions are there usually exam will play around those for four five Concepts only one is your normal like this W questions they will give you the data and they will ask you to calculate wains and EPS ultimately like this that is one another concept which they may Target is the bonus issue bonus shares what if company has issued some bonus shares in the current year so what does the bonus shares come meaning bonus shares means additional shares given to existing shareholders at free of cost at free of cost by issuing bonus shares is company receiving any money no no no money no no money that means ideally is Will bonus shares affect your earnings sir here in this particular case if company issues one lakh shares means company will receive money no so when you receive the money makes a lot of difference but due to bonus shares is company receiving money or it's given at free of cost free of cost that means should there be any weight weight SC drama in bonus shares or no drama no drama because bonus shares has impact on earnings or no impact no impact okay all or another ways bonus shares will be issued on what on original shares only if you have already some original shares you will get some bonus shares that means bonus shares linkage is on what original shares so what we say is whatever weightage you give on original shares same weightage you give on bonus shares also on original shares if you're giving 12 x 12 weightage means on bonus also you give 12 x 12 weightage on original if you're giving 6 x 12 weightage means on bonus also you give 6x2 because bonus shares is directly linked with your original shares that is the reason okay people this is one pointer we need to keep in mind another one is I told you all right whenever bonus Shares are issued we anywh calculate current year APS along with current year APS one more thing you need to do what is that last year EPS also should be or previous year EPS also should be restated for comparison purpose I told you the logic of this in regular class now I'll not go into that yes so all not only you need to calculate current EPS but also previous EPS you need to restate restate means again recalculate okay for comparison purpose otherwise comparison will go for a toss I proved it to you there right all right how to do this very simple think that you have to restate previous EPS a simple way to remember this and do it is think that the bonus shares has happened in the last year itself and accordingly calculate last year's Zs you'll get the right number that's all it is all this logic I've told okay I hope you remember okay even if you don't forget the logic don't freak out yes every provision when we do regular classes I'll give you the explanation why is it there but for the examination they will not test you why the provision is there they'll only ask you the application of it as long as you are remembering what to be done that is good enough for Examination for the time being last one month don't freak out too much about logic Y and all that stuff last one month we should be selfish we want to get the degree C in degree that should be the main focus fine all right hook or crook let's get it okay if you have forgotten logic no problem mug it up after examination you can go back and watch the video and see ah why it happened and all that you have any way own your own sweet time that time we'll update our knowledge for the time being focus should be on marks all right so let's do a thing let's apply this bonus shares in one of the problem look at this there our class notes as on 31st March 2013 equity share capital of adiya limited is rupees 10 this rupes 10 is the number of shares or face value of share Capital face value how much is the face value of share Capital 10 divided into shares of how much each 10 each so total share Capital 10 CR each share of face value 10 means how many shares does the company have 10 CR divided by 10 which is one CR shares company has already issued correct okay all right now this was already there during the financial year 20134 that is probably the current year it the company has issued bonus shares in what ratio one is to one ratio so one one original shares if you have means one additional shares you'll get it as bonus we have only one shares or we have one shares one CR shares so one CR original shares was there means how many bonus shares will be issued one CR bonus shares will be issued okay will bonus share will the company charge any money due to bonus shares or it'll be issued at free of cost free of cost okay the net profit after tax for the year 31st March 2013 and 31st March 2014 is 8 and A2 and 11 and2 CR respectively so bonus came in which year 31st March 20 I mean 20134 w year but they have also given your profit after tax as on 31st March 2013 31st March 20133 means current year or previous year it is previous year correct no this is current year and this is previous year why have they given you previous year profit after tax because due to bonus shares we need to calculate only current year APS or restate restate what previous year APS to calculate previous year APS you need previous year is cor that's the reason they've given this okay so two years date they've given all right that's fine EPS the company has disclosed this 8.5 and 5.5 75 respectively this the accountant has already calculated and reported it you need to comment whether what EPS they have calculated is correct or not correct let's can we quickly review it okay very simple all right so original shares how many original shares were there one CR so this one CR shares when it was issued have they told no that means what the Assumption assumption is it was there from the beginning so how much weightage you will assign for this 12 by 12 yes no people oh let's quickly look look at it over here where is it I'll bring this maybe one minute closer this is your EPS calculation let's do the EPS calculation firstly for the current year that is 31st March 2014 so to calculate EPS we need two components what are those two components is and WS is means earnings attributable to equity shareholders we calculate EPS from Equity shareholder perspective not from preference shares okay so that's the reason we take each divided by wains wains means weighted average number of equity shares okay sir how do you get is you first take profit after tax and if there is any preference dividend you reduce and then only you'll get is now in this problem they have given current year last year Pat is 8.5 current year Pat is how much last year Pat is 8 and a half and current year is 11.5 CR correct but in this problem have they given any preference dividend no data if nothing is there means preference dividend is zero that means patent is are different or same in this problem Pat and is are same so current year 11 and a half last year 8 and a half copy it from the question only correct okay divided by WS all right now we have one class of shares or two class one original shares and another one bonus shares right originally original shares how much we had 1 CR when was it issued no information that means how much weightage you'll give you'll assume that it was there from the beginning so how much weightage you will give 12 x 12 okay so this is the weightage on original shares sir if you have one original shares means how many bonus shares will the company issue one bonus shares will be issued okay sir bonus shares weightage is always linked on the original shares on original shares how much weightage you give 12 x 12 so on one CR bonus shares also weightage will be 12 by 12 so totally how much is the Ws for the current year 2 so each divided by WS if you do you'll get an EPS of 5.75 correct what EPS did the accountant report for the current year 5.75 that means what they have reported is wrong or correct only correct only but hang on when bonus comes only current year EPS we will calculate or also we will restate restate which year last year EPS so previous year EPS you need to restate as you have to recalculate each of previous year is already given which is 8 and half CR wains of previous year will you take one CR though the bonus came in the current year for comparison purpose what we should do think that the bonus shares was issued in the last year only that means how many shares was there in the last year 1 or 2 1 original share plus 1 bonus share so totally you need to take how much 2 rupes this is just for the comparison purpose so do this when you calculate how much are you going to get 4.25 correct so last year restated EPS should be 4.25 how much did our accountant show he showed 8.5 that means what they've done is correct or wrong wrong so that mean that you need to correct current AP is reported is correct but previous year in fact they have not restated that's what they've done how they got 1 8.5 is they ignored bonus shares they ignored bonus shares ignoring bonus shares how many shares was there 1 they did 8.5 divided by 1 how much is the number you're going to get 8.5 can we do this this is acceptable no so you need to just comment on that little garam masala you need to add that's all that I think we are comfortable what is one divided by two okay one divided by two okay no quickly we are writing something will happen no issues don't do this in exam okay to tell to show that only I did like this okay all right this is done this is one kind of problem that is the bonus shares problem okay next thing next concept is the right shares okay same right Shares are also additional shares given to existing shareholders but not at free of cost right Shares are issued at discounted price okay right Shares are additional shares given to existing shareholders and a discounted price so shares cannot be issued at discount sir companies act says shares you cannot issue at a value below face value here disc refers to market price let's say the market price of the share is 150 right shares will be issued at 130 that means isn't the shares issued at a discount yeah face value is 10 Rupees what company's act says is you cannot issue a shares below face value okay here discount refers to the discount is calculated from the market value perspective okay again right Shares are additional shares issued to existing shareholders at a discounted price I I proved it to you with one shirt example if you remember in regular class that even right shares also has an element of bonus okay remember what is that shirt okay forget anyways so right shes also has an element of bonus sir if bonus element comes means stop what do you have to do only current year EPS you need to calculate or also you need to restate you also need to restate previous year APS also why do we say right shares as an element of bonuses here in this case what is the market price of the share the market price of the share is50 but right shares was issued at 150 or 130 so how much discount are you issuing this right shares at 20 that means are you issuing the right shares at market price or below market price how much below market price 20 this is considered as a bonus element for right sh calculation okay sir all right fine so right sh calculation you can do it in one logic way but I say presented in one formula way I told you in normal class that present in examination right problem in Formula way only what is that formula first we have to calculate something called theoretical X right price share this is nothing but your average price this is nothing but your average price now you have one one shares or two shares what are those two shares original shares and right shares so you just need to find out what average price of the two so first we'll take in the numerator value of original shares value of original shares you can call that as fair value of the shares before the rights issue fair value of the shares before the rights issue if you're not able to remember this formula you can simply write value of original shares plus value of right shares that is the numerator correct no divided by number of original shares and number of right shares if you do this automatically you'll get the average price that average price only here we refer to as theoretical X right price per share okay this is one second one is right shares also has an element of bonus here bonus bonus element is find out with the is found out with the help of a formula that formula we call it as adjustment factor or class purpose we used to call this as AF how do you get AF how do you get if now is one shair is worth one anymore or it includes bonus element element so when you calculate adjustment Factor adjustment Factor should be below one or it should be greater than one adjustment Factor should always be greater than one so the formula to calculate adjustment factor is very simple okay you will take the fair value of the shares before the rights issue which will be given to you in the problem sometimes they also call this as come right price per share okay value of the shares before the right issue only we call it as come right price per share or you can also call it as fair value of one share for the rights issue divided by theoretical X right price per share do that that particular number only we call it as adjustment Factor this adjustment Factor one quick checkpoint is should be greater than one if it is lesser than one that means somewhere you have done some calculation wrong stop there only correct that and then move forward that is one all right now this adjustment Factor let's say you got it as 1.01 you got it as 1.01 how much is the number greater than one the 0.01 the 0.01 represents your bonus El the 0.01 represents your bonus element so whenever bonus shares is there what you'll do bonus shares weightage is based on a separate concept or it's based on original shares it's based on original shares so you have to multiply this adjustment factor to the original shares then you'll get including the bonus element accordingly you'll assign the weights okay sir this is the concept fine so let's do a thing let's apply this right Shar problem in one of question now or just one minute give me a recap of that right CH means what meaning or tell me the point is Will right CH include an element of bonus yes okay then in whenever Right shest comes we calculate one average price that only we call it as theoretical X right price per share given by the formula value of simple formula is value divided by number of shares value divided by number of shares we have one shares here or two types what are those original and right so constructive formula value of original shares plus value of right shares divided by number of original shares plus number of right shares if you do that you'll get average price that is one second one since right shares has an element of bonus we need to calculate that that bonus only is expressed as a fraction or a formula that's called adjustment Factor so adjustment Factor should be greater than one okay so to get that we'll simply take the formula what the fair value of the shares before the rights issue divided by theoretical X right price per share since this adjustment Factor has a bonus element we have to multiply with the original shares and get it how that work works we will see it in this particular problem check this compute basic APS of Savita limited from the following data net profit for the last year is 20 lakh why have they given for last year right right shares also has an element of bonus whenever bonus is there we only calculate current year APS or also restate restate the previous year that's the reason they've given you previous year net profit so net profit always means Pat whenever they tells net profit net profit and accounts means Pat is Pat same as is no from Pat we have to reduce what preference dividend to get is but in majority of these problems preference shares C data will not be given so if preference shares is not there means will preference dividend be there no if preference dividend is not there means Pat only will become is okay all right so in these sort of problem usually Pat and the is will be same number okay so Pat for last year they've given 20 lakh current year it is 30 lakh great number of shares outstanding prior to right issue before rights issue how many shares we had 10 lakh shares how many right shares have you issued one right shares for four shares outstanding if the already if the shareholders have already purchased four shares means they will be eligible to buy how many right shares one so right shares is given in this ratio if you have four original shares means you can buy how many right shares one we have only four shares or we have 10 lakh shares we have 10 lakh if you have 10 lakh shares means company will issue how many right shares 10 lakh into 1x4 if you do automatically you'll get 250,000 so basically 250,000 right shares the company is issuing in the current year okay all right now one second hang on right Shares are issued at free of cost or at price price that means we should ignore the weights or we should consider that means we should ignore the dates or pay attention to that pay attention so rights issue price this 250,000 shares the shareholders will buy by paying the company how much 20 rupees one rights are offered right Shares are offered at a price of 20 last day of exercise of the right is 31st March okay all right calendar year is followed over here that means year begins on January and ends on December so on the first day of the first day the company come out with rights issue or last day to subscribe right is 31st March 31st March that means rights came only after 3 months okay keep this in mind okay the fa the fair rate of one Equity shares before the rights issue was 25 the market value of one share before the rights issue was how much 25 but is the rights given at that market price or below the market price below market price that's the reason we say rights also has an element of bonus because it is issued at a discount so can we calculate this okay first calculation is what theoretical X right price per share you calculate how do you get theoretical XR price per share value divided by number we have one value or two values since we have two shares we have to calculate two values how many shares before we had right before the rights is how many shares we had 10 lakh what is the value of one share before the rights issue 25 so take 10 lakh into 25 10 lakh into 25 if you do you'll get 250 lakhs okay plus value of right shares sir how many right Shares are being issued 250,000 at what price is one right shares offered 20 so 250,000 into 20 you do how much is that 50 lakh that is 50 lakh this is your value divided by number of shares how much original shares we had 10 lakh how many right shares we issued two 2.5 so totally if you do this you'll get 24 you can do like this also or you can calculate in a single number right CHS are given in one ratio what ratio if you want to buy right shares means minimum how many original shares you should already have four that means instead of 10 lakh you can also take four that way also I can calculate because to get right shares minimum original shares how much you should have four and what is the value of one original shares 25 if you have four original shares means how many right shares can you buy one at what price can you buy right shares 20 so divided by number of original shares which is four plus number of right sh which is one like this also if you get calculate you'll get the same answer whichever way you are comfortable do it okay sir all right this is your theoretical X right price per share which is how much we got it 24 next is to calculate adjustment Factor we know adjustment Factor should be greater than one because adjustment Factor includes an element of bonus how to calculate it very fair value of one shares before the rights issue what was the fair value of one share before rights issue 25 divided by theoretical X right price per share which is how much 24 so 25 divided by 24 if you do you'll get 1.04 that 04 this is 04 represents your bonus element over here okay bonus shares is not calculated separately it's expressed as an formula here called adjustment Factor okay people this is your basic calculation in rights issue now can we calculate our EPS for EPS what do we need each and veins so let's calculate the each and veins we'll do the calculation this way first what do you how much is the is for the current year for this year how much is is 30 lakh is this is or is this Pat It's Pat is what given in the problem but preference dividend is there or not there not there if preference dividend is not there Pat and is are same so current year is is 30 lakh previous year 20 lakh that I've copied here current year 30 previous year 20 okay each given mentioned over here next we also need what WS okay we are we are doing cumulative approach we are doing cumulative approach in cumulative approach what do we do tell me how do you assign the weights from the first day to the next next transaction date from the first transaction date you will count it to the next transaction date so our year is beginning on which date 1st January the rights cut rights cut transaction happened on which date as for the problem last date to subscribe the right is 31st March so our year started on 1st January so rights transaction happened on 31st March that means first you will assign the weights of how many months three months correct because we are doing cumulative approach sir before the rights issue how many shares we had 10 lakh I've taken that yes this is your original shares right shares also has an element of bonus as bonus is calculated separately or as an adjustment Factor so hence multiply adjustment Factor 10 lakh into 1.04 you do how much is that 10 lakh into 1.04 you do how much you're getting in your calculator 10 lakh 40,000 that means that 40,000 no that 40,000 is your bonus share 40,000 is your bonus shares for bonus shares do we assign separate weightage or it's based on original shares original shares so by multiplying 1.0 4 you'll get original shares also you'll get bonus shares also anyway weightage for both of them are different or same same hence we're doing it like this yes people how much weightage we'll give for this now 3x2 so into 3x2 we do that's the reason we say take the original shares and multiply by The Adjustment factor and then work out under cumulative approach clear so far good okay next sir after 31st or rather on 31st March what happened company issued how many right shares initially company had 10 lakh shares there afterwards they issued a right shares of how much 50,000 that means from 1 April onwards company will have 10 lakh shares or company will have 12 lak 50,000 shares company will have 12 lakh 50,000 shares after this any more transaction happened or no more no and year is ending on which date 31st December so count from 1st April to 31st December how many months 9 months so from 10 lakh the number of shares became 12 lakh 50,000 and the weightage you'll assign is how much 9 by 12 so how much is that if you calculate you'll get this particular number this is your is this is your WIS divide these two you'll automatically get PS to be 2.5 manageable okay so right shares has an element of bonus if bonus is there means we need to also restate previous year APS so let's restate the previous year APS each is 10 lakh only so bonus shares did we calculate separately or as an adjustment Factor adjustment Factor hence you take previous year previous year how many shares we had 10 lakh you multiply 1.04 when you multiply 1.04 what are you going to get original shares and bonus shares put together if you multiply how much is it totally 10 lakh 40,000 right last year was the right shares there or it was not there no last year how much how many shares did you actually have 10 lakh what is a weightage you will give for this 10 lakh 12 x 12 that means for bonus also you'll assign a weightage of 12 x 12 including bonus only you got this 1.04 yes hence we'll take the last year cost shares and multiply adjustment factor and the weightage you will assign is 12 x 12 like this manageable right Shares are not there hence rather right Shares are not there in the last year hence that particular portion is ignored okay sir so that way you'll get the of the last year to be 10 lakh 40,000 divide these two you'll get the EPS for the last year this is your right cha problem this also is popularly asked from this particular topic usually all this used to be asked for five five marks in our old syllabus these days if they want they can ask for two markers it's a very straightforward calculation usually WR SH a problem they should ask for four to five marks at least according to me but bonus shares question and all they can ask easily for two two marker it's a pretty straightforward calculation can I move forward okay this is done online also there everybody no issues excuse me all right this was the drama about basic EPS we only calculate basic EPS or one more type one more type what is one more type diluted EPS so BS discussion we have done basic EPS we class purpose maybe we used to call it as beeps there is one more kind of eps that we calculated which is your diluted EPS or for class purpose we used to call this as depths sir depths C separate calculation is only necessary if you have something called POS only if POS is there means we calculate depths separately otherwise depths separate calculation not required what is this POS potential ordinary shares or potential Equity shares potential Equity shares or potential ordinary shares only we call it as or only that is there means we calculate depths so what does this POS mean simple POS means currently they are not Equity shares currently they are not Equity shares but in future they may become Equity shares currently these are not Equity shares but in future may they may become Equity shares like convertible preference shares convertible preference shares currently they are what preference shares after you convert preference shares what will they become Equity shares that is an example of POS convertible debentures currently they are debentures but when you convert the debentures into Equity shares they will become Equity shares okay so that is what is POS instrument only if company has issued this POS instruments depths separate calculation company has to do otherwise not required okay sir all right so how do you calculate diluted APS you don't have to do your working from the beginning you already calculated your basic EPS tell me what is the formula for basic EPS e divided by WS diluted EPS takes that data and does some adjustment we take basic EPS data and we do some adjustment of okay how do you calculate diluted APS first have you already calculated each for basic APS purpose yes take that number in the numerator and add dilution adjustment and add something called dilution adjustment what is dilution adjustment we will or maybe I'll tell you uh similarly take the veins for basic APS purpose and add the dilution adjustment so simply we have to take this this is basic APS calculation to this we need to add what sir dilution adjustment that's all it is so what is this dilution adjustment simple so if you have convertible debentures if you have convertible debentures on let's say it is 10% convertible debentures now what is depths trying to calculate here is if you convert this debentures into Equity shares today if you convert this debentures into Equity shares today what will happen to EPS that is what we are trying to calculate and reported as diluted EPS is this okay actually are you going to convert today or in future actual conversion may happen 5 years later 10 years later we don't know depths is trying to calculate if this convertible debentures gets converted into Equity shares today what will happen to EPS is this okay all right now you tell me sir if you convert this debentures into Equity shares will the number of equity shares same be same or increase in increase that is the dilution adjustment in denominator if you convert debentures into Equity shares number of equity shares will increase that is what we mean by dilution adjustment in your denominator here comfortable okay one more thing is sir currently on this debenture you are paying company's paying interest if this debenture gets converted into Equity shares should this interest payment required or not required not required sir interest is an interest is an expense sir if this interest is no more there means expense will increase or expense will reduce expense will reduce correct no if an interest expense is not there means obviously expense will reduce sir if expense reduces means what happens to your Pendle Pendle balance will increase p balance increases means is also will increase that is your dilution adjustment in your numerator because if you convert this debentures means this interest C payment is no more necessary that is your dilution adjustment easy people Everyone good okay one second hang on now stop sir if if expense is not there means expense is not there means what will happen to your profit profit will increase sir if profit increases means automatically tax also will increase that means should we take interest as a dilution adjustment or after tax interest because interest so far you're paying interest interest is an expense due to that expense profit was reducing and you your tax also was little bit less now if you convert this debentures into Equity shares means interest will you pay or not required that means you will save this expense so that means expense will reduce expense reduces means profit will increase if profit increases means tax also will increase that means what is the net benefit the equity shareholders are getting net benefit Equity shareholders are not getting is not interest saving it is the after tax interest okay hence we don't take interest as a dilution adjustment we take interest into un minus tax rate I explained you all this in normal class for now we can simply stick to the formula interest into one minus tax rate is a dilution adjustment with respect to convertible debentures POS easy yes people ah similarly you tell me if there is convertible preference shes convertible preference shes what you'll do prer if you have convertible preference shares means if you convert that preference shares into Equity shares today is preference dividend required to be paid or not required not required so preference dividend becomes your dilution adjustment will you do preference dividend into one minus tax rate like the way we did for tax uh interest will you do like this for dividend no because on preference dividend will you get tax benefit or no tax benefit that means you will do you'll not you will not do one minus tax rate directly you will take what preference dividend preference dividend becomes dilution adjustment in that case okay sir same so if you convert preference shares into Equity shares today number of equity shares will be same or it will increase it'll increase that is a dilution adjustment in denominator okay people all right this is what we do and or rather this is how we calculate diluted EPS let's apply it in one of the problems where is it h let's take this question only question number 10 in our class notes net profits so net profit means pad what is the pat for the current year 85 lakh 50,000 number of equity shares outstanding is how much 20 LH okay great from which day is this outstanding mentioned or not mentioned not mentioned that means even if you assign the weights the weight weight you will assign is 12 by 12 or you can ignore also because whether you do 12 x 12 or you don't do 12 x 12 answer will be same interest expense for the current year is how much 6 lakh interest expense they told okay the interest expense usually will be paid on the debentures correct or on loan here we'll see what it is income tax rate is 30% number of 8% convertible debentures stock it a not normal debentures it is a convertible debentures convertible debentures means at some point of time in future this debenture you'll repay in the form of cash or give them Equity shares you'll redeem this debentures not by paying cash but by giving Equity shares this only we call it as what POS is POS there yes if POS is there means only basic EPS you will calculate or also diluted diluted EPS because separate calculation becomes necessary okay people all right check this number of 8% convertible de of 100 each the face value of each debenture is 100 how many debentures we have 1 L okay so 1 lakh is the number of debentures and each face value is 100 calculate the interest for me one lakh is a number of debentures each face value is 100 that means the value of debenture is 1 or 100 lakh and these are 8% debentures if you multiply 8% what are you getting 8 lakh correct no 8 lakh that means interest should be for 8 LH but then the question may they told interest expenses only 6 lakh okay stop there there some drama there then what is a drama what is that actually interest should have been how much 8 lakh but the question is saying it is only 6 lakh and they don't at least if they had told if they told interest paid 6 lakh if they had told interest paid 6 lakh I would have assume that interest expenses 8 lakh of that 6 lakh is settled 2 lakh is outstanding did they six did they say six lakh is interest paid or interest expense itself they told interest expense itself is six lakh that means what weits weights the indirectly what they're trying to say is Sir if you issue the debentures in the current year only for 7 months will you pay whole year interest or 7 months if you issue the debentures in the current year only for eight months then you will pay how many months interest eight months sir if you had issued the debenture for whole year the interest expense should have been 8 lakh is it eight or is it six six that means are have you issued those debentures for the whole year or lesser period that's what you need to find out here so 8 lakh is the interest for how many months whole year which is 12 months but how much is the interest expense as given in the question six lakh so 8 lakh represents 12 months interest means six lakh represents how many months interest you need to Pro rate when you Pro rate how much are you getting 9 months that means indirectly these debentures are issued for the whole year or only 9 months in the current year 9 months and we ignore all this information or we should consider we should consider that means the weightage you'll assign is what 12 x 12 or 9 by 12 9 by 12 what that is one pointer so always whenever they give you convertible debentures C check whether full year interest is considered there could be hidden adjustments like this everybody cool okay that is one and each debenture is convertible into how many shares 10 shares on one debenture if you convert means how many Equity shares you have to give 10 and how many Equity shares we have one lakh on one share if you're giving 10 Equity shares means on one L on one one debenture if you're giving 10 Equity shares means on one lakh debenture how many Equity shares extra you have to give 10 lakh Equity shares if you have to you have to ISS to extra if you convert this debenture correct now now you need to calculate BS and deps basic EPS is very straightforward okay because how many shares are there sir basic EPS considers only how many Equity Shares are there exactly now only actual shares actual Equity Shares are considered for basic EPS calculation diluted EPS for basic APS purpose we only take the actual Equity shares and calculate for Dil uted APS purpose we take the actual also and we will take POS and do the calculation that's the difference between basic APS and diluted APS okay s all right so actually how many Equity shares has the company issued 20 lakh when have they issued the shares given or missing missing the mean m h drama not there so let's calculate basic EPS sir we read the question they gave Pat but is preference dividend there or not there if preference dividend is not there Pat and each will be same so very straightforward basic EPS calculation how much is the pat as given in the question 85 lakh how much is a w sir 20 lakh if you want you can directly write 20 lakh or you can also do 20 lakh into 12 x 12 which you'll get same how much is that 20 lakh this is your is this is your WS divide the two you'll get basic APS to be 4275 that's it okay sir can we take the same number for diluted APS purpose or we have to add a dilution adjustment add you take each for basic APS purpose and add the dilution adjustment you take the veins for basic APS purpose and add the dilution adjustment accordingly you'll get the numbers required for diluted APS okay first let's do the dilution adjustment on each can you tell me what is a dilution adjustment on each first of all we are calculating depths depths calculation is only necessary when you have an instrument called POS what is POS potential ordinary shares potential ordinary shares means currently are the equity shares no can they become Equity shares in future yes depths is trying to calculate what if if they that debentures here we have debentures if debentures gets converted into Equity shares today what will happen to EPS okay all right that is the impact we need to do sir if you convert the debentures into Equity shares today should you have to pay interest anymore or not required so one expense you will save if you save one expense means profit will increase that means the earnings attributable for Equity shareholders will be same or it will increase increase but should we take interest or after tax interest so how do we get that interest into one minus tax rate how much is the interest currently you have paid for the debenture holders in the current year 6 lakh rupees should we take 6 lakh or 6 lakh into 1 minus tax rate tax rate is 30% so you will take 6 lakh into 1 minus tax rate tax rate is 30% which is 0.3 so after tax interest is how much 420,000 this much is the net benefit Equity shareholders will get okay people Everyone or if you want to put it another way how much interest saved how much interest got saved 6 lakh correct so if interest got saved means pel balance will increase by 6 lakh correct but interest is an expense if an expense is not there means pnl balance will increase if pnl balance increase means tax also will increase how much tax will increase how much is the tax rate 6 lakh 30% which is how much 1 lakh 180,000 sir if ta tax increases by 1 L 80,000 means it is a benefit for shareholders or it's a it's not a benefit it's not a benefit so here one benefit is there due to uh due to convertible debentures getting converted into debentures profit will increase by how much 6 lakh but at the same time tax also will increase by how much 180 what is the net benefit shareholders are getting 420,000 that only is expressed as formula here interest into 1 minus tax rate if you do that automatically you'll get 420,000 yes people okay this is the is for basic APS purpose this is the dilution adjustment add the two how much are you going to get 89 lak 70,000 for a diluted DS purpose you'll take the each has 89 lakh 70,000 Okay g all right divided by next uh what is the each for basic EPS purpose 20 lakh plus dilution adjustment what is a dilution adjustment in veins what is a dilution adjustment in veins if you convert this debentures into Equity shares today should you have to give any extra Equity shares yes on one debenture how much extra Equity shares you have to give 10 we have only one debenture or one lakh debentures one lakh convertible debentures you have so how many extra Equity shares you have to give 10 lakh correct okay huh that means dilution adjustment is how much 10 lakh correct no not 10 lakh why sir this interest is for whole year or 9 months sir here numerators you have taken six lakh 6 lakh represents whole year interest or 9 years or another 9 months right if numerator dilution adjustment is on 9 months 9x 12 platform means denominator dilution adjustment should we take it for whole year or 9 by 12 9 by 12 how many extra shares you will give due to conversion 10 lakh Equity shares should we take 10 lakh or 10 lakh into 9 by 12 10 lakh into 9 by2 how much is that 750,000 correct people okay this is your dilution adjustment add the two you'll get the veins for diluted APS per P which is 27 lakh 50,000 these two you divide you will get diluted EPS done people Everyone good okay this is your diluted EPS while calculations next we will go for the next W calculations I think uh yeah conceptually we have done with everything now we have few more questions to be covered up that's all next question is what I'll do it this one more way sir preference dividend you can take care of no right for preference dividend will you do Dividend into one minus tax rate or only dividend only dividend that's all that one minus tax rate will only come for interest it will not come for dividend that also instead of convertible debentures and the question may be substituted with convertible preferen also such question we have done in class now I'll not do it because yeah I think you know the concept there all right let's take one more POS calculation compute depths and depths of a limited from the following data profit for the current year how much 10 lakh weighted average number of equity shes outstanding they only given veins how much 4 lakh that means should basic EPS calculation any drama or easy easy sir we see if you if you read the question anywhere are you able to see any preference CHS no that means it's preference dividend there or not there so net profit here means Pat so since your preference dividend is not there Pat and is are same is is how much 10 lakh WS is how much 4 lakhs how much is basic EPS 10 lakh divided by 4 lakh your basic EPS is how much 2.5 that is very straightforward calculation okay now they also asked only webs are also depths depths that means we need to take dilution adjustment let's see what sort of things are there over here weighted average number of equity shares under option during the year 2 lakh you know Can Company issue sh shares to their employees ESOP plan ESOP means what employee stock option let's say company issued here only will take let's say company issued ESOP to the employee under ESOP employees can buy how many shares 2 lakh shares the company wants to give some shares to their employees how many shares they want to issue 2 lakh now you think sir if compan is issuing shares to their employees means will they give it at market price or lesser than market price lesser than market price that means do you think do you think these and all are issued at proper price or lesser price lesser price and moreover will the employee buy all the toak shares today only or in the future normally the company will put some condition let's say company has put a condition that if you work in my Organization for 3 years if you work in my Organization for 3 years after 3 years or at the end of three years you are eligible to buy how many shares 2 lakh shares I mean this 2 lakh shares will the employees buy from the company today only or after 3 years after 3 years correct that means this is a POS do you agree with me this is an option this option is a POS you have you actually issued shares or we have given share option to the employees share options okay if employees wants they can utilize this offer and buy the shares now or after 3 years after 3 years if they want they can also reject this that's the reason it's option correct but this option is a POS why currently are they Equity shares no they may become Equity shares after when 3 years that only that only call it as what POS and if there is POS means should we calculate depths yes that's what they have asked okay sir now what is a drama here very simple sir what is the market price of one Equity shares in the last 6 months what is the average price of one Equity shares 25 but check what is the exercise price of the option 20 that means the market indirectly they're telling the market price of the share is 25 but is the employee buying it at market price or lesser price how much lesser price 20 that only we call it as EP EP as exercise price exercise price for one share how much employee is paying the company 20 rupees but the correct to value of that each share is how much 25 that means how much discount it's being given on one share 5 rupees yes no now since you have issued the shares at discount since you have issued shares at discount how this discount impact your EPS is what we're trying to calculate as a diloted APS correct now yes why diloted APS because have you already issued this option or it'll be issu should in future the shares will be purchased now or after 3 years in my exam that's the reason can we consider this for basic EPS calculation or only diluted only diluted because basic EPS considers only actual shares is this 2 lakh shares actual or it will become actual shares after 3 years after 3 years that mean this particular number should only be considered for diluted APS calculation why we consider this number for diluted APS calculation because did you issue the shares at market price or below below you have issued the shares at a discount how that discount impacts your EPS only is what we are trying to calculate as depths okay sir okay let's calculate it sir how many shares simple this is a logical method how many shares will the employee Buy in the future utilizing this option utilizing this option employee will buy how many shares in the Future 2 lakh will the employee buy the shares at free of cost or pay some money how much money will the employee pay on one share two rupees I mean so totally how much money company will get on this what are the total proceeds on one share company will recover from the employees 20 rupees how many shares company is selling to the employee 2 lakh that means total proceeds is how much 40 lakh that's what we have written first line okay sir got it all right now simple sir if you have 40 lakh rupes money with you you have how much cash with you 40 LH rupes cash with you and the market value of one share is 25 rupees market value of one share is 25 me telling or question telling the market value of one share is how much 25 you have 40 lakh rupees with you and the value of one share is 25 how much how many shares can you buy if you have 40 lakh rupees money with you and if the value of one share is 25 means how many shares can you ideally buy you can buy 1 lakh 60,000 shares 40 lakh divided by 25 1 lak 60 correct or no that means that means what ideally how many shares company should have sold this to their employees 2 lakh or 160 160 considering the money that the company has received ideally they should have issued how many shares under option only 1ak 160,000 shares should have been issued under option did the company give the option to the employees to buy 160 LH 1 lak 60,000 shares or 2 lakh shares 2 lakh shares yes no actually how many shares should have been actually received should have been issued only 160 but in reality how many shares are issued under option 2 L how many extra Shares are issued under option 40,000 that means indirectly is company collecting any money on this 40,000 shares or no money no money yes or no this is your dilution adjustment this is your dilution adjustment sir this is 40,000 is the value or number of shares number of shares your numerator or it affects your denominator visualize your EPS EPS calculation is e and veins e is value veins is number this 40,000 is value or number so where should I put this as a dilution adjustment in numerator or as a dilution adjustment in denominator so hence dilution adjustment in denominator is 40,000 got it people that's all it is has has the company already done any accounting for this no that means is there any dilution adjustment on is no in case of convertible debentures in case of convertible to benur company has already accounted interest that accounted interest will get saved yes that's a dilution adjustment in numerator here this option and all has the company done any accounting no right and this option will get exercised now or after in future in future okay that's the reason there is no dilution adjustment in numerator options will not have any dilution adjustment in numerator it will only have dilution adjustment in denominator these two you will add you will get each for depth purpose these two you add you'll get veins for depths purpose do the division of these two you'll get the diluted APS manageable people that's all it say this also is a popular question in the examination done people okay one more thing you need to keep in mind here is Sir name itself is saying diluted EPS diluted EPS means EPS should increase or it should reduce the word dilution means what the word dilution means reduction you know remember your P sambar Dal water water watery Dal correct so will be strong or hard or it'll be full diluted diluted yes no so diluted APS means dilution means reduction so if your basic EPS is 2.5 means diluted EPS should be 2.5 or it should be lower than that should be lower how much number did you get 2.27 okay that mean this is diluted only suppose instead of 2.27 if you get 2.8 if you get 2.8 how much is your basic APS 2.5 diluted APS you calculate it and by chance if you get 2.8 this is dilutive or it is not dilutive it is not dilutive that only we call it as anti-dilutive this we call it as not anti anti-dilutive EPS okay sir as per as20 anti-dilutive EPS are not reported anti- diluted VPS are not reported always check this when you do diluted DPS calculation this is not there much in your syllabus we will do if anti- diluted DPS is there means what to do how it becomes anti-dilutive and all probably you'll learn in your ca final okay there is a particular way in which some problems are there in some few cases may it will work out fine for now it is not there in our syllabus so let's not go too much into all that stuff but only one thing you need to keep in mind is your that anti-dilutive EPS should be reported or it should not be reported it should not be reported okay sir that is one thing you need to keep in mind okay or maybe just one more step sir how much is your basic EPS in my example or here 2.5 by chance if you get depths as how much by chance if you get depths as 2.8 can we report to this 2.8 or we cannot we cannot in that case what do we do is if you get anti-dilutive EPS means BS and depths we will make it as equal BS and depths we make it as equal how much is basic EPS 2.5 diluted EPS also we will report it at 2.5 this 2.8 we cannot report this is how we do the reporting if you get anti-dilutive EPS means beths and depths will be reported at the same level that's all it is done people okay this is one next one is one more thing is we need to keep in mind mind or one more type of question that can come is with respect to this look at this x limited during the current year ended 31st March 20 X1 they have income from continuing operation how much 240,000 they have lost from discontinuing operation how much 360 continuing operation means those operations the company wants to continue okay like suppose here AR let's say we want to discontinue CS don't spread rumors we are not just an example let let's say we have CA Cs and Acca three divisions or three operations we had CS division we are planning to discontinue CS division we're planning to dis today we took a decision to discontinue CS today only can we close it off huh now already there will be some existing CS students we need to support them let's today we took a decision to close it we feel the ultimately the closure will happen by over a period of 6 months in the next 6 months complete closure will happen is it okay okay now this CS division is it being continued or it's planning to be discontinued this only we call it as discontinued operation do yes people okay ca and Acca division are we planning to discontinue or it is continuing this these two becomes your continuing operations okay that is what is the breakup they have given usually they will not give the breakup but by chance there is another type of problem which can be asked so how much is the income that you have got from continuing operation 240,000 from discontinuing operation did you get income or did you get a loss how much loss 360,000 so for one operation you got 2H 240 profit from another operation you got a loss of 360 so if you add these two what are you going to get 240,000 profit 360,000 loss so net net me how what is it 1 L 120,000 loss that means totally at overall company level we have reported a profit or reported a loss total operation it's a loss of 1 120,000 easier because Co and do if you add you'll get total continuing operation and discontinued operation both if you add means you'll get the total profit or total loss made by the company okay accordingly net loss of 1 120,000 these two how they got 120 240 profit they've added 360 loss they netted off and finally they got a net of net loss of how much 1 120,000 overall in the current year the company has made a loss of 1 lakh 20,000 great company has 1,000 Equity shares actual Equity shares how much they have 1,000 and 200 potential Equity shares outstanding as on 31st March 20 X1 200 is the POS 200 is the POs you are required to calculate BS and deps right sir did they give you the data now at the total company level or they have split split what is that split have they given CA data yes have they given DOA data yes Co and do if you add what are you going to get total company data Co means continuing operation do means discontinuing operation do means total operations have they given you the data separately yes that means we need to calculate the EPS also Al separately for 1 by one so let's calculate here where it went H look at this first is continuing operation sir continuing operation is is how much how much profit continuing operation made 240,000 there is no preference dividend if there's no preference dividend means the bat only will become is how much is that 240,000 that I have written over here yes people first we are doing basic EPS calculation how many shares does a company actually have th000 sir division will the will each division issue Equity shares or Equity Shares are issued for whole company whole company that means whether it is C Doo number of equity shares will be same because division wise the shares are not issued Shares are issued at overall company level so WS is how much 1,000 and when this th000 Shares are issued they did not tell that means how much weightage we need to assign 12 x 12 or you can ignore that also so each is 240 WS is thousand how much is EPS 240 any problem the EPS for continuing operation is 240 like this we have to calculate for do also and to also total operations also now discontinuing operation they made profit or loss loss how much loss so 360,000 will discontinuing operation have any separate Equity shares or Equity shares for the whole company how much is actual Equity shares for the whole company th000 so if you do it how much you're getting positive or negative number negative so negative EPS we will report a sir what is this standard name as20 is what is it profit per share or it is earnings per share earnings can be profit or earnings could be a loss even loss per share is also reported if you show EPS as a positive number that that means it is a earnings per share if you report it as a negative number that means it is a loss per share whether it is earnings is positive or loss we still have to report EPS so when we calculate how much did we get 360 okay sir now we'll do it at total operation level at total company level how much company net net may company made 1 120,000 profit or loss loss so 1 120,000 loss these two DOA profit is 240 uh rather CA profit is 240 DOA loss is 360 these two if you adjust total operation call loss is how much 1ak 120,000 how much is the number of equity shares at company level still 1,000 so if you calculate EPS how much is it 120 okay sir this is basic EPS did they ask only basic EPS or even diluted EPS let's do the diluted APS so they only given potential shares okay that means this only is indirectly dilution adjustment they've not given any further data there's a dilution adjustment in what Isha V they have given number of shares sir visualize your EPS numerator is what each that means it is value denominator is what veins that means it is number of shares this potential ordinary shares is 200 means we should consider this as a dilution adjustment in numerator or denominator denominator so let's calculate the diluted EPS is there any dilution adjustment in numerator or no no data no data that means each for depth purpose is also same 240 okay what is Ws will you take it as th000 no 1,000 ordinary shares we have plus PO is how much 200 they have not given the data so I'm going to assume that entire 200 is ration adjustment because they have not given what type of POS it is in all since we don't have information entire 20000 I'm assuming it as dilution adjustment only yes people lack of data yes so how much is your veins 1,200 now calculate your EPS 2,400 divided 1,200 if you do how much are you getting 200 correct basic EPS was how much 240 diluted EPS how much are you getting 200 that means it is increasing or reducing anti-dilutive or dilutive only it is dilutive only clear okay let's do the similar calculation for discontinuing operation now what is discontinuing operation is for depths purpose same what about WS should we take it as 1,000 or 1,200 1,200 now recalculate how much I getting 300 oh oh oh oh oh oh problem why sir loss this was basic APS was loss correct sir if you sir now when you calculate from profit angle when you calculate from profit angle if basic EPS is 10 means a diluted EPS should be 10 or lesser than 10 lesser than 10 it should be 78 or whatever if you're calculating from loss angle if loss if basic loss per share is 100 rupees means diluted APS loss per share should be lesser than 100 or more than 100 so when you're working from loss angle means dilute DPS should be 100 or more than 100 more than 100 loss should increase when you working from profit angle depth should give you a lower number when you're working from loss angle depth should give you a higher number keep that in mind and check this how much was the basic loss per share 360 diluted loss per share should be 360 or greater than 360 greater than 360 but you got how much 300 I mean this looks like a dilutive or anti-dilutive anti-dilutive yes okay what this where as2 guidance comes into picture what they see is to find out whether EPS is dilutive or anti-dilutive you you should always check continuing operation you should always check continuing operation because discontinuing operation are you planning to continue or you planning to shut down if you're planning to shut down means will it give proper results or weird results now sir if you're planning if we are planning to shut down CS division means will we Market CS course no that means our CS division will always be making loss so hence to find out whether it this EPS is dilute or anti- dilutor we always check what number what data continuing operation did continuing operation did you did it give you anti-dilutive or dilutive only dilu so you don't have to check discontinuing operation and find out whether it is and dilutive or anti-dilutive that is not the comparison the comparison is always done at what level continuing operation level that continuing operation did it give anti-dilutive EPS or dilute only dilute only that means can we go ahead and report it yes so that mean this is still we'll go ahead and report it we will not check these two and find out whether it is anti-dilutive or not to find anti anti-dilutive we always refer which data continuing operations got it as simple as okay s all right next the same thing calculations for your total operations what is total operation each same 120 what is the Ws 1,000 plus POS of 200 it becomes th 200 and you calculate how much are you getting 100 right how much was basic EPS loss how much was the loss 120 ideally depths loss should be same or it should be more more you're getting more or you're getting less but but it's a total operation means total operations how do you get Co plus do do data should we take to find anti-dilutive or only Co only Co data continuing operation data is used to find out whether EPS is dilutive or anti-dilutive that means is should we worry about this or not required not required so can we go ahead and report all this very much you can go ahead and report it so BS for all the three operations are this depths for all the three operations are like this like this you can go ahead and report it this is another kind of question that can turn up not that popular but can turn up if the examiner wishes to ask so yes people this is the quick revision pointers relating to as20 EPS thank you hello people let's continue our discussion in this Marathon Series so next we are taking up accounting standard 22 that talks about accounting for taxes on income this particular standard as22 is necessary because accounting profit and taxable profit will not match accounting profit and taxable profit will not agree it not match why so accounting profit is prepared by by keeping accounting standard provision company's act provision in mind but income tax income tax profit is arrived by keeping Income Tax Act of 1961 Provisions in mind with respect to many areas Accounting Standards value and income tax value will not agree hence accounting profit and taxable profit will not match to plug this difference only or to fill up this difference only we have a standard called as22 that filling up that that gap of filling up is done by creating something called DTA or dtl we create something called defer tax asset or defer tax liability to fill up that particular Gap one common example of difference is depreciation right sir we have already revised accounting standard 10 okay did accounting standard give you any for any asset did they tell you depreciation rate planted missioner you depreciate 20% building you depreciated 40% like that was any rate given or no rate no rate in fact in fact As Told you can choose whatever method whichever method reflects the pattern of economic benefits that you get from the asset that method you choose so is any rate mentioned in accounting standard 10 or not mentioned not mentioned but same thing if you check an income Tax Act of 1961 it act gives for each asset what at what rate should it be depreciated that rate and accounting standards depreciation value will not match depreciation as per accounts and depreciation as per tax will not match year on year it will not match but at the end of the year end of the useful life total depreciation as per accounts and total depreciation as per tax will be same but year on year there will be a difference so hence so check here let's say the profit as per accounts before depreciation is 10 lakh in tax Also let's assume that it is 10 lakh as per accounts the depreciation you have charged in your pnl is 2 lakh but as per Income Tax Act let's say the depreciation is 2 and a half lakh applying the rate that means how much is the profit as per accounts 10 lakh minus 2 lakh if you do you'll get 8 lakh how much is the profit as per tax 7 and a half lakh is this matching or they're not matching they're not matching so to plug this difference only we create DTA and DT or rather DT L and plug off this differences that's a background behind as22 okay sir now we got to know that accounting profit and taxable profit will not match right there will be a difference as far as as22 is concerned the differences are of two types these differences are of two types one is a temporary difference or also known as timing difference another one is permanent difference either it could be a temporary SL timing difference or it could be a permanent difference temporary or timing difference means what these are those differences temporary name itself is saying temporary temporary differences are those differences which will come in one year and it'll stay forever or it'll get reversed it'll get it'll come it'll arise in one year and gets reversed in the subsequent years okay if if the difference comes in first year means maybe the difference will get sorted in the next year itself or if difference comes in first year means the difference may get sorted in the fourth year fifth year 10th year whatever but that difference will stay or it will get reversed it'll get reversed at some point of time if difference is getting reversed means we call such differences as temporary difference or also known as timing difference okay for this temporary difference or timing difference we create DTA or dtl this differences are plugged these differences are filled by either creating defer tax asset or by creating defer tax liability there is another kind of difference called permanent difference name itself is saying permanent that means permanent differences are those differences which will come in one year will they get reversed subsequently or they will never get reversed they will arise in one year and never get reversed subsequently example agricultural income as per as let's say we are in agricultural business from agricultural business let's say we generated a profit of 50 lakh okay assumption on this 50 lakh agricultural income as far as income tax act is concerned should we have to pay any tax or it's exempt exempt that means what is taxable income as per tax record zero as per accounts the profit is how much 50 lakh as per tax how much is a profit how much is taxable profit zero are these are the same or different difference there is a there is a difference will this difference gets reversed subsequently or forever there will be difference Forever This difference will be there yes or no because Income Tax Act says that on agricultural income you don't have to pay any tax at all it is completely exempt so these are all what we refer to as permanent differences okay for permanent differences DTA detail is not required DTA detail is only required for your temporary differences temporary whichever differences are there we create DTA Dil for permanent way DTA detail is not required I've explained you more logic in the regular class I think this much is good enough for our revision per this is the first aspect can I move on next one is Sir how to create DTA dtl in fact I had given you four equations I told one equation if you remember all the other equation you can do it on your own anybody remembers what is that uh okay maybe I've written it here let's review this maybe now we know that accounting profit and taxable profit will not match because income and expense as per uh tax and accounts will be same or it'll be different different like in this example May depreciation expense as per accounts was how much 2 lakh depreciation expense as per tax was how much 2.5 LH I means compared to accounts tax is having same depreciation or higher depreciation higher depreciation how much higher depreciation 50,000 higher depreciation correct okay that is what we are trying to express this as equation if expense as per tax compared to accounts compared to accounts if tax is having more depreciation means what will happen like in this case may check what is depreciation as per accounts 2 lakh after considering depreciation how much was profit as per accounts 8 lakh but how much was a depreciation as per tax 2.5 lakh how much is the final profit before tax as per tax record 7 and a half lakh how much compared to accounts tax was having less depreciation or more depreciation compared to accounts tax was having more expense if expense increases means what happens to profit if expense increases means profit will reduce that is the underlining principle of forming this equation if expense as per tax record compared to accounts if tax is having more expense means if the expense is more means what will happen to profit if expens is more means profit will be less so taxable profit in the current year as first tax record is how much less sir if taxable profit is less means if profit is less means you will pay more tax to the government or less tax since taxable profit is less in the current year the tax that you pay to the government in the current year is also less but these are temp permanent difference or temporary difference temporary current year you might have paid less tax current year you might have paid less tax when the difference gets reversed in the future Year may you have to pay more tax current Year may you would have paid less but in the future Year may when the difference gets reversed you'll have to pay more tax so if you have an obligation to pay more tax means you will create an asset or liability liabilities that means in this case me you will create what defer tax liability like that okay Z once more what is it once more this equation you always check so DTA DL is done by comparing income as per accounts compare the income with with tax or expense as per tax you take compare it with expense as per accounts accordingly do it first we are forming the equation from expense angle as per tax record if expense is more compared to accounts if tax record is having more expense means what will happen higher the expense lower the profit so if expense is more as per tax record means the profit as per tax record in the current year is less since the profit as per tax record is less the tax that you pay to the government in the current year is also less right all right but these are what permanent or temporary difference current year you might have paid more tax but when the difference gets reversed in the future you'll have to pay more tax if you an obligation to pay more tax means you will create a defer tax liability like this okay sir one if you remember means automatically you can go on constructing the other three okay first first was expense as per tax record was more next will be what expense what if expense as per the tax record is less as compared to accounts tax records are having higher expense or lower expense compared to accounts of tax record is having lesser expense if an expense is less means what will happen to your profit as per tax record taxable profit is more in the current year taxable profit is more so if profit is taxable profit is more in the current year means the tax that you pay to the government will also in the current year be more correct in the current year you might have paid more tax but will this difference stay or it will get reversed when the difference gets reversed in the future current year you might have paid more but when the future Year may when the difference gets reversed you will pay more tax or less tax less tax that means it's like your prepaid expense prepaid tax prepaid tax you will show it as a liability or asset that means in this case what will you create defer tax asset that n g next these two are from expense angle you can also build an equation from the income angle so let's review from the income angle if income as per the tax record is more one income as per the tax record is more if one income is more means or if income has compared to accounts if tax is having higher income means what will happen to your profit higher the income higher The Profit that means taxable profit in the current year is more if taxable profit in the current year is more means the tax that you pay to the government in the current year is also more in the current year you might have paid more tax but in the future Year may you will pay less tax when the difference gets sorted in the future may you are paying less means current year you already paid an advance that means you will create what here defer tax asset DTA okay same thing one more equation if the income as per tax record is less compared to accounts income tax record is having a less income if income is less means profit in the current taxable profit in the current year is also less that means the tax paid to the government in the current year is also less current year you might have paid less tax but when the future when this difference gets reversed future may you will pay more tax in future may if you have an obligation to pay more tax means you'll create defer tax liability okay s next is carried forward losses carry forward losses now let's say first year first year may company made a loss of 100 lakhs all the numbers are in lakhs second year company let's say made a profit of 400 lakhs okay this is profit this is profit before tax let's say company is taxable at the rate of 30% in the first year how much tax the company will pay since the company made a loss of 100 first year made the tax that the company will pay zero okay next year may how much tax the company will pay will they calculate 400 lakh of 30% will we calculate 400 lakh 30% no what how what does income Income Tax Act say if you have made any loss in the current year mean this loss you can carry it forward and adjust it so the next year may will you pay tax at the rate of 400 lakh into 30% that is 120 lakhs no how will you pay tax from 400 lakh you'll adjust the loss how much 100 lakh and then you'll calculate 30% how much is this 90 lakh correct okay this is the actual tax that you'll pay to the government correct now this is a loss loss can you carry it Forward sir loss you can carry it forward for seven or eight assessment years and adjust correct eight H okay you can loss you can carry it forward for eight years and take the benefit due to this loss future year cut tax is more or future year cut tax is less future year cut tax is less means you have an obligation to pay tax or you have an obligation to receive benefit benefit that means on carried forward loss Will you create defer tax liability or DTA only defer tax asset only that's a reason okay on all carried forward losses you'll create only defer tax assets that is one done people okay this one I will take it later first let's review few things we have learned now you're comfortable with the DTA and dtl creation yes okay so let's understand that or apply that in one another question and see how well you have got it Rama limited this has given you the following information they have given depreciation as per accounts as per accounts how much is Dei 2 lakh as per income tax record the depreciation is five stop as per income tax the depreciation is 5 accounts it is only 2 lakh now compare this is working from the angle or expense angle expense angle check always compare tax expense with accounting expense and construct the equation expense as per tax record is how much 5 LH expense as per accounts record is how much 2 lakh that means compared to accounting record tax record is having more depreciation tax record is having more depreciation how much more depreciation three lakh correct so compared to accounts tax is having a higher expense or rather expense as per tax tax record is more more by how much 3 l right so as per tax record expenses more if expenses more means taxable profit in the current year will be less tax paid in the current year also will be less current Year may you want have paid less tax but in the future Year may you have you'll have an obligation to pay more tax because depreciation is permanent difference or temporary difference in the future may if you have an obligation to pay more tax means will you create defer tax asset or defer tax liability defer tax liability got it okay how much is the difference 3 lakh so first take that how much is the difference three lakh this is permanent difference or timing difference timing difference so we will not create DTA DL on the difference amount we take the difference amount and multiply by the tax taxable difference is what we are trying to plug okay so take the difference how much is difference three lakh right three lakh what is the tax rate given in the question 50% so take the difference and multiply the tax rate so 3 lak into 50% if you do how much is that 150,000 when this 150,000 what do you need to create tax liability easy that is first part of this particular question now in some usually in some majority of the question they will only give you one data then automatically the question is over here they only give you one data or one more they give you one more expense called preliminary expense okay they told what read the question carefully they told unamortized preliminary expense sir amortised means what the word amortised means it is transferred to P an expense which is transferred to pnl we call it as un an expense which is transferred to pel we call it as amortized an expense which is not yet transferred to pnl we call it as unamortized clear that is the meaning fine now check unamortized preliminary expense that means expens has not gone to pandle as per which record tax record as per tax record have you transferred this expense to tax cup payel or not yet not yet because Income Tax Act does not allow this you know this this is 35d as per 35 of income tax act what it says preliminary expense should be return off over 5 years 20% each year correct or no but do we have that that that rule is there in accounts or it is there in income tax income tax act says that preliminary expense should be written off over 5 years you should take the benefit over five years but in accounts May will we write it off over five years or we will book entire expense if you incurred preliminary expense in let's say we have incurred preliminary expense of one lakh rupees in accounts May what you do entire preliminary expense will be taken as an expense in accounts right but as per tax record in the first year only will we take entire one lakh no when we take entire one lakh or it should be written off over five years five years that means how much is the expense as per tax record 20,000 as per tax record the expense is only 20,000 as per accounts how much is the expense in this example 1 lakh but as per tax it is only 20 so how much has not gone to pendl as per tax the expense is 1 lakh but how much have you considered for tax purpose only 20 how much have you not considered in tax 80,000 that only we call it as unamortized in my example unamortized is how much 80 but should we have to calculate this or they've given in the question in the given question unamortized expenses how much 30,000 unamortized means now you tell compare this and tell me which record is having what you always compare the tax tax with accounts you compare and this is an expense in this example May check expense as per taxes how much preliminary expense as per tax is 20 but as per accounts it is 1 LH that means compared to accounts compared to accounts tax is having more expense or less expense compared to accounts tax record is having less expense yes so if the expense is less means taxable profit will be more less lower the expense higher The Profit so because as per tax record expense is less profit taxable profit in the current year is more that means tax paid in the current year is also more these are permanent difference temporary temporary the difference will last for how many years 5 years yes or no because in Income Tax Act says that preliminary expense should be return off over 5 years but accounts May you'll write it off in first year only I mean this difference will be there for five years okay again going back to the example as per tax record expense is less if expense as per tax record is less means profit as per tax record is more that means tax paid in the current year is also more in the current year you might have paid more tax but in the future Year may when the difference gets sorted you will pay less tax if you will pay less tax in future means what will you create defer tax asset so defer tax asset you need to create how much is how much is a difference how much is that unamortized portion 30,000 that itself is a difference and what sort of a difference is this temporary difference or timing difference will we create DTA dtl on the difference or taxable difference taxable difference take the difference and multiply by the tax rate so 30,000 into 50% if you do how much you going to get 15,000 on this 15,000 are you creating dtl or DTA d DTA so they've given you two data one component is giving rise to dtl another one is giving to rise to DTA so as per as22 we don't show DTA and dtl separately we knock them off just like your plan assets and dbo and unamortized PS cost amount we adjusted no here the same things DTA dtl are adjusted so which is more here dtl is 150 DTA is 15,000 which is more dtl is only more so the net defer tax liability create for how much 1 lakh 35,000 easy people that's your question you need some more time to review or carry on carry on okay so what is a journal entry sir simple sir for defer tax liability what is a journal entry liability has what balance cred credit balance now you are creating a liability means you should debit or credit only so if you want to create defer tax liability the journal entry will be you'll write two defer tax liability right and we debit what p and account so the journal entry to create defer tax liability is pnl account debit to defer tax liability okay for similarly what is the journal entry for defer tax assets assets have debit balance so entry will be DTA account debit to pend account DTA to pendel account is the journal entry for different tax assets okay when differences comes you create DT dtl when differences gets reversed as long as you have difference you will show DTA or for that matter dtl once the difference gets reversed means dtl dtl is required or reverse it reverse to reverse what is the entry Ulta entry dtl to this is the entry for creation for reversal the entry will be hold on dtl account debit to P similarly DTA reversal entry will be P account debit to D like okay sir okay one more example we will review see this Omega limited is working on a different projects which are likely to be completed in 3 years the project will run for three years it recognizes revenue from these contracts on percentage of completion method so we are using percentage of completion method okay acceptable okay for financial statements during X1 uh x0 X1 X1 X2 X3 X3 for three years they've used percentage of completion and how much revenue is recognized in accounts 11 lakh or how much income is recognized in accounts 11 lakh 16 lakh 21 lakh correct people if you add these two how much are you getting or if you add all the three how much are you getting 48 lakh so for good this is recognized in financial statements so financial statements means accounts financial statements the balance sheet prepare and all you you prepare balance sheet p and all in what format schedule three format schedule three relates to income tax act or companies act so financial statement is always referred to the accounts okay now check what did they say further however for tax purpose it has adopted a completed hello dear students here we are with at another exciting update for you if you guys are appearing for one minute the screen went off here I think it has to come I think it came uh okay now okay now better okay s Papa I cut him off sorry s all right now as for tax record are we using percentage completion method or completed contract method completed contract method maybe Income Tax Act rule says that you have to follow only completed contract method that means income will be same as for accounts and tax or different different so check under Income Tax Act how much income or Revenue have you recognized in first year 7 lakh second year 18 lakh third year 23 lakh 7 18 and 23 but if you do the total how much is it 48 lakh that means the total income as per accounts and tax are they different or same same but year on year if you check are they same or different year on year there is a difference but at total after 3 years is this difference there or it has got reversed so I mean this is what permanent difference or temporary difference temporary difference another name is what timing difference so these are all timing differences yes people okay so on timing differences should we create DTA dtl yes okay that's what they're asking for that we need tax rate how much is tax rate 35% now you will make me happy tell I'll give you this data tell don't look at a solution okay as per tax I'll tell you the first sentence you'll continue with that as per tax record this we are talking from expense angle or income angle income angle as per Income Tax Act the income is 7 lakh as per accounts the income is 11 lakh okay Carry On compared it to accounts compared to accounts tax is having perfect the compared to accounts tax is having a lesser income compared to accounts tax record is having lesser income so if income is less means profit will be less because the income as per tax record is less taxable profit in the current year also will be less that means the tax if profit is less means tax paid in the current year also will be less but permanent difference no current year you would have paid less tax when the difference gets reversed after 3 years you'll have to pay more tax if you have an obligation to pay more tax means you will create defer tax liability how much is the difference 4 lakh will you create the dtl on the difference or taxable difference so take the difference 4 lakh and multiply tax rate of 35% 4 lakh 35% you do how much is it 1 lak 140,000 that is a defer tax liability you will create correct so 1ak 140,000 is what defer tax liability you okay sir this is for the first year did they give you only first year records or three years three years now you know this in this problem you'll get to know both dtl creation as well as dtl reverse because after three years difference is there or sorted sorted okay stop first year what did you create dtl that means what is the balance in dtl dtl means it has to come in balance sheet how much dtl you will show in your balance sheet in the first year 1 140,000 what is the journal entry you will pass first here you have to create a dtl what is the entry P account debit to Def tax liability 1 140,000 is the entry in the first year this is a detail creation yes okay let's review the second year maybe we'll stick to this only I've copied this data I've copied from the question only okay now all right sir second year second year how much is the accounting income 16 LH how much is taxable income 18 LH now you tell me compared to accounts tax is having same income or more income compared to accounts tax record is having more income that means if income as per tax record is more if income is more means taxable profit is also will be more tax paid also will be more tax paid also will be more so current year you might have paid more tax future year less tax in future year you'll pay less tax means what will you create DTA DTA a correct yes but hang on this this this first year you already created def tax liability that detail is there now it's getting reversed now for second year you will not create DTA dtl is already there in instead of creating DTA what you'll do is you'll reverse dtl to this extent comfortable like that because dtl is already existing we create both DTA and dtl or only one only one so instead of creating DTA here we will reverse the previous year dtl fully no to the extent of difference how much is the difference here 2 lakh will we reverse it to the extent of difference or taxable difference so 2 lakh 35% how much is that 70,000 70,000 will you create DTA or you will reverse dtl how much dtl was already there 1 lakh 40 how much did you reverse in the current year 70 that means the dtl balance in the second year will become 70,000 this dtl will come in your balance sheet on the liability side at 7 so for second year are we creating or are we reversing for reversing dtl what is the entry dtl account debit to P account 70,000 7,000 that's your Okay g great next third year as per accounts the income is 21 as per tax the income is 23 so compared to accounts tax is having more income more income means more in more income means more profit more profit means in the current year you have paid more tax in the future year you will pay less tax in the future you will pay less tax means you will create DTA but will we create DTA here or reverse reverse what dtl already created so what is the difference 2 lakh will we reverse to the extent of difference or taxable difference 2 lakh 35% how much 7,000 again in third year we will reverse dtl for 70,000 how much dtl we had 70,000 how much reverse in third year that means detail balance at the end of third year will be Z okay because the reverse after third year difference is there or difference has got sorted once the difference is sorted means DTA Dil is required or we have to close this chapter that's the reason dtl balance has become zero third here may reversed dtl so reversal entry is dtl to P 70,000 70,000 you don't have to pass this this is just for your reference I study material has only asked this particular portion okay with journal entry I feel we'll have better Clarity so I had written this in our regular class okay zaru this is about your DTA and dtl drama okay one more in fact two more types of questions are there that can get asked in the examination we'll see that give me a minute okay sir we pay tax to the government based on accounting profit or taxable profit we always pay tax to the government based on taxable profit okay you remember we provision for tax all right correct instead of provision for tax we actually the name we call it as current tax the schedule three name is current tax instead of provision for tax we call it as current tax you tell me tax is PED to the government account based on accounting or taxable profit how do you calculate tax take taxable profit and multiply by the tax so you take taxable profit and multiply by the tax rate that way if you do you'll get provision for tax that provision for tax only is called as use a fancy name called current tax yes people what is the journal entry for current tax in fact what is the journal entry for provision for tax P account debit to you can write provision for tax or you can call it as current tax this is the ENT yes people okay this is one all right now are we paying only or are we making only provision for tax or are we also make DTA dtl DTA dtl what is the journal entry for dtl you tell me sir PN account debit to defer tax liability observe these two for current tax also pnl is debited for defer tax liability also pnl is debited so that means you have to show tax expense in your pendel the total tax you have to show in your pnl the total tax that you show in your P only we call it as total tax total tax will have two components what are those one is provision for tax another one is DTA or dtl instead of provision for tax we call it as what current tax plus you'll add what defer tax sir you will add when if it's a dtl you will add why because the entry for provision for tax and defer tax liability different are same here also you'll debit P here also you'll debit P so if it is defer tax liability means you will add what is the entry for defer tax asset the entry is what DTA to pnl account so means here pnl is debited or credited means if you get defer tax asset you'll add or you'll minus majority of the cases you'll get defer tax liability only but by chance if you get defer tax ass it in that case how do you get tax expense again or maybe reconstruct this equation for me how do you get tax expense current tax plus defer tax liability if it is there means you will add if it is defer tax asset means minus both you'll not get but I've written the equation just to be on the safer side correct people this is one more thing okay next one more component we need to remember is uh Matt mat I think in your tax syllabus you had AMT I think right alternate minimum tax you didn't have minimum alternate taxes 115 JB was not there right most probably then it'll come and see a final taxation I don't know the syllabus I've not seen it but anyways that has a small implication here little bit I'll explain any I've explained in regular class but just say quickly we will revise so what is this is we have one provision called mat mat stands for minimum alternate tax what is this concept is what was happening was in Income Tax Act there were a lot of exemptions section 10 exemptions lot lot of them were there agricultural income is exemption can take 10A 10 10 gradu so many exemptions are there many big companies they had a lot of profits they had a lot of profits they used to use this tax exemption and pay zero rupees tax to the government okay huge profit but tax paid to the government is zero now if government does not get the money then how will politicians house yeah how and all all that will happen no not all that road Railways how and all this will get constructed yes or no correct so obviously government needs money correct so hence they thought that we have given too much exemption so it is ultimately affecting our treasury toy so they introduced a concept of minimum alternate tax government told doesn't matter even if you use exemption still you have to pay me a Minimum Tax still you have to pay me a Minimum Tax so what Mata provision was what said was the companies they have to pay tax as per normal provision they have to pay tax as for their normal provision or they brought in one more called mat Provisions they also brought in something called Matt Provisions let's say as per normal provision you have to pay tax a company has to pay tax to the government at the rate of 1 lakh as per mat there is a separate calculation which you'll probably learn in your CF fin let's say that that will be given to us in accounts you don't have to worry let's say as for Matt it comes to 80,000 okay so what the government is saying now you tell me sir government will what want lower of the two or they want more higher of the two so government is saying compare the two and higher of the two is what you need to pay as tax to the government okay let's make this may for interesting purpose let's say as per Matt the calculation is 1 and a half lakh as per normal provision how much is a tax payable 1 lakh as per Matt provision how much one and a half lakh which is higher here one and a half lakh that means actual tax which the company will pay to the government in the current year will be how much 1.5 correct now due to mat is company paying any excess tax due to Matt is company paying any excess tax in the current year yes if Matt was not there means how much tax company would have paid 1 lakh because because of this mat they are paying how much one and a half lakh so how much excess is paid because of Matt how much excess is paid 50,000 1 and a half lakh minus 1 lakh which is 50,000 yes or no this works like your set off of loss if you have losses what you'll do if you make if company makes his loss in the current year what they'll do carry it forward and utilize same goes this we call it as mat credit this we call it as mat credit whatever ex's you paid in the current year you can utilize this I think you can carry it forward for 15 years if my memory is is Right some years are there I think it is 50 I don't remember I think I've given it you regular notes but just say you can carry forward this for few years and utilize in the future that's what we mean by Matt credit easy people did we get this much understanding now stop how much is tax expense how did you get tax expense tell me again once again current tax plus defer tax liability if you have defer tax asset you will minus but are you paying tax at the rate of normal rate here or Matt mat due to Matt how much excess are you paying 50,000 sir will you just pay the tax xes or you also will make provision for it provision that means can you make the provision only for this much amount or also for this ex's also for this exes so this for this Matt credit also you need to make provision this becomes your total tax expense this only they call it as amount debited to P like this they will ask the question calculate the amount to be debited to P okay s now tell me the equation once again again amount debited to P is given by what equation current tax current tax plus defer tax liability if you have defer tax asset minus plus mat credit or you can call it as ex's tax of mat comparator that's what I've written here check amount to be debited to P is current tax plus defer tax if it is defer tax liability you'll add if it defer tax asset you'll minus plus excess of M over current asset that is nothing but your M this is what we need to calculate in the next question can we review that next question quickly yes I think this one question number three from the following details of a limited for the year ended 31st March 27 calculate the defer tax asset defer tax liability as per years 22 final and also the amount to be debited to pnl account you know how to calculate that okay now accounting profit is 6 lakh book profit as per Matt as per Matt how much is a profit three and a half lakh but as per normal income tax provision what is a profit as per normal in income tax provision 60,000 as per normal provision of income tax the profit is 60 as per Max provision the profit is 350 normal tax rate is 20 mat tax rate is how much 7 and a half this information they have given so can we go ahead and calculate first let's do the calculation that we know of Sir how much is the income as per the normal income tax provis 60,000 how much is the income as per accounts 6 lakh yes as per accounts the taxable profit is how much as per rather as per tax record how much is the income or how much is the profit 60,000 as per accounts how much is the income 6 lakh compare what is it compared to the accounts compared to the accounts tax is having higher profit or lower profit compared to the accounts tax is having lower profit if the profit is less means if the profit in the current year is less means tax that you pay to the government in the current year also will be less current year you want have paid less tax but these are what if they don't tell the difference always assume it as temporary difference only so current year you might have paid less tax but in the future Year may when the difference gets sorted you'll have to pay more tax if you have to pay if you have an obligation to pay more tax means will you create DTA or dtl DT dtl how much DTA dtl find out the difference that's what accounting profit 6 lakh taxable profit is 60 difference is 540 on the difference will you create DTA dtl or taxable difference take the difference and multiply don't take mat rate DTA DL working is on the normal what is the normal tax rate 20% so the difference is 54 54 20% how much 8,000 you have to create defer tax liability okay sir that is what the requirement of the question calculate DTA or dtl which you have already done yes people okay next second point is you will pay tax to the government based on what you will pay tax to the government based on the normal tax provision or mat provision whichever is higher so let's calculate that okay the normal tax only we call it as current tax how do you get current tax how do you get current tax will you pay tax to the government based on accounting profit or taxable profit what is a normal taxable profit 60,000 what is a normal tax rate 20% that means how much is current tax taxable profit is 60,000 tax rate is 20% means the normal tax is 12,000 instead of calling this as provision for tax we call it as current tax correct G will we pay tax to the government at 12,000 or we also have to compare it with Matt compar compar it with Matt what is the profit as per Matt calculation 350,000 but what is the tax rate as per Matt at 7 and half% The Profit as per Matt rate Matt calculation is 350 given Matt tax rate is 7 and a half calculate how much is a tax as per Matt 26250 as per Matt calculation it is 26250 as per normal calculation it is 12 now in the current year company will pay tax at what rate the lower of the two or higher of the two 12,000 or 26250 whichever is higher so the actual tax paid by the companies to the government in the current year is 26 okay sir all right because of Matt is company paying any extra tax yes in the current year due to Matt is company paying any extra tax yes if Matt was not there means how much tax company would have paid 12,000 because of Matt how much tax companies paid 26250 so because of Matt how much extra tax companies paid 14,250 that only we call it as Matt credit or excess of Matt paid over the current tax you can call it as Matt credit or I can use the same name I see uses this name if you want you can also call it as M credit your choice okay sir all right did they ask this or they ask amount debited to P amount debited to P how do you calculate amount debited to P current tax yes current tax is how much 12,000 plus if it is defer tax liability you will add defer tax asset means minus here here it is what defer tax liability so you took the current tax of 12,000 you added defer tax liability of 1 lakh 18,000 that's it or even mat credit how much is Matt credit 1450 add that finally how much you debit to P 1 L 34 250 that's the requirement of this question that's all n g okay one more question that can be probably sir I'm just from my basis what and all can come I'm covering some new new question also can be framed if something new comes don't blame me okay these are some popular question which I'm revising all right one more provision of uh what is there is as per years 22 is listen to this sir there is a small concept called tax holiday tax holiday tax name it is saying holiday in Holiday May you tensed or you're chilled chilled tax holiday means are you paying tax or you Exempted Exempted so let's say government give you I government tells you one com government tells one company I give you five years tax holiday that means what for five years should they have to pay any tax or not required not required yes no now what as22 says is listen to the sentence then we will apply this in question now normally on temporary difference on temporary difference will we create DTA dtl yes on temporary difference or timing difference we will create defer tax asset or for that matter defer tax liability what this one extra fitting or extra provision says is if company has any tax holiday if company has any tax holiday sir it's a temporary difference means what the difference will come in one year and get reversed out subsequently yes so this provision says that if any compan is enjoying tax holiday means for those differences for those differences which comes during tax holiday and gets reversed during tax holiday for such differences DTA Dil is not required once more for those differences which arises during tax holiday and also gets reversed during tax holiday for that no DTA or for that matter no dtls required this is a provision Okay g let's understand this better with the help of one question H check this beta limited one company is a full taxfree Enterprise for the first how many years 10 years for 10 years should they have to pay tax or not required not required okay and it is in the second year of its operation they get tax holiday for 10 years currently we are in which year two years into operations depreciation timing difference so they only told dep and we know this depreciation is a permanent difference or timing difference so they only told depreciation timing difference resulting in tax liability tax Li means DTA or dtl dtl they only give resulting in tax liability that means on this ideally on this depreciation here you have to create defer tax liability okay sir depreciation timing difference resulting in defer tax liability in year one year two is th000 lakhs and 2,000 lakhs respectively this is a difference how much is the difference due to depreciation in the first year 1,000 and 2,000 all the numbers are in lcks okay s first year and second year you have got the difference will this difference be there permanently or it will get reversed it will get reversed check this from the third year onwards it is expected that the timing difference would reverse third onwards the reversal will start by how much every year 50 lakh first year how much difference came 1,000 second year how much difference came 2,000 this is what I've written first year you'll get th000 difference second year you'll get a difference of 2,000 from third year onwards you'll get the difference or difference will get reversed difference will get reversed okay but do not forget for how many years the company has tax holiday 10 years so do the calculation every year the difference will get going going on getting reverse to the extent of 50 so from third year till 10th year actually it'll go on till more why have I stopped my calculation till 10 because tax holidays 10 years okay so till 10th year how much reversal will happen every year 505050 we go on getting revers from year three to year 10 totally if you add all this how much reversal has happened 400 correct so for good tell me the provision once again as per as22 for those differences which come during which arises during tax holiday and reverses during tax holiday for that DTA detail is required or not required not required why it is simple sir on first year or look at this difference sir company is having a tax holiday of how much 10 years so first year let's say on depreciation you created defer tax liability you created defer tax liability off you created dtl let's assume dtl means company will have an obligation to pay more tax for 10 years is company paying tax or no tax you are creating one liability but is the company really settling this liability or not then what's the point in creating because is company going to pay tax till 10 years or they're not going to pay that's the reason companies this provision says that for those differences which comes both during tax soliday and gets reversed during what tax soliday for such differences don't create any DTA or Dil okay comfortable okay listen to my sentence differences comes in tax holiday difference comes in tax holiday it gets reversed after tax holiday it gets reversed after tax holiday on this you will ignore DT dtl or create you will create only for those differences that comes and gets reversed during what tax solid only for that D retail is not required okay sir Now understand this how first year how much difference came thousand difference came how much difference got sorted during tax holiday or that means indirectly can I say out of this, lakh difference 400 lakh difference got arised in tax holiday period and it also got reversed during tax holiday period yes total difference in the first year is how much th000 in that th000 difference 400 AR arrival as well as reversal has happened during tax soliday only that means on this 400 difference is DT Dil required or not required no DTA Dil is required correct people what about that 600 balance difference are the the 600 balance difference getting reversed during tax holiday or after tax holiday after tax holiday company has to pay tax that means on this 600 lakh difference we should ignore dtl or create create okay you will create dtl on 600 no 600 lakh is a difference we create DTA detail on the difference or taxable difference what is a tax rate given in the question some they must have told assuming tax rate is how much 40% so on this 600 lakh how much DTA dtl you will create 600 lakh of 40% 600 lakh of 40% is how much 240 lakh so in the first year company will create dtl only to the extent of 240 ideally how much is the difference 1,000 you should have created 1,000 40% how much dtl 400 ideally you should have created 400 dtl but in this difference some differences came during tax holiday and it also got reversed during tax holiday so for such differences is detail required or not required not required so only on for those differences which came during tax holiday but it is getting reversed after tax soliday which is how much 600 lakh that we are creating dtl over here understood our people okay this is the first year first year you will create the dtl to the extent of 240 lakh what did they ask in the question compute the dtl at the end of second year and any charge to pandle account they are asking the detail at the end of which year second year we got detail at the end of second year or first year first year they asked for second year also no okay so differences came only in the first year or also second year also second year how much difference came in the second year again 2,000 this 2,000 difference is it getting reversed during tax solid or after only after only sir you should you should always adjust the difference on fif basis which difference came first 1,000 or 2,000 so that means first reversal will always be adjusted with 1,000 because th000 difference came first reversal this 400 will be adjusted first with 1,000 okay sir I mean this 2,000 car difference it is coming during tax holiday but it is getting reversed during tax holiday or after after after so on this difference should we ignore or create what should we create dtl as they only mentioned in the question so the difference is how much 2,000 will you create dtl on the difference or taxable difference this is the total difference or additional difference means you need to create additional dtl so 2,000 uh 2,000 40% how much is it 800 lakh that means now you need to create additional dtl in the second year for 800 lakhs more correct people yes yes yes yes yes so first year how much dtl you need to create 240 second year how much more you need to create 800 that means what is the total balance of dtl 104 correct people this is what they asked in the question this is the detail balance at the end of second year detail balance should become 240h uh one4 lakh second year may they also asked how much charge to pendl account what is the journal entry for dtl pendl account debit to dtl they ask for both the years or second year second year how much detail are you creating 800 L what is the journal entry to create dtl pendl account debit to dtl account so second year how much are you charging to pendl account 800 lakh you charging to P that's what they asked done people that's it this is another type of question that can come okay that's it with respect to as22 thank you hello people welcome back after that break so continuing our discussion further next we'll be taking up as25 that talks about interim Financial reporting okay as25 talks about interim financial reporting sir first of all as25 is not mandatory so which company has to follow this interim financial reporting how often should they do this reporting and all no guidance is offered if at all interim financial reporting is done by company how or what are the things to keep in mind as25 gives the guidelines okay this is one now what is this interm financial reporting first of all we need to know what is interim period sir in a year how many months are there 12 months any period normally you prepare financial statement considering how many months data 12 months data if you are preparing if you are if the period is not 12 months if it is lesser than 12 months then that we call it as interim period if the period is not 12 months if it is lesser than 12 months we call it as interim period and for that interim period if you're preparing any financial statements that only we call it as interim financial statements or interim financial reporting okay normally listed companies will prepare financial statements on not quarterly basis all that becomes your interim financial reporting because they are preparing the data for the whole 12 months or only 3 three months 3 three months that is your interim financial reporting that way okay that was one now sir how should this interim financial statement be prepared as25 gives two options one either you can prepare a complete set of financial statements you can prepare a complete set of financial statement somewh it is here or you can go for condensed set of financial statement as25 or as per as25 you can prepare your interim financial statements on a complete basis or on a condensed basis complete basis means you prepare annual financial statements in the same format May in the same schedule in the same things may you prepare interim financial statements also everything did to that is one okay just that annual financial statements you will prepare by considering 12 months data interm financial statements will you consider 12 months or lesser if you're preparing financial statements on a quarterly basis means you'll only consider 3 months data is it mandatory it has to be three no you can prepare intern financial statements on a six months basis also because as25 does it recommend that it has to be only three or it can be anything anything less than 12 is interim period okay it can be three it can be two it can be six it can be eight whatever that is entity Choice there is it okay the way you prepare your annual financial statements in the same format you can prepare interim financial statements also that we call it as complete set of financial statements or you can go for shortcut that short cat only we refer it to as condensed set of financial statements in condensed set of financial statements where what we do very simple what as25 sayses the heading and subtotal The Heading and subtotal should be as per the latest annual financial statements The Heading what is the heading you'll give for balance sheet tell me under heading you'll give balance sheet as on so and so company below that equity and liabilities under that shareholders funds and all that is mean by heading and sub subheading heading and sub subheading as for whatever heading and subheading you're giving in annual financial statements same thing has to be maintained in interm financial statements also but additional line item is optional like under current assets what and all you'll show you'll give a breakup dataro cash and all you'll give a breakup that breakup only we call it as additional line item becomes optional you don't have to give that breakup in interim financial statements you can simply write current assets 10 lakh that breakup entity has a choice there that's all that's if you're adopting for that choice then we say company has gone for condensed set of financial statements okay people practically no company will apply this okay see all these are first of all extra work if you tell the company this is optional first thing they will says thank you I don't want to do okay so all these are practically irrelevant but companies prepare for financial statements quarterly no sir that is as per se agreement sebi says that you have to give me the data on a quarterly basis that because of the listing agreement company gives the data to sebi on quarterly financial statements but that is not as per as25 because sebbi says you have to give it companies are giving it but otherwise practically nobody will apply this okay that is one all right next sir in interum financial statements may also you need to report BS and deps webs and deps we already seen this okay it's a very simple topic usually three types of questions can be asked from this particular topic both at inter level as well as say fin level they play around the same question this topic is ditto same thing you learn as IND 34 in your CF final ditto ditto no change okay the standard if I cover here in fact I can do one thing I just know finished CF final Marathon that only I can copy paste here only I forgot that I mean next attempt I'll do that H because everything is same it no change okay just the standard name change here it is as25 there it is inds 34 name also same okay yeah but only extra efforts from my end same okay we'll move on to the uh next aspect sir if there is any major events you need to give a disclosure of that in your interim financial statements also like if you have done any litigation settlement if you have done any uh amalgamations okay if you have declared any dividend like that if any major events has happened that disclosure has to be given in interim financial statements may also these are not that very important at best whatever we have discussed now can be fitted as Theory question for one or two marks for mcqs okay the first type of question that can come relating to this topic I feel is the period period of IFR what is this let's see let us say company current year is 1 April 2025 to 31st March 2026 this is the current year for this particular company and this particular company is preparing their interim financial statements on a quarterly basis assumption so that means they will have how much how many months data in a quarter how many months are there 3 months that means they are presenting the data q1 Q2 Q3 Q4 let's say currently we are in quarter number two first quarter is what 1 April 2025 to 30th June 2025 so second quarter will begin on 1st July 2025 to 30th September 2025 let's say we are in this particular period okay now in what what are the breakup of financial statements tell me what put together only we call it as financial statements pnl balance sheet cash flow statements and note stop right now I have to prepare pnl I have to prepare pendl right interim financial statements also there will be pendl there will be balance sheet there will be cash flow statement this pendel I have to prepare for what period this pendl I have to prepare for what period sir for what period are you preparing IFR now July to September that means you need to prepare one pnl for 3 months you need to prepare one pnl for 3 months what 3 months are those 1st July 2025 to 30th September 2025 that is one okay this is what 3 months of what three months of current current period yes same three months data same three months data you have to give it for the last year for comparison purpose same 3 months 1 July 2020 now what 2025 or 2024 2024 same 3 months period of the you need to give it for the current year or previous year previous this is one for this period you need to prepare okay sir along with this along with this two more you also need to prepare ydp YTD means year to date year to date our current year is beginning on which date 1 April now our current quarter is ending on which date 30 our current year is beginning on 1st April and currently we are on 30th September this information from 1st April to 30th 30th September information only we call it as YTD as an year to date that year to date period P also you need to prepare so what it will be now here yd means here it will be how many months 6 months what are those six months so year begins on 1st April 2025 and currently we are on which date 30th September 2025 this is what three months data or 6 months 6 months dat of last year or current year same YTD 6 months data you need to give also for the previous year for comparison purpose 1st April 2024 to 30th September 2024 same YTD data of the the previous year also you need to these are the periods for which you need to present your PN understood that's what I've written here okay s all right next comes the balance sheet next comes the balance sheet sir balance sheet is a statement that you prepare on a particular date our current interim period is ending on which date 30th September so you will prepare one balance sheet on 30th September 2025 that is the first thing okay and you also have to give something for comparison as25 recommends that you give you give last year annual financial statement for comparison purpose last our current year is beginning on 1st April 20125 so last year ended on which date 31st March 2025 so you also need to prepare a balance sheet on 31st March 2025 you don't have to prepare it you already have it give that yes comparative financial statements okay so for these two dates or these two balance sheets you need to give that's what I've written here one on 30th September and one on 31st March 2025 of the pre year that is uh yes this is for full year ideally this is not comparable but anyway not in my hands standard Setters opinion that this is what you need to prepare and present for comparison you're doing it correct but anyway let's not worry too much about that practically headache will not come because these are all what mandatory or optional optional so why are we breaking our head about it yeah so it is okay no company will follow so much of it any which way so far okay next one more component of financial statement is what cash flow statement for cash flow state statement you only need to give YTD data here YTD is how many months year begins on 1st April and and the current period is ending on 30th September so you need to give YTD of current year and you also need to give YTD of previous year what period will be this now 1st April 2025 to 30th September 2025 this is a yd of the current year same YTD period cash flow statement you also need to present for the previous year also so these are the periods for which you need to prepare the respective financial statement as interim financial statement that they can ask you as one question okay explain the period for which you need to prepare IFR if you are in this particular quarter like that a question can come this is what this is what you need to write you just need to mention this theoretical question but can come for three to four marks if examiner wants has come can come first type of question we don't have any extra question on this this itself is a question are we sorted with this can we move on to the next one okay next one one more is Sir obviously in interim financial statement may you are preparing pnl in pnl May you will show income and expenses on and in balance sheet you will show assets and liability on what basis may they should be measured how the assets liability income and expenses should be measured in IFR as25 says whatever basis you are using for your annual financial statement same basis you use for IFR also in annual financial statements May if you are def deferring the expense means in interim financial statement may also you will defer in annual financial statement May if you are not deferring any income means in interim financial statement may also you should not drier like prepaid salary or prepaid Insurance next year Insurance expense if you pay current year only will you book it as an expense or show it as prepaid expense prepaid expense in annual financial statement May you'll show it as prepaid expense in that means in annual financial statement May are you booking this expense or differing differing in interim financial statement may also can you defer acceptable in annual financial statement May if you're deferring means in IFR also you can defer in annual May if you are not deferring means in interim may also you should not def a basis that's what we have written over here yes people this is another kind of question which can come okay sir all let's do a thing let's take up that question immediately see this one question number 10 an bharati limited reported a PBT of 4 lakh rupees in the third quarter ended 30th September So currently we are in the which IFR period third quarter and that third quarter is ending on 30th September okay Zar now it's not necessary we have to start uh start the period from April only you know it could be calendar year also if it is calendar year means January February March is first quarter April May June becomes your second quarter July August September becomes third quarter maybe here they're following calendar year we don't know right if they're saying third quarter is ending on 30th September means third quarter that's okay sir no further inquiries there okay on inquir quy You observe the following give the treatment as per as25 okay sir they have calculated how much profit 4 lakhs now they will give you some data as to how did they calculate this for L we need to tell whether the calculation they've done is right or is it wrong if it is wrong means we need to rectify and get the correct profit that's the requirement of the question okay prepare the adjusted profit before tax for the third quarter they have calculated it as 4 lakh and they' have given these adjustments we need to check whether these adjustments are proper or not okay first adjustment check dividend income of 4 lakh received during the quarter stop sir when you if you receive the dividend today think from annual financial statement okay you preparing annual financial statement if you receive dividend today will you defer it or account it today only you'll account it today that means in annual financial statement May dividend income will you defer or book it immediately book it immediately yes in annual may you are not deferring means in IFR May should you defer or you should not it's should not differ check how much is the dividend amount 4 lakh it has been recognized only to the extent of one so in the current quarter the accountant booked only one LH how much did we receive four only they booked how much one balance three lakh they have defered where in IFR acceptable unacceptable that means three lack of income dividend income this is not dividend paid this is dividend income it is recognized or not recognized sir one income is not recognized now correct or not correct not what they've done is not appropriate so what we should do now we'll have to book this income when you book an income what will happen to pre profit this profit will be same or it will increase I means what you have to do now you'll have to add three LH this adjustment you'll have to do like this some adjustments you'll have to do and get the revised profit so due to this adjustment you'll have to add 3 lakh can we move on to the next one okay 80% of sales promotion expends of 15 lakh stop so obviously to make the sales there will be some expenditure selling expense think from annual Financial State prospective selling expense will you defer or you'll book it as in when it Acres you'll go on booking will you defer it or you'll not defer you are not deferring an annual financial statement means can you defer an IFR or not allowed deferment of this expens is not allowed actually yes check what did the accountant do 80% of sales promotion expense of 15 LH calculate 80% of this 15 lakh is a total expenditure 80% of that is how much 12 lakh what did they do 80% of sales promotion expense of 15 lakh incurred in the third quarter when did it AC third quarter that means when you should account it third quarter only but it has been deferred to the fourth quarter as the sales in the last quarter is highend they are saying next quarter May we'll have higher expense so we'll book more more next quarter May sales will be high so we will book more expenses what accountant is telling is that the way accounting Works no as in when it ACR you need to account it so 80% of this expenditure they have accounted or not accounted there's an expense when expense is not accounted how much is that value 15 80% which is 12 lakh now if you now can you defer this or not allowed not allowed book it when you book an expense what will happen to profit it will increase or it will reduce we should reduce our profit by how much 12 lakh rupees 8 15 lakh 80% so 12 lakh rupees we need to adjust or reduce from The Profit can I move on to the next okay in the third quarter company changed depreciation method to WD to straight line stop can you first of all change the depreciation method yes depreciation is B is on pattern of economic benefits if benefit changes means dep depr method also you can change change in depreciation method accounting policy change or accounting estimate change accounting estimate when you change a method of depreciation will you calculate the depreciation from the beginning or only today onwards if you today if you change the method means from today onwards depreciation will change and due to the method change will you get same depreciation or you may get more or less you may get more or less when will you account that today correct no so that means any change in depreciation method if you do whatever extra depreciation you get should you defer it or book it book it let's see what the company did in the third quarter company changed the method from wdb to slm which resulted in extra depreciation how much due to this method change you got extra depreciation of 12 lakh should we defer it or book it immediately book it immediately the entire amount has been debited in third quarter so that means accountant has for a change done a mistake or no mistake means the treatment given is correct any adjustment required or nothing nothing they've done everything correctly fine fair enough 2 lakh rupes extraordinary gain like Lottery income suppose we won Lottery income will you defer it or book it immediately book it immediately so you got some extraordinary gain 2 lakh and it this gain was relating to which quarter third quarters when you should book it third quarter what did the accountant do it was allocated equally to third and fourth quarter that means 2 lakh rupes the accountant has allocated to quarter number three and quarter number four how much allocated allocated equally means one one lakh so how much actually should be accounted how much actual gain should be accounted 2 lakh how much did the accountant book in the third quarter only one that means how much gain has been deferred one lakh should we defer this gain or book it book it so that mean has the accountant done that no so what we should do there's one lak again which they have deferred accounted when you account a again what will happen to profit it will reduce or it will increase increase so add 1 lakh rupees due to this particular adjustment that's all yes sir all right cumulative loss resulting from the method of inventory uh change in the method of inventory valuation like from fif if you go to weighted average from V weighted average to F4 that that only we call it as change in cost formula we've learned this from F4 to weighted average or vice versa that is an accounting estimate change or policy change it's an accounting policy change policy changes are done prospectively or retrospectively retrospectively okay check cumulative loss resulting from the inventory method change was recognized in the third quarter how much 3 lakh so you changed the method and you got totally some loss okay how much loss is that three lakh sir that loss you should book it now or you should do retrospective calculation retrospective out of this loss one lakh relates to previous quarter so if it relates to previous quarter means you should book it in the previous quarter but what did we do entire three lakh loss we booked in the current quarter only entire three three lakh relates to current quarter or one lakh relates to previous one that's means this one lakh loss we have booked it in the current but should it be booked in current quarter or last quarter last quarter that means we have booked extra loss allowed or reverse it when you reverse the loss what will happen to profit profit will increase so you need to add one lakh rupees yes people next one sale of investment in the first quarter stop when you sell an investment you will get some profit or loss when will you book that profit or loss on the day you sell here sales was done in third quarter or first quarter only first quarter so how much gain you got 20 lakh so this gain of 20 lakh what you should have bought ideally you should have done since it is related to first quarter the entire 20 lakh gain you should book it in the first quarter only what did the accountant do the company had apportion this equally to four quarters they booking this gain over four quarters so 20 lakh of gain they have allocated to four quarters means how much is each quarter gain 5 lakh we are in third quarter accountant has booked 5 lakh rupees gain in this quarter allowed or not allowed not allowed they already booked the again what we should do they already booked again means profit is unnecessarily increased how to do it reduce 5 lakh rupees this plus minus you'll have to do that's all take the number and calculate 4 + 3 you do -2 + 1 + 1 - 5 that way if you do you'll finally get the answer the final answer you're getting is 8 so loss is the adjusted profit in the third quarter is8 lakh rup that's all there is another type of question that can come manageable that's it for this and all they'll give three to four marks no dumb only yes no just you have to take that and do plus minus that's answer is there only okay the this is one another type of question that can come from this particular topic is tax expense this is important this is in fact popular both at inter level and final level tax expense you already know we have already done as22 you know tax expense right right so now in interim financial statement may also you will have you prepare pnl so in pnl you'll have to book tax expense how tax expense should be booked in IFR as a next concept normally sir profit for every quarter will be or it'll fluctuate it'll fluctuate hence the standard Setters have taken a call that you'll book tax expense based on something called water water as in nag okay watar weighted average annual tax rate weighted average annual tax rate we have to find out this water and based on this what we will book the tax expense for the respective IFR okay sir now how to find out this what anybody body remembers that I've done all this D not I done seriously yeah okay weighted average annual tax rate is given by the formula expected tax expense in the current year divided by expected accounting income for the current year into 100 yes no forgotten fully okay at least they're honest ah okay expected tax expense in the current year divided by expected accounting income for the current year into 100 if you do you'll get something called weighted average annual tax rate we will take this as a BAS and book the tax expense every year okay how this applies let's learn it in one question this question okay let's see how it works uh an Enterprise reports quarterly an estimated annual income of 10 lakhs so how much is the expected annual income 10 lakhs assume the tax rates are on first five on first five lakh taxes has to be paid at the rate of 30% on the first five lakh of income you have to pay tax tax to the government at the rate of 30 and in the balance income you it's taxable at the rate of 40 so flat rate or slab rate here tax are being done on slab rate don't be a Bry and tell the companies are only taxed at flat rate and all that don't question the question if they say slab rate we will take slab rate as simple as that okay the estimated quarterly income so you have preparing probably here only they told them they are preparing they doing the reporting on what basis quarterly that means here IFR interim financial reporting is done on no quarterly basis the four quarters respective income they have given okay people if you add all this obviously you will get 10 lakh Rupees done okay calculate the tax expense to be recognized for each quart and we know that tax expense has to be book to book tax expense we need to find out weighted average annual tax rate or what half how do you get that expected tax expense in the current year divided by expected accounting income for the current year into 100 okay first tax expense so tax is on flat rate or slab rate slab rate what is that slab rate how much ever is your income on the first 5 lakh income you have to pay tax at the rate of how much percentage 30% so how much tax you'll pay on this five lakh 150,000 so is your income 5 lakh rupees or your income 10 lakh your income is 10 lakh out of this 10 lakh income for the first 5 lakh income you will pay tax at the rate of 30 how much balance income is there out of 10 five got taxed at 30% means balance is another five that will get taxed at what rate 40% so how much is the expected tax expense for the current year 3.5 lakh that's your first component expected tax expense in the current year 3 and half lakh rupees easy divided by expected accounting income for the current year how much is the accounting income you are expecting for the whole year 10 lakh so nowhere they mention accounting income so if they don't give you any data we assume that taxable income and accounting income are same so how much is the income here 10 lakh so accounting income will be taken as 10 lakh only okay sir it's simple like this on name itself is saying water water means what weighted average tax rate so we are trying to find your average tax rate so how much tax are you expecting to pay for the current year three and a half lakh how much is your income 10 lakh so on your 10 lakh income if you are paying a three and a half lakh tax means on an average how much tax are you paying on a 10 lakh income if you're paying a tax of 3 and a half lakh rupees means 35% roughly are paying that is only expressed as formula expected tax expense in the current year three and a half lakh divided by expected accounting income for the current year 10 lakh into 100 so how much is that rate 35% use this rate use this rate to book your tax expense in IFR that's all okay s this is the first working oute now they asked each quarter a tax expense sir how much is the income for the first quarter how much is the they have given estimated quarterly income for four quarters is this much how much is the expense for income for the first quarter 75,000 right this is profit before tax how much tax you will you you'll book it as expense how much tax expense you'll book every quarter 35% so your income is 75,000 means and if your water is 35% means how much is first quarter a tax expense multiply the two you will get the tax expense for the first quarter yes similarly what is the income for the second quarter two and half third year car 375 4th year car 3 lakh copy that and just go on multiplying 35% water car rate you'll get respective quarter tax expense that's all this is a tax expense if you add everything totally you'll get how much 350,000 how much are you how much tax are you expecting to pay to the government 3 half LH that way this number will get T out that's all this is another kind of problem how much is a tax expense you have to pay to the government every year easy people okay need any minute to review or okay all right yes these are the three types of questions that can come from this particular topic usually they'll play around this three questions only yes so with this this particular topic is completed thank you hello people let's continue our discussion on Marathon series the next topic we are taking up is accounting standard 29 as 29 scope is very simple three components when the company should recognize provision when the company should disclose contingent liability and when they should disclose contingent asset that's all is a scope of as29 okay now moving along in this Direction first as29 is not applicable for something known as executory contract if it is executory contract as29 will not apply except for owner's contract meaning for owner's contract as29 will apply for executory contracts as29 will not apply so what is this executory contract name itself is saying executory executory contracts are those contracts where neither parties have performed their obligation or all the parties in the contract have performed their obligation to equal extent okay same example I used to give in regular class if you remember let us say Reliance has hired Mr X he's a CA first trank okay so Reliance hired Mr X all right for some let's say 20 lakh rupees package okay along with that Reliance told Mr X if you join our company because many candidates accept the proposal and last minute may they won't join they'll back out they'll join some other company so Reliance told if you join our company we will give you a joining bonus of three lakh like that they have made an agreement so they have made an agreement on 31st March 2025 Reliance and Mr X have signed the employment agreement on which date 31st March 2025 but the joining date is 1st May they've agreed that Mr X will not though they signed the agreement on 31st March Mr X will join the company when one and one month later that is on 1st may he will join okay sir now this is an executory contract how something from this joining bonus perspective 3 lakh rupees Reliance has to pay joining bonus to Mr X for three lakh have they paid or not yet so that means Reliance has performed their obligation or not yet not yet okay so Reliance has not perform their obligation what about Mr X will he be eligible to get three lakh yes but when only when he joins has Mr X joined we are on 31st March now has on 31st March has Mr X joined the company or not yet that means neither party have performed their obligation or both the parties have performed their obligation to equal extent what is the equal extent both of them have agreed so such a contract we call it as what sir executory contract for executory contract as29 does not apply this is first thing okay s okay moving along sir whether it is provision or whether it is contingent liability whether we are talking about provision or contingent liability we look for one key component one major component should be there for you to either recognize provision or disclose contingent liability that is obligation that is obligation only if obligation is there means then only you'll think whether should be recognize provision or disclose contingent liability obligation means in class I told you it's a no Escape scenario it's a no Escape scen scario like here let's say a limited has filed a legal case against B limited and demanding a compensation of 40 L now the case is going on in the court of law now B limited if they are found guilty B has to pay how much to the a limited 40 lakh probably yes now can be limited escape from the legal proceedings or they have to when Court calls for hearing can B limited tell I won't come no they have to can can if court orders pay 40 lakh can B say no I will not pay no they have to honor yes or so that means is matter in be limited hands now or it is left to be limited hands can be limited Escape or No Escape No Escape that No Escape scenario only we call it as what sir obligation okay the they've defined as 29 they've defined obligating event obligating events are those events where entity has no realistic alternative but to but to settle the obligation not much all we may not remember so simply for our class purpose we'll remember it as No Escape if there is no Escape scenario we call that as obl obligation is there only if obligation is there then we'll think about provision or contingent liability yes people this is one sir obligations are of two types legal obligation constructive obligation either it'll be a legal obligation or a constructive obligation legal obligations are those which arise as part of contract or law those obligation which come due to contract or law we call it as legal obligation excuse me now here sir let's say I am a fridge dealer I'm a manufacturer of let's say LG LG fridge I purchased okay now normally fridge and all come with a warranty yes let's say my fridge which I purchased LG fridge it comes with 5e warranty all right now after 2 years that fridge broke down it was not working properly now I went to the LG LG people and told fridge is not working properly can LG people tell no no no I'll not do anything get lost or they have to repair this product they have to either repair the product or replace the product because they have given me what warranty right that means they have obligation this obligation is rising as part of what contract because they have sold me the goods and given me warranty they have to honor this obligation yes or no so such a type of obligation which arises as part of contract or law we call it as legal obligation like gratuity you'll have to pay as per gratuity act so gratuity obligation is arising as part of law so some obligation which come as part of contract or law only we call it as legal obligations okay there is another kind of obligation called constructive obligation constructive obligations are those which arise as part of your previous Trade Practices or Customs those obligation which arise as part of your previous Trade Practices or Customs only we call it as constructive obligation example I given the same example if you remember let's say aru Pro we have a policy what policy any student who gets a rank gets a cash reward of 50,000 any student who scores a rank gets a cash reward of 50,000 let's say we have this internal policy we have not signed any agreement with any student saying if you get a rank we will give you 50,000 nothing like that we have not told them over phone nor sent any email nor signed any contract okay but but but but but you checked with your seniors I got to know about their policy do they actually pay this your senior told yes Ma I I was also surprised but I got 50,000 your senior who had got a rank also had got how much cash reward 50,000 your senior told yes I got a rank and I got 50,000 cash reward also from this company called aru that means one one idea is already set in your mind now what is that one idea is already set in your mind now what is that if I get a rank I will also get 50,000 yes or no that idea is already set correct did we do any signing with you is there any contract or a law law that requires us to pay this 50,000 no but still aru will have an obligation that obligation we call it as constructive obligation because this is set how this is set how based on our history our historical practice was to pay any rank holder a cash of 50,000 yes or no so those obligation which arises as part of your previous Trade Practices or Customs such an obligation we call it as constructive obligation and it's not necessary it has to be a legal obligation for you to account under as29 you can either have a legal obligation or you can have a constructive obligation anyone is good enough for you to for apply as9 okay s that is one next now we'll dive into the main aspect which is provision you know this already sir to recognize provision there are four conditions should be satisfied anyone remembers what are those four for you to recognize provision that compulsorily has to be four and all the four should be satisfied what are those there must be a present obligation arising of past event which results in probable outflow of economic resources okay where reliable estimate of the outflow can be made if all these four conditions are satisfied then only we'll go ahead and recognize the provision so first one one by one first the company should have a present obligation obligation you already know obligation means no Escape scenario right that company should have that No Escape scenario no that's a first condition clear and this obligation should be because of a past event so we never recognize a provision for future events provision is always Rec recognize for a past event for a future event like in future may I I'm planning to buy Rolls-Royce Rolls-Royce Phantom car worth let's say 10 Rupees will I make a provision now only I've decided in my mind a red color car okay and from this showroom only I will buy that particular date only I will buy that particular time only I'll buy was okay so I've already decided okay and was well I mean I'm thinking 10 CR will be the value now only can I pass the journal entry no provision is always recognized for the past event and not for the future event that's a second condition yes people third one probable outflow of economic resources the word probable means more than 50% chance for more than 50% chance of outflow okay that's the third one fourth one you should be able to reliably estimate the outflow how much outflow will happen you should be able to reliably estimate if four conditions all the four are satisfied means you can go ahead and recognize the provision let's take a small example same a limited has filed a legal case against B limited demanding a compensation of 10 lakh because a feels B has misused their patent a b limited has misused their patent so that's the reason a has filed a legal case and demanding how much compensation 10 lakh okay let's test provision condition what is the first condition of provision present obligation sir now we are thinking from B limited perspective here okay from B limited perspective understand the matter is now in B limited hands or it is left left because now who's going to decide this matter court right that means can be limited Escape Court proceedings or they have to honor that means does be limited have a present obligation If Today Court gives a judgment that you have to pay 10 lakh Rupees can be limited Escape or they have to pay that means is does B limed have a present obligation yes second one arising out of past why did you why do you think a filed a legal case against B limited because a feels B has misused their patent that misusing of P patent has already happened so that means it is a past event second condition satisfied third one probable outflow of economic resources now when the matter is going on in the court B limited will cons consult whom lawyers be limited ask their lawyers what do you think will happen lawyer told 70% go 70% % chance that we will lose the case there is a 70% chance of losing the case that means what sir this percentage is less than 50 or more than 50 that is the third condition what is the third condition there must be a probable outflow of economic resources now if B loses the case they have to pay a limited that means from B limited perspective it's an inflow activity or outflow outflow if you want to recognize provision means that outflow a chance should be greater than 50% here is outflow chance greater than 50% it is not 70% chance of winning it's a 70% chance of losing I means there is a if you lose the case b has to pay so there is a 70% chance of outflow means this is what possible obligation or it's a probable it's a probable probable obligation means more than 50% chance that's the third criteria trying to S okay sir okay lawyer told there is a 70% chance of losing but we may settle it at 7 lakh a has demanded how much compensation 10 lawyer feels at 7 lakh we can settle the matter okay fourth the condition is that what is the fourth condition of provision reliable estimate of the outflow can be made here are you able to reliably estimate the outflow yes as per lawyer opinion how much is a reliable estimate 7 LH that means all the four conditions are satisfied means you will go ahead and recognize the provision for 7 lakh rupees okay sir sir later Court asked us to pay 9 lakh means sir provision is Paka number or estimates estimates currently you have recognized the seven if later Cod says pay 99 lakh rupees means from 7 lakh you make it to 9 lakh by increasing the provision by 2 lakh if Cod says no you pay only 1 lakh then from 7 lakh you reduce the provision to 1 lakh by reducing how much 6 lakh so since provision is an estimate estimates can be increased or for that matter estimate can be reduced if code says don't pay at all so nice then what will the B limited do if B limited has already recognize a provision of 7 lakh means they will keep the provision or reverse reverse it so you can increase the provision you can reduce the provision you can also reverse the provision if need because all these are estimates okay sir so what is the difference between liability and provision sir sir provision is also liability sir provision is also liability sir that means there is no difference sir no sir is credit our a liability is credit our a liability okay sir I purchase the goods 10,000 for 10,000 on a credit basis at 2 months credit that means when will I pay the credit R after 2 months so that means I will show credit R in my books how much 10,000 with respect to credit r or with respect to this liability is there any confusion with respect to amount no I clearly know how much I have to pay how much I have to pay 10,000 I clearly know when I have to pay when I have to pay this after two months so is there any confusion with respect to amount and are timing or clear clear that is called liability with respect to liability when you have to pay how much you have to pay is clearly defined clear clearly you no liability or provision is also liability provision is also liability with uncertain timing and uncertain amount with uncertain timing and amount meaning when this provision will come to what extent it will come you can only estimate you can't say with Precision here in this case my lawyer is saying that we can settle it at seven but court may say pay 8 lakh but court may also pay pay 2 lakh that means Paka number or it may change so how much to what extent this provision will be eventually settled you can only estimate you can't say with PKA number and when can you say can you say with Precision court order will come only in the next month only now it can come in next month or it can come after 10 years also who knows yes or no that means timing and amount can you say with precession is it defined or you can only estimate estimate that's the difference between a normal liability and provision that's all okay that's the reason sometimes when you book see in your IC books the word liability and provision are used interchangeably because provision also ultimately is what liability okay that's the reason they interchange but this is the difference between the two done dun d d okay this is one first aspect is over that is provision next one is contingent liability contingent sir when should we disclose contingent liability first of all is not accounted sir contingent liabilities are only disclosed okay all right now when should you disclose it sir what if the lawyer says let me modify this question what if the lawyer says there is only 30% chance of losing 30% chance of losing now you tell me for you to make provision obligation outflow should be probable it should be probable probable means probable means the outflow chance is more than 50% here outflow chance is more than 50% or less than if the outflow chance is not probable okay then we disclose it as contingent liability that we call it as possible obligation which we call it as possible possible means between 5 to 50% if the outflow of chance is anywhere between 5 to 50% we call this as what sir possible obligation for all possible obligations we disclose contingent liability easy good okay suppose suppose suppose let's modify this obligation is probable obligation is probable if it is probable means will you disclose contingent liability or recognize provision if the obligation is probable means ideally you should recognize provision but we are not able to estimate the amount we not able to estimate the amount that means fourth condition of provision satisfied or failed we feel we will lose the case but how much we'll have to settle we cannot estimate why sir sir somebody filed a case against me saying I have contaminated a land 20 years ago 20 years back I went to some forest and contaminated there some bras filed a case against me I'm just saying example H don't spread rumors in yeah so now you tell me 20 years back I'll have all the records no I means is it possible to estimate this or difficult if you are not able to reliably estimate means can you recognize the provision or you should not so though the obligation is probable since you're not able to reliably estimate the amount in that case may you will disclose it as contingent liability that case done people okay okay these are the few cases of contingent liabilities next next is contingent asset till now we we took this a limited and B limited example till now we were analyzing from whose perspective B limited perspective because a had filed a legal case against B demanding compensation how much 10 lakh so from B limited perspective it's in from B limited perspective it's an outflow from a limited perspective it's an outflow scenario or inflow scenario so if if if if inflow chances probable if inflow chances probable you know already know what is that INF flow probable means what 50% chance if there is a more than 50% chance a will also ask their lawyer what is the status ma a a lawyer told 60% chance we will win there is a 60% chance that we will win sir if a limited wins means they will pay the money or they will get the money so inflow or outflow inflow that mean this inflow is what there is a 60% chance of this inflow means this is possible inflow or probable inflow probable for all probable inflow we disclose it as we disclose contingent asset we disclose contingent asset Okay g that's all it is once more or okay not possible okay the word though it's here it is right if the inflow is probable then only you'll disclose it as contingent asset okay suppose suppose suppose lawyer told there is only 40% chance that we will win there is only 40% chance that we will win that means now you tell me is inflow chance probable for it to be probable it should be more than 50% is it more than 50% no this becomes what sir POS possible outflow or possible inflow for all possible inflows and all you ignore for you to disclose contingent asset it has to be compulsorily probable inflow is it probable here or not probable not prob that means you don't have to do anything done people this is the thing this table I've given that summary check there are four scenarios that can come here one is work ually certain another one probable another possible another remote okay you will say it is virtually certain if it is if the chance is more than 95% or let's analyze it from liabilities outflow perspective from the outflow perspective let's analyze if the outflow chances more than 95% if the outflow chances more than 95% we call it as virtually certain if if the liability if the outflow is virtually certain means you recognize the liability you recognize the liability if the out flow chances probable if the outlow our chances probable when it will be probable more than 50% but less than 95% okay more than 50% but up to 95% you could say that scenario we call it as probable for all probable outflows we dis or we disclose or we recognize recognize what we recognize provis if the outflow of chances possible possible means 5 to 50% for all possible obligations or for all possible outflows we disclose contingent liability then there is something called remote remote means less than 5% chance if the obligation or outlow our chance is less than 5% means we don't have to do anything which is simply ignore like the way you're doing right now they you're sitting no like that just ignore okay now that is from the outflow angle now we are analyzing from what same thing we can analyze it from the inflow angle okay if the inflow is virtually certain if the inflow is virtually certain you go ahead and book your asset whatever asset is it if it is virtually certain me recognize asset if it is probable inflow probable means more than 50% chance of the inflow then you disclose contingent asset if it is possible inflow when it will become possible 5 to 50% if it is possible inflow ignore if it is a remote inflow ignore that's all it is so these this table kind of gives you a summary with respect to that when to do what done people and IC know sir they will use this word liability and provision interchangeably sometimes in case of virtual virtual certain scenario also they will say recognize it recognize provision they will say because as for them liability and provision are one and the same you don't have to worry about that if you want you can write recognize liability here or recognize provis also done people that is one next need a minute or carryer on everybody there till here till now yeah sure there sir great sir H okay moving along almost over let one or two more Provisions are there then we'll take up few questions in this regard next one is something called owner's contract in fact I used to tell my class that in owner's contract may we don't have any question you may not get it I disappointed me in this RTP they brought in one question called till now we didn't have okay but anyway we had done one question on the same ground they have built in one more which we will solve okay but what does ous contract if if you remember we started the class with this for executory contract as29 does not apply but for owner contract as29 very much apply so what is this owner's contracts loss making contracts we call it as owner's contracts if you have entered into any loss making contracts we call that as a owner's contract yes people now how let's review this example let's say x limited have made a contract with Y limited that they will purchase 1 lakh units X will purchase 1 lakh units and for each unit how much they will pay 10 rupes that means how much is a purchase price totally 1 lakh units for each Unit 10 rupe means the total is how much 10 lakh Rupees is the purchase value correct they've made the contract now but the actual purchase will happen one or two months later let's say on 1 May contract theyve made now but actual purchase actual delivery of the goods and all will happen on 1 May a few months later two three months later let's assume done people and this contract also says is the goods already delivered or it will be delivered in future in future so the contract also there in contract there is a clause saying if x limited backs out if they cancel the contract there is an exit penalty of 80,000 if x limited later on if they say I will not purchase then X has to compensate a penalty of how much 80,000 rupees this is the contract cut terms okay now proceeding further let say on 1st March recession hit the country that is a recession let's say we made this contract on 1st January 20125 assumption when was the contract made 1 January when will we purchase the goods 1 may but currently we are on 1st March the we are in recession economy all right now X feels IO I made a mistake I should have not entered into this particular contract why because now X feels they can sell this product only at 8 rupees per per unit conditions are bad there is no demand for this product now if at all X buys after purchasing X had a plans to sell it now how much is a selling price per unit 8 rupees okay for X limited there's a happy scenario or a sad scenario sir they have made a contract that they will purchase the goods at 10 per unit after purchasing they'll be able to sell it at how much only eight per unit that means X will how much will end up making what if they go ahead with this contract X will end up making some loss how much loss sir how much loss X will make 2 lakh rupes huh 2 lakh rupes will be the total loss yes no correct because they will perchase it at 10 lakh they'll be able to sell it at how much 1 lakh units they'll be able to sell it only at 8 per unit means the selling price will be selling price 8 lakh purchase price is 10 lakh means you will end up making a loss of 2 L is this loss incurred or it will be incurred if they go ahead with this contract and purchase the goods as agreed they will make a loss of 2 lakh rupees so far okay all right another option is there for x what is that instead of going ahead with this contract they can also cancel if they cancel X has to pay how much penalty 80,000 that means every door is opening only loss loss loss correct if they go ahead with the contract 2 lakh loss if they cancel the contract 80,000 loss that means it is a totally a loss making contract such loss making contracts only we call it as owner's contracts if you have entered into such contracts we call it as owner's contract cont meaning I hope it's clear now if you are the finance manager of the company which option will you go for if you are a finance if you are a finance dager means what you'll go higher of the two but if you are a proper finance manager you'll go for this particular option this let's say option number one this is option number two you'll go for which one obviously you'll go you'll choose the lower of the lower loss option that is what as29 also says if you have any owner's contract you make the provision at lower of the two which is the lower of these two 80,000 so you will make provision for honorous contract at the lower of the two amount which is 80,000 yes people done this is uh one particular Point what something went online anything happened H oh it went off Papa uh now fine okay that is also okay one second H now now it's okay now online I can resume I believe right yes sir okay so this only standard is saying is a provision you'll make the provision at lower of the two now this is expressed as in words what is the first number in this exit penalty one is exit penalty so for owner's contract we'll make the provision at lower of exit penalty and here it is excess benefit or excess cost this is this 2 L rupes is excess benefit or excess cost you can write like that okay so provision is made at one exit penalty or excess cost how do you get excess cost cost minus benefit from the contract so you find out those two amount and accordingly a lower of the two is what is chosen for making the provision for owner's contracts done people we'll also apply this in one of the RTP questions once more it example but I think you know how to calculate yes done that means indirectly you're telling you'll take care of that question H okay fine then next question is reimbursement next scenario or the next concept is reimbursement what is so what is the definition English word reimbursement mean reimbursement means getting back getting back if you have spent money means you can claim it back suppose I spent 10,000 rupees as fuel charges today and I recovered it from arivo Pro I spent how much 10,000 and I recovered how much 10,000 that recovery only we call it as reimbursement okay now how is this relevant in as29 scenario okay let's take this example now P limited is a raw material manufacturer they will manufacture raw material and they sell it because for them it's finished goods okay P limited will manufacture one product and they will sell it they will exclusively sell it only to Q limited P limited will manufacture one product and give it only to what and sell it only to what Q limited Q limited will use this material and produce one more finished goods that means what P limited material becomes a raw material for Q limited is this okay with you now P limited is selling one product to Q limited let's say it's a cosmetic product okay P limited sold one cosmetic product exclusively to Q using this cosmetic product they Q limited refined it and produced a little better product which they finally sold it off to the customer this is the arrangement okay now P will Supply raw material to Q using this raw material Q will produce finished goods and sell that to the customer cosmetic product beauty beauty product okay now y q limited sold this beautiful product to customer customer also in the the thinking that they he will he or she will become full fair and lovely glow and lovely applied Left Right Central full okay Q limited applied applied applied applied after 2 3 weeks beautiful cream after 2 3 weeks you should see the customer's face such a glow I tell you full red full bubbly bubble bubble bubble bubble whole face full bubble okay customer was so delighted with this new experience he simply filed a case against Q limitter demanding compensation of 10 L okay this what has happened now Q limited asked the lawyer Macha what what case lawyer po look at his face Court Judge only by looking at his face only he'll dismiss the case and ask us to pay 10 lakh RUP liw told Paka we will lose the case there is AR 80 to 90% chance that we will lose the case that means Q limited has to recognize what Pro because pres present obligation arising out of past probable outflow of economic resources lawyer told 90% chance of losing so it is probable reliable estimate of the outflow lawyer told we have to settle 10 that means all the conditions of Provisions are satisfied so Q will make a provision of 10 LH okay so far but but but Q is little smart you told fine I accept that maybe gty or fault is me mine also okay because of this customer's wonderful phase but but but but I produce this finished goods from raw material so that means there is a partner in crane who's that P limited so q and P have made an arrangement saying if any customer files a case against Q limited demanding compensation P will reimburse 40% P will reimburse 40% like that P and Q have an Arrangement okay sir that means Q has to settle the customer how much here in this case Q has to settle the customer here expected settlement value is 10 lakh so Q will make a provision here only that transaction or Q will also have one more here Q will recover how much from P limited 40% as per their Arrangement yes or no so that means p q will get some reimbursement or money back so how much money back is expected 4 lakh rupees correct what should we do for this 4 lakh this is a 4 lakh only we call it as what sir reimbursement everybody understood the concept now this 4 lakh from Q limited perspective it's an outflow or an inflow inflow and you already know the rules for inflow what is that rules if the inflow chance if it is virtually certain book and asset if it is probable inflow means disclose contingent asset if it is possible or remote inflow means ignore that is what this reimbursement concept also says if the inflow chance if it is virtually certain this reimbursement you recorded as a separate asset if Q feels that there is a it's virtually certain that we will recover money from P limited then this 4 lakh rupees will be booked separately as a reimbursement asset this will be booked separately as a reimbursement asset to the extent of how much 4 L if it is not virtually certain means then you can if it is probable means disclose it as contingent asset like that that's what is a provision all about you will record reimbursement as a separate asset now the next question is Sir can we net off this provision and reimbursement can we net off this provision and reimbursement as29 says no you show provision separately you show reimbursement asset separately in the balance sheet this you show on the liability side reimbursement asset you show it on the asset side both you don't net off is the guidance given for the reimbursement that's all is this concept of reimbursement can Ive forward that's all according to me over can I move on okay next last concept is restructuring h yeah restructuring what is this restructuring sir if you're planning to shut down any Division if you're planning to shut down any location or any product or if you are changing the management structure all that only we call it as restructuring like aru if you decide to shut down Acca division we are not okay again just an example that we call it as restructuring let's say some directors of Ru Pro we fired double fellows not working properly and we fired them we brought in new directors that is also what sir restructuring if you're changing any management structure management people if you're firing them and bringing in some new people let's say all the students we made you as directors anyway we are for the company we appointed you only as directors probably in one month only you'll close the company anyways all that only we refer to as what sir restructuring correct right that's the thing sir when now you tell me let's say we are planning to shut down a particular division now ACC a division let's say we're planning to shut down in that Acca division there will be some employees are they required now or we'll have to let them go we'll have to fire them yes can we fire them just like that or we have to compensate them have we already paid the compensation or we have to pay them we have to pay them should we make provision for that should we make provision for that is what we are trying to test here that only we refer to as provision for restructuring everybody understood okay zaru all right what as29 says is you should should recognize provision for restructuring provided organization is committed to restructuring organization should be committed to restructuring so when can you say organization is committed a detailed so all these are small activities or big activities sir for us ACC is a we generate big chunk of revenue from Acca also right Acca is a big division for us one big Division if you are shutting down means that's a small call or a major call major call major call just like that one day we will decide or with a careful planning care careful planning so that's what as29 says if you want to make provision for restructuring a detailed formal plan should be made one plan should be made and that plan should be either implemented or it should be communicated like let's say I'm planning to shut down ACC emplo ACA Division and fire the employees means I should have made this plan and I should have I should have called all my employees and told boss probably in the next two months you'll be let go so I have made the plan yes have I just made the plan or I also communicated communicated so in that case you can make the restructure because yes because other party now already has one idea is already set in other party's mind what does that know company will fire me but at the same time they will give me some money that idea is already set so constructive obligation has arised so you will make the provision okay sir like that a detailed formal plan should be made either that plan should be implemented or communicated or once more let's say that Acca division has 50 employees let's assume in that 20 employees one day I called and fired all of them together Tata by by now what will other 30 employees feel bukuu that means they already got to know that 20 gone means probably as 30 also we will go yes no so like that either the plan should be communicated or the plan should be directly implemented when those two happens you will recognize the provision for restructuring but for you should make the provision only for committed cost of restructuring only those costs which are relating to restructuring only for that we should make the provision just to give you another example I think this example had given a normal class so let us say I am planning to shut down my CA practice and I want to move to ca coaching CA practice to ca coaching I want to shift currently I'm in CA practice is is a restructuring for me yes I'm planning to shut down this and move on to ca coaching now sir I already have my CA practice I mean some employees are already working for me are they required anymore or I have to fire them I have to fire them okay that means let us say I am planning to compensate them 5 lakh rupees there are few employees I'm planning to compensate them 5 lakh rupees I've already told them B I'm shifting I'm shutting down the closing closing the ca practice and moving to ca coaching so I've already made the plan and I also have communicated the plan to them yes that means should we make the provision for this five lakh yes I'll make the provision is this a restructuring yes have I made the plan yes have I communicated or implemented the plan yes so should we will we make the provision yes this is one part sir if I'm shifting to ca coaching means can I use my CA practice laptop for CA coaching business no for CA coaching we need a little more High processor instruments the normal laptops and all will not work it should be a gaming laptops or the processing speed should be really good otherwise the classes will crash laptops will crash so I decided that I'll have to buy some more iPads I have to buy some more laptops I feel all this will cost about 50 lakh rupees to buy new iPads or new laptops and all that how much it will cost 50 lakh rupees okay can I make provision for this 50 lakh sir is this relate my existing business is what CA practice is this related is this 50 lakh related to my existing business or it's related to new investment for this and all we should not make profis so due to restructuring if you're planning to make any new Investments or if you're planning to do any relocation reorganization okay suppose my CA practice was I was doing it in let's say excuse me which region I'll take my region only I was in Udupi okay I was doing CA practice in Udupi now I feel I wanted to see a coaching in bengalore I means I have to shift from Udupi to bengalore there will be a relocation cost or reorganization cost can I make provision for that is that related to my old business or new business new business you should not make Provisions for all that that's what we have said over here no provision should be made for relocation future investment or any marketing cost and people only Rel relating to the existing business restructuring if there is any committed cost make provision for that for your new new Investments and all you should not make it is what they're trying to say and we already know this will we make Provisions for future operating laws my Rolls-Royce example if I'm planning to buy Rolls-Royce after 2 years will I make provision now only no if similar ground May if company fails the next two years may they will make 10 lakh loss will they book it now only no provision is always made for what events past events for future may if company is expecting any oper law for that also provision should not be made this could be important watch out for this they will combine all this in one case study and ask you should we make provision or not usually that's the way the question they ask in CF final I'm expecting same pattern to be continued in C inter also right now the questions are pretty straightforward I think they will increase the standard of the question slowly now the way we see the pattern done sir this is the provision or all app pointers relating to as29 we have some questions is relating to that can you quickly run it by AC remote I don't have much it I don't know who has can switch it on okay now will you make me happy by answering questions so uh more than example your disclaimers are mandatory correct we should give no otherwise why who knows what and all rumors you'll spread just kidding ah I know you are lovely students only my colesterol is high ah okay at the end of The Current financial year ending on 31st December number 2017 that's our current year fair enough company says that there are some 20 lawsuits some 20 cases going on against them that they've given goalie we'll see we we'll see over here with respect to five cases there is a 100% probability that we will win the case so if we win the case means will there be any outflow no that means how much is the loss zero that means should we have to recognize any provision or contingent liability here or nothing nothing leave that in the next 10 cases you know totally we have 20 cases no First cases may we feel 100% chance that we will win the case so no outflow leave it in the next 10 case may we have a 60% chance of winning stop we have a 60% chance of winning means what is a chance of losing sir somebody has filed a case against us that means it's an inflow scenario for us or outflow scenario outflow so outflow will happen when you win the case or lose the case so if they give you winning percentage always first convert it into losing percentage for us to analyze what it is if there is a 60% chance of winning means how much is a percentage chance of losing 40% that means there is a 40% chance of outflow is my statement right there is a 40% chance of outflow 40% chance of outflow May means it is a probable outflow or a possible outflow for possible outflows we make provision or we disclose contingent liability we disclose contingent liability yes people that breakup theyve given total losing percentage is how much 40% that's what we found out here in that they are saying there is a 30% chance that if you lose the case we have to pay the compensation there is a 30% chance that we will pay how much compensation 1 120,000 multiply you simply have to take the amount and multiply by the probability percentage 12 3 are 36 so this is 36,000 off there is a 10% chance that we will lose the case and pay how much compensation 2 lakh that means how much is this 20,000 correct people okay that means that there is a total outflow expected how much sir 56,000 yes this is with respect to what one we have like this one cases or here we have five we have 10 cases 10 cases for one case the outflow expected is 56,000 for 10 cases how much it is 560,000 correct now yes people for this 560,000 make provision or disclose contingent liability disclose contingent liability yes people like this we have calculated here that's all or I've calculated like this only here if there is 60% chance of winning means will there you will you pay any outflow no that's what I've written 60% into Zer then 30% into 1 120,000 10% into uh 2 lakh rupees this will give you the amount for one case we have one case or we have 10 cases like this 10 Cas multiply you'll get the total amount got it okay similarly we have few more cases look at this remaining there are how many cases now five cases so there is how much percentage chance of winning 50% sir there is a 50% chance of winning means how much is a percentage chance of losing there's 50% chance of losing also for it to be probable for it to be probable it should be more than 50% here is the losing chance more than 50% or exactly 50 exactly 50 means this becomes what probable obligation or possible still it is a possible obligation only correct now for all again possible obligation provision or contingent liability disclosure contingent liability disclosure same way calculate 50% and if you win the case will you pay the amount or no amount no amount so 50% into zero Okay g there is a 30% chance that we will lose the case and how much we will pay 1 lakh so multiply these two 1 lakh for 30% how much is that 30,000 and there is a 20% chance that we will lose the case and pay 210 multiply these two it will be how much 42,000 this by doing this you'll get the amount for one case we have one case or like this we have five cases so multiply by five so if you multiply by five totally how much you going to get 360,000 for this also contingent liability for above case also contingent liability so totally how much contingent liability you will disclose 920,000 that's all you need to write in calculator got it all this is one someone is in Jos okay uh all right a company has not made provision for warranty in respect of certain Goods considering that the company can claim the warranty from the original supplier one company is saying One customer has filed a case against us we have to compensate the customer but company is saying I will not make provision because I can claim this amount this scenario only what do we call it as just know we learned bubble bubble face what is that reimbursement company is saying I will not make provision because I can claim this 100% amount in my example reimbursement was only 40% here the company is saying full amount I can claim back so I will not make provision is that right no you have to make provision also you have to make uh reimbursement also you'll recognize provided if it is virtually certain so you have to show provision separately reimbursement asset separately okay so you can't say that I will not do both you have to do both and show them at their respective places a theory question that's it okay one more question we will take in this uh regard an engineering goods company provides sales warranty for two years to the customer after selling they give a warranty period of 2 years so within two years if something happens to the product then we'll have to either repair the product or replace the product okay keep that in mind based on the past experience company has been company has been following policy of making provision of warranty based on the invoice amount on the remaining balance warranty period so they have a policy that they will check how much warranty period is remaining based on that the company will make the provisions okay what sort of provision is that they're saying the warranty period is less than one year means we will make a provision of 3% if the warranty period remaining is more than one year means we will make provision of 2% 2% of what of the invoice of the sales value 3% or 2% is what we will make the provision here they are not asking you should you make provision you need to calculate how much is the provision one second come not coming only calculate the provision for warranty as per as 29 as on 31st March 20 X2 as well as 31st March 20 X3 you don't have to give your gam Masala here provision should already be created the question is how much that we need to calculate and for one year or two years two years they're asking you okay now just check sir for the first year is ending on which date 31st March 20 X2 so that means we are in which year 1st April 2011 to 31st March 2012 okay check sir you have sold some product on 19th January you have sold some product that means if the product is sold in the current year or previous year only not in this year it sold one year before this correct no because 19 January 2011 this year starts on 1st April okay that means before this year only you sold one product no problem how much value did you make the sales for 40,000 so whenever you sell the product you also give warranty how many years 2 years when will the warranty expire you have sold the goods on 19th January means warranty will expire 2 years later that means what is warranty expiry date 18th January 2013 yes people so this particular product sale which you have made that particular product warranty ends on 18th January now how what is the company's policy of making Prov just on an adoc amount or based on the period remaining period remaining if the warranty period remaining is less than one year means company makes how much percent provision 3% if warranty is more than one year warranty period remaining is more than one year means 2% now our current year has ended on 31st March 2012 correct this warranty period on this sale will end on which date 18th January 2013 so count from here to here how much period is pending from 13 March 2012 to 19 18th January 2013 I just want to know whether it is less than one year more than one year I don't want the exact period it is less or more it is less than one year correct if it is less than one year means will we make how much provision 3% that means on this 40,000 how much provision I should make in the current year 3% and they told 3% on the invoice value only that means on this 40,000 I'll make a 3% provision is that okay sir on this sale I will make a provision of 3% in the current year can I move on okay next 29th January 2012 okay that I think that was made in the current year that falls in the current year current year we made some sales how much is the value of the goods sold 25,000 sir you sold the goods on 29 January 2012 means this also you will give two years warranty so added two years to this when will it expire 28th January 2014 warranty expires on this sale on 28th January 2014 correct avable now currently our current year is ending on which date 31st March March 2012 so count we are on 31st March 2012 this warranty expires on 28th January 2014 I mean this is less than one year or more than one year more than one year for more than one year what is the provision we make 2% that means on this sales we have to make how much provision in the current year 2% so 25,000 into 2% correct yes all right now 15th October 2012 we sold how much 19,000 so 15th October 2012 Falls in our current year or it was sales was made in next year next year if you're about to sell the product now only you'll make provision that means current year should I have to worry about this third period or this particular component should I worry or ignored ignored it becomes relevant only for the next year that means current year how much provision I need to make 40,000 3% which is 12200 25,000 2% which is 500 so totally how much provision I need to make 1,700 that is the provision requirement for this particular Year yes people that is 2011 and 12 easy everybody okay so they asked the provision requirement only for one year or even next year also they also asked how much provision should be made for 31st March 2013 that means now we are in which year now the year is ending on 31st March 2013 means year will begin on 1st April 2012 to 31st March 2013 now we have come to this year okay now let's see again sir first product you sold on 19th January for 40,000 but when is a warranty expired 18th January 2013 currently we are on which date 31st that means for the current year this product warranty this this particular sales car warranty period still remaining or it has expired expired for expired products if the warranty period is expired will I have any obligation or no obligation I means should I have to worry about this 40,000 no for this particular 2013 2012 13 year should have to consider 40,000 or not required not required why warranty period has already got expired now come to the second one for a 25,000 sale when is a warranty period expiring 28 January 2014 now we our year is ending on which date 31st March 2013 so count from 31st March 2013 to 28th January 2014 if you count it is less than one year more than one year what is it from here 31st March 2013 to 28th January 2014 more or less less than one year I mean this 25,000 now warranty period remaining is less than one year and our policy is what if warranty period remaining is less than one year means how much perc provision 3% that means now on this 25,000 for this year how much perc provision I need to make 3% which is how much 750 clear now what about this 15th October 2012 15th October 2012 comes in current year so I in the current year how much sales have I made 90,000 so this particular again if you add two years warranty period to this when will the warranty expire 14th October 2014 I am on 31st March 2013 13 now and this particular sales car warranty will end on 14th October 2014 from here to here if you count less than one year or more than one year more than one year that means this period car or this particular sales car warranty period remaining is more than one year if it is more than one year how much per provision more than one year means I make 2% provision so in the current year on this 90,000 I need to make a provision of 2% yes which is how much 1,800 so on these two sales totally how much provision I need 255 this is the provision closing balance I need for second year any confusion this is what they asked as first requirement what should be the provision balance as on 31st March 2012 and what should be the provision balance as on 31st March 2013 that we have calculated here once more or okay Baka now stop sir we are in this year now this year totally how much provision we need how much provision we need we need 255 Z should we have to account to 2550 or we already have 1,700 we already made provision last year how much 1,700 we we already have last year provision closing balance becomes current year opening balance how much provision balance opening balance is there 1,700 but how much we need we need 1,700 or we need 2550 means in the current year we have to make provision for 25550 or increase the provision from 1,700 you have to make the provision to 255 how much you need to increase it by you have to increase it by 850 what is the journal entry to make any provision pnl account deit to provision there's a warranty provision so you simply write P account debit to provision for warranty 850 850 this is what they mean by how much is the amount debited to P if you are making extra provision means obviously you will debit P andl so in the current year you'll debit P andl by how much 850 that's what is the requirement of the question yes people okay that's another type of question from as29 yes so with this as29 is also done for thank you hello people so let's cover RTP May 20 may only no May 2025 RTP of our Advanced Accounting in our discussion now okay yes so overall RTP if I have to say one or two questions has been overall newly framed but otherwise pretty much the same copy paste and some numerical changes they've done in majority of the questions so let's see sir the intention of this RTP is we will be covering the new new questions if it is ditto similar means we will not do I'll just call it as a repeat and move on okay so let's review let's start so in the books of G limited the closing inventory amounts to as on 31st March 2024 is 104,000 and this closing stock is arrived as per fifo method okay great the company wants to change from fifo method to weighted average for 31st March 2024 in the current year from F4 they want to Shi to weighted average okay on the basis of weighted average the closing stock value is how much now 10 lakh 80,000 as per fif it is 1040 as per weighted average it is 880,000 great the near realizable value is NRV is 12 lakh rupees okay they have given they are saying what is the value of inventory in the books that you will show I crazy sir you have changed the method from fif to weighted average means will you use fif method valuation or W weighted average method weighted average what is weighted average method inventory value 888 and in that means the cost of the inventory will be taken as per weighted average and how much is that 8 lakh 80,000 inventory will be valued at cost or NV whichever is lower that means inventory will value it at what 880,000 that's all it is since you have changed the method you need to also disclose this its impact on financial statement you need to disclose so D for Delhi is the right answer Chiller okay next a company has a balance of 17 lakh 50,000 in Loan account with State Financial Corporation we have taken a loan it's the same adjustment in almost every preparation of financial statement question this adjustment is there which is inclusive of 1h1 15,000 interest accured but not due okay so interest is aced but it is not uh due because normally sir you'll pay the interest to the bankers on a monthly basis or you can make an arrangement to pay on yearly basis also yearly basis also so current year interest has aced but I is it due yet or it'll due a little later do a little later the loan is secured by the hypothecation of planted missionary we have given planted missionary a security and taken the loan loan okay now sir as per schedule 3 how should you show this loan now you tell me totally how much is the amount 175 in this 1715 1H 15,000 is the interest portion normally loan you will settle loan will be a long-term loan this interest you will settle Beyond one year or within one year mean this 150,000 can you show it a loow normally comes under where under long-term borrowings interest acur but not due can you show it under uh long-term borrowings or it should come under current liabilities current liability so in this currently total amount is 150,000 in this 150,000 1 15,000 is for interest this interest should come under where current liability balance 16 lakhs should come as what long-term borrowings that's what you need to do so option is c for Chen disclose 16 lakh as a secured loan under long-term borrowings and 1 Point 1 15,000 you show it under other current liability s CH adjustment nothing again same dto dto adjustment most byproduct you know this concept byproduct what you'll do sir as per is2 by product by product what you'll do by products you'll find out the realizable value of the byproduct and reduce it from the cost of the main product that's what they are asking here most byproduct as well as scrap by their nature are immaterial they they are measured at what by products are valued at net realizable value D for da is the option that's all this is a theory question it's okay here we will see valuation of inventory sir this is the same question I think we did in uh our marathon also or maybe one component was new okay 2 minutes me we'll quickly review this you are required to compute the value of closing stock okay check we have a raw material as well as we have finish Goods stop raw material valuation is direct or it is linked to finish Goods raw material valuation is always linked to finished goods if finished goods is valued at Cost then raw material also will be valued at cost if finished goods is valued at NRV means raw material will get valued at replacement cost that's always a concept okay now why am I I think the same question we had done in Marathon but one extra fitting they have given maybe because of that I'll review this check how many units of raw materials we have 700 as closing balance that means closing stock in units they have given it as 700 they have given per unit cost breakup cost price including GST this is the culprate including GST how much is that 280 sir GST means tax can you add tax to the cost of inventory yes provided these are nonrefundable tax meaning you should be able to claim it or it should not be here what they said they're saying ITC is available sir if input tax credit is available means can you add it to the cost of the asset no but this cost already includes GST so what we have to do should we take the cost of the product as 280 or we should reduce 20 we have to reduce 25 because ITC is available for this because this is a not a re non-refundable tax this is what tax refundable tax refundable taxes and all you cannot add it only non-refundable taxes can be added that's all as extra fitting and so fright invert Transportation cost can you add yes handling charges yes so add the two how much is it so totally you'll get raw material cost is how much 310 then they've given replacement cost replacement cost and all you'll add up no that is a separate valuation basis replacement cost is how much 200 this is raw material breakup similarly finished goods how many units of finished goods we have 1,800 units so raw material consumed for finished goods is how much 280 can you add this yes labor cost can you add yes V Direct overhead can you add yes 40 so add this 280 + 80 is 360 360 + 40 is 400 okay all right now they've given fixed overhead stop can you add fixed overrate to the cost of finished goods yes but fixed over rates are absorbed on normal capacity or actual capacity whichever is higher what is a total fixed cost 360,000 normal capacity is 36 actual capacity is 30 you'll take which one 30 or 36 higher of the two Which is higher 36,000 so 3 lakh 60,000 3 lakh 60,000 will be absorbed by how many units 36,000 units so per unit how much is the cost 10 per unit okay sir that means how much fixed over at Cost you'll absorve 10 per unit understandable everybody directly I've written short for for me hope this is okay so that means the total cost of the finished goods will become how much 410 easy so far now you need to do this valuation under two circumstance one when the net realizable NRV of the finished goods is how much 500 sir cost of the finished goods is how much 410 NRV in the first case they've given it as how much 500 that means in this case my finished goods will get valued at what cost or NRV whichever is lower which is lower 41 that means in the first case finished goods is getting valued at cost so raw material also will get valued at Cost what is the cost of finished goods 410 what is the cost of raw material 310 so that's a respective valuation I'm going fast or manageable manageable so the valuation so how many units of raw material we have 700 finished goods car 800 raw material will be valued at its cost of 3110 finished goods will get valued at its cost of 410 so that is a cost price this is the number of units this is the rate per unit if you multiply you'll get the value that's dto question we did in Marathon only extra fitting here was that tax W portion rest everything was same Okay g next similarly next case may they told now the NRV of the finished goods is 380 they're asking us to assume it is 380 what is the cost of finished goods 410 but NRV of that finished goods is only 380 now in this case may finished goods will get valid at what 380 or 410 whichever is lower which is lower 380 what is that 380 NRV so now finished goods in the second case has got valued at NRV if finished goods is got valued at NRV means raw material also will be valued at replacement cost what is the replacement cost of raw material that valuation can you take care of that's all you have to put that in table okay nothing much in this done this is done next is the cash flow statement W question so let's review and see what we can can learn from this particular question following data of VL limited is given and you need to prepare cash flow statement as per accounting standard three okay and that to under and you don't have to prepare full flesh cash flow statement you just need to find Cash Flow from operating activity specifically under direct method that's all only one part of cash flow statement which is operating activity and a direct method is what we need to prepare okay this is also straightforward question only anyway 2 minutes I'll review they've given 31st March 2024 and then theyve given 31st March 2023 31st March 2023 balance becomes opening balance 31st March 2024 becomes closing balance data given okay inventory tradeables cash is given fine then they've given trade payable all this they've given okay fair enough any other information no anyway direct method no under direct method what and all we need you tell Will we take pnl and find operating cash flow no under direct method directly we want what cash received from dear cash paid to creditor expense paid and all okay now sir they have given check here one by one we'll go they have given datar opening and closing balance they also given you sales they have also given you sales but cash received from dat are nowhere is visible how can we get this preparing a ledger just prepare datara Ledger what is datara opening balance 188 closing balance 205 see here where is a datara balance here datara opening balance was 188 closing is 20 clear how much is the sales given sir sales is 85 lakh 50,000 what is the journal entry for credit sales in fact they told in the question all the sales are on credit only and all the purchase are on credit only even if they don't mention this we assume Any Which Way sale what is the sales given in the question 85 lakh sales will be posted in which side of the datar Ledger credit side you'll post it as two datar that means you'll get money received from datar as a balancing figure have you not done all these questions yes so I mean this particular component will come in your cash flow statement yes okay 85 lak 33,000 is a money received from datar you will show it as cash flow from operating activity done okay next similarly what have they given they have given you trade payable as in credit arsa first we have closing balance and then we have opening balance let me write this so opening balance of credit ARs and closing balance of credit ARS you know purchases do you know purchases do you know they give cost of sales cost of sales so how do you get cost of sales cost of goods sold how much is that opening stock plus purchases minus closing stock so how much is cost of sale 56 lakh do you know opening stock yes opening stock is given in the question to be 1 lakh 65 closing stock is 120 opening stock is 165 purchase we don't know closing stock is 120 is it okay find out the purchase from this equation sir how do you get purchases Sol this and tell me how much is a purchases value quickly quickly tell 40 so so 45 you need to minus 56 lhus 45,000 is how much 55 lakh something 55 lakh 55 huh that's what yeah 55 lakh 55,000 is a purchases correct so that is a value you'll get 55 lakh 55,000 now you know purchases also okay and you know credit ARS opening and closing balance now we need to put how do you get cash paid to credit ARS how do you get cash paid to credit ARS opening balance of credit ARS is known closing balance is known purchases is known prepare a ledger no credit ARA Ledger you prepare that's what they've done here check credit ARA opening balance posted credit ARA closing balance posted what is the journal entry for purchases made purch purchase account debit to credit R purchases posted cash paid to credit R has arrived as a balancing figure I hope I can go at this pace okay now right so cash pay to credit are how much 55 lak 75,000 so if it's a payment means you'll show it as a negative number you follow the same presentation then they will L you do the normal presentation yes people this is done let's come back to the question what else is there sir is uh interest income an operating activity or an investing activity investing so ignore this fire Insurance claim received I'll talk about this a little later depreciation is a cash or non-cash expense ignore that because we are not using indirect method we are using direct method what about administrative expense paid they've given administrative expense 154,000 administrative expense is part of our operation I mean this is your related to operation ations sir this is not expense paid this is Administrative expense but do you see in your balance sheet any outstanding expense no so that means what this expense is still outstanding or paid paid so administrative expense paid is also how much 154,000 where will admin expense paid come under operating activity so this is 154,000 payment minus yes people okay next the only thing probably we need is a taxation right and tax we already know the drama what is a tax drama if they just give you opening and closing balance what is the Assumption if only provision for taxation opening and closing balance is given means what do we assume opening balance relates to the last year last year tax will be still outstanding or it will be assumed to be paid it will be assumed to be paid yes we will make that assumption when when only opening balance and closing balance of provision for taxation is given correct here only that is given or even current year provision is given see this is your pnl account and pnl account you are able to see income tax what is this provision for taxation made so now we'll prepare a ledger of the provision for taxation or maybe here only I'll prepare provision for taxation Ledger when you prepare what is provision opening balance 65 where will the opening balance come buy balance brought down how much 65,000 provision closing balance will come on the debit side how much is the closing balance of provision 48,000 okay next sir how much Prof provision did you make in the current year as per PN Del account in PN Del account may you get current year provision for tax how much is current year provision 95,000 so what is a journal entry for making the provision for any make for any provision what is the journal entry pnl account debit to provision so when you post that entry pendel account debit to provision the posting here will be by Pendle account how much provision did you make 95 add up Sir adding this you'll get how much this side 160 here also it should be 160 matching or there is a balancing figure how much balancing Figure 1 lakh 112 1 lak 12,000 is the balancing figure what is that balancing figure will you only make the provision or you also settle when you make the pro when you pay the provision what is the journal entry provision for taxation account debit to bank arrived as balancing figure this you need to prepare as working note number three okay this tax paid where it will come if they don't give you break up of tax tax we always show under which activity operating activity check under operating activity 1ak 12,000 they have already red down now payment for tax 1 12,000 they've reduced they've added everything and then they've reduced the full amount you do one by one it's okay yes people in fact all this adjustment nothing new everything is straight away from materials normal questions why I took up this question is because of this there is one thing called what sir fire Insurance claim received even this also we have covered in our regular class but but but but but but there in the problem where we had done fire Insurance claim was relating to the plant when plant was destroyed and you received Insurance claim sir plant is operating activity or investing activity investing activity so if any property plant and equipment is destroyed and if you get any insurance claim that is operating activity or investing activity so in that problem we had shown it under investing activity but here have they told it is plant sold no and moreover they're asking you to prepare what activity operating activity so the Assumption here is the stock has been destroyed assumption here is the stock stock so stock is an investing activity or part of our operations I means this fire Insurance claim we should show under investing activity or operating activity you are paying this or receiving this so means under operating activity you should show this as a positive number check up they show sir how often do you think all this will happen every day no that means this is an ordinary item or extraordinary as3 says that all the extraordinary item should be shown separately okay so that means you'll have to show this line item it will come under operating activity only 1 lak 10,000 but at the end as a separate activity okay adjustment for Extraordinary activity how much 1 lak 10,000 so you need to tell all the other cash flow all other activities or all other components operating cash flow is how much 13 lakh 6,000 from extraordinary activity how much cash flow have you received 1 lak 10,000 you need to give a separate disclosure of this and totally the net cash flow from operating activity is 146,000 only because of this adjustment I took up this question rest everything is a ditto same no new adjustment at all according to me this is done can I move on to the next question done this is done no next a next this one as4 question we will review this question and see what we can learn so we are closing the books on 31st March and so current year we Clos the books on 31st March 2024 and the financial statements are approved by 30th June because as4 targets that only no as4 means there is a window what is that cut off window as4 covers only those events that occur between the balance sheet date and the date on which financial statements are approved by the board of directors in case of company here approval date is what 30th June okay during the first quarter May some events have taken place first quarter May is it falling within this window yes yes the window is 31st March 2024 to 30th June 2024 first quarter period is what 1 April to 30th June so it is falling within this window yes or no so some transaction has happened in this p we need to probably identify whether it is an adjusting event or a non-adjusting event okay first one is ditto I think you already you should be knowing this smart limited one company they have an inventory of 50 stitching machines we are dealing with stitching machines so if you're are dealing with this machiner means is this PP for us or inventory for us in fact they only specified how many inventories we have 50 units of Machinery we have each cost is how much 5,500 per missionary okay fine as on 31st March Mar 2024 the company is expecting a heavy decline in the demand of this missionary in the next year I mean selling price will be same or it is expected to fall fall the inventories are valued at cost or NRV whichever is lower aha great thank you we didn't know only during the month of April 24 during the month of April 24 means current year or next year next year due to the fall in demand the price has gone down drastically the price of the goods have reduced and the company has sold F machine during this month at how much price 4,000 rupees I mean selling price of the missionary has now fallen to how much sir 4,000 right not only this only is what now NRV because how do you get NRV selling price minus selling expense minus further completion cost this is already finished product will finished product have any further completion cost no selling expense given no I mean sales value only will become NRV you know this provision we have studied if the value of NRV Falls after the report period but before the approval of financial statements then it will be treated as what event adjusting event in fact I made your notes also in the class you remember any decrease in the inventory after the any decrease in the net realizable value after the reporting period but before the approval of financial statement is stated as an adjusting event because inventory normally if you interpret this is a non-adjusting event because on the balance sheet date we don't know how much the inventory NRV will be yes or no means condition existed or condition did did not exist ideally condition did not exist but since inventory is a big ticket component inventory has a substantial effect on financial statement there is a exception bought to this rule what is that exception if net realizable value of the inventory decreases after the reporting date reporting date here refers to balance sheet but before the approval of financial statement that fall and net realizable value will be treated as adjusting event so NRV will be taken as how much now 4,000 cost of the inventory is how much 5,500 how will you value the inventory cost or NRV whichever is lower which is lower NRV how many units of machinary uh closing stock you have 50 so 50 units of inventory will be valued at 4,000 now correct no people that means inventory will get valued at what price 2 lakh rupees because NRV is being lower that's all yes I think we have done some question on this fine okay this is also done next a fire has broken uh Broken Out In companies go down on 15th April so our year has ended on 31st March on 31st March did we know that a fire is going to break down that means fire means automatically it is what event non adjusting event because on 31st March condition was not existing so non adjusting event I hope I don't have to read this further okay now check company has entered into a a sales agreement in to sell a property in fact for this I had given you some pointers what pointers you need to check whether you are in what negotiation stage or finalization stage if you are in negotiation stage or proposal sent stage then it is a non-adjusting if you have already finalized or if you have already entered the agreement then it is a adjusting right so now ideally the moment now you have into negotiation stage or you have entered the sale agreement you have entered the sale agreement one day before the current year is ended which is how much which is what 30th March to sell a property for 7 and a half lakh rupees which is shown in the books at 550,000 so so far if that stopped means I would have treated this as what event adjust adjust event that but read the next line the transfer of risk and reward is complete in the month of May so normally when you make an agreement risk and reward will get transferred on the same day but here you made the agreement on 30th March but the risk and reward is transferred on 30th March or may may that means it's it becomes like a proposal stage okay if they had not given this line if they had not given this line then I would have treated this as what event adjusting event because since they have SP said that the risk reward is specifically transferred in May that means now we will interpret this to be a non-adjusting event only because for this particular word okay because Normal assumption is on the date of agreement the risk and reward will get transferred that's the reason in the notes I told if you have entered into an agreement means treat it as a adjusting event but here since they have given this particular word in this case may you have to treat this as a non-adjusting event any confusion or carry on carry on clear no no issues online also okay now people every everybody are still there yes okay moving along sir company has received during the current year 2223 a government grant of 15 lakh for or this only huh a government grant of 15 lakh for the purchase in fact current year is 2023 or what year now current year is ending on which date 31st March 2024 so that means current year will begin on 1st April 2023 and end on 31st March 2024 we are talking about 20 23 24 as a current year but when did you receive the grant 2223 2223 is current year or previous year previous year we have received a grant how much 15 LH for purchasing a missionary that means this is a monetary Grant related to a specific asset and as12 says that for such Grant we can either go for asset cost reduction method or deferred government grant method I think that is not the intention of the question check here the company has received a notice of refund maybe we violated some condition because of that government is asking the refund of government refund of the grant when was that refund notice received 15th June 15th June comes in the current year or next year year next year due to violation of some of the conditions in the current year okay because we violated some conditions in the current year we received the refund notice on 15th June keep this in mind and tell me now what is it adjusting or non-adjusting event adjusting event why sir wait why is this refund being asked violation are you are you unaware as a company are you unaware of the violation or are you aware since you violated the condition which year current year since you violated the condition in the current year next year may you have got a refund notice that means Condition it's a surprise event or condition was existing condition was existing so that means this will be treated as what event adjusting that's all okay sir if they just ask the nature you give only one Diner answer adjusting non-adjusting if they ask you to justify then only add garam masala okay otherwise not required read the question and accordingly figure it out what how much of answer you need to write okay this is done next this this is as fer repeat question remember that bonus so changes in accounting policy same question we did in Marathon manyi class it's a repeat one no change this one is also repeat but anyways we'll quickly cover it I think this one you should be able to answer AP limited is a construction contractor cont all for the Engineers contractors and all A7 will apply they undertakes construction of a commercial complex for one company called K limited AP limited submitted separate proposal they have submitted a separate proposal for three units of commercial complex so there are three units for all the three units we sent same proposal or different proposal different proposal a single agreement is entered though we are actually constructing three units have you made three agreements or one agreement one agreement but propos proposal It Center separately the agreement lays down the value of each three units as 50 lakh 60 lakh and 75 lakh respectively each unit contract price is separately identifiable agreement also lays down the completion time for each unit each unit should be completed within which time they have mentioned now you need to comment whether it should be treated as a single contract or three separate contract single or three separate contracts so for you to created a separate contract there were some condition what are those condition separate proposal should be sent separate negotiation should be done correct revenue and cost you should be able to identify separately here you have sent a separate proposal PR contract it's also negotiated Pro separately because though you have entered into one agreement while it's one value or three separate values that means it subject to separate negotiation contract price you know if you are constructing if you are constructing three units means won't you know the cost that means condition is failed or satisfied that means there will be one contract here or three separate contract here you will treat it as three separate contract in this particular case okay that's a literal application of provision okay this one is also repetitive okay 2 minutes we'll review on December 23 a construction company they undertook a contract to construct a building for 45 lakh so the contract price is how much 45 lakh on 31st March 2024 so you got into contract on 1st December 2023 maybe at the end of the year that is 31st March 2024 company found that it has has already spent how much 32.5 spent means that only we call it as cost cost incurred till date how much cost we have already incurred 32.5 on this particular contract current year we have already incurred additional cost of completion is estimated how much 15.5 this only we used to call it as further completion cost okay okay what should be the amount to charge to revenue in the current year is what they're asking they're asking you how much revenue you'll book Revenue you'll book based on percentage of completion how do you find percentage of completion cost incurred till date which is 32.5 divided by total estimated cost for to get total estimated cost these two you'll add 32 lakh 32.5 already spent 15.1 expected to be incurred so totally how much cost in this 47.6 32.5 have already incurred means what is the percentage of completion 68.2% if 68.2% of the work is complete means you can recognize that much of Revenue what is your total contract price 45 lakh 45 lakh 68% you can recognize which is how much 30 lak 73,000 this is what they asked in the problem okay but just for your one more reference we have given what is that sir this is a profit making contract or loss making loss making how sir what is your contract price 45 lakh what is your total estimated cost so your total estimated cost is 47.6 lakh but your contract price is only 45 that means this is a profit making or loss making how much loss are you expecting 2.6 should we wait for this booking or book it immediately the day you know this you need to book it immediately though they have not asked just for your reference done this is also done as9 same repetitive question you remember delivery deleted buyers request to Consignment to sale of approval Marathon also we did the same question didto I told that is I don't know that is examiners favorite many times they ask the same question Ulta they'll change the name and keep asking it's a repeat question let's not worry about that okay as10 okay this this is actually our class notes while question we have done this question this is also repeat but just for the sake of your satisfaction one one question we will do but P it's a repeat you have the same question in our material also okay sh limited they've contracted this question is relating to as10 shushy limited contracted with a supplier to purchase a Machinery which is to be installed in one of the department in 3 months time so the missionary order we have placed but we will get it in 3 months time special foundations were required for missionary which were to be uh which were to be prepared within this Supply lead time maybe we'll have to do some alterations to fit in that Machinery the cost of site preparation and laying Foundation is 141 870 site preparation cost can we added to the cost of asset yes because it is what D I had given you the example remember you want to install a Machinery in one particular area but area is like this Humpty Dumpty can you install or you have to level at leveling charges only we call it as what site preparation unless you incur those leveling charges can you install the Machinery no that means are these cost necessary to bring the to make the asset management ready yes so can you add it yes 141 870 is your uh site preparation cost you can add that's all you have to do over various cost they will give you need to you need to find out what is the total cost of the Machinery that's all this you can add next there is a technician service which were given by Department a or in fact one minute I think I have to go here okay these activities were supervised obviously if some work is going on means someone should supervise this so so these activities were supervised by a technician during the entire period sir how many months it will take to supervise mon three months okay who is employed for this purpose at what the supervisor how much salary are we pay 45,000 for how many months will we pay the salary to the supervisor 3 months is this necessary yes if some activity is going on mean someone should supervise that I mean this is also directly related to asset only yes can we add this yes how much 45,000 is for one month activity will go on for how many months 3 months so what will be the total one 135,000 okay all right but this technician service no we did not appoint an outside vendor this technician service were given by the department B to Department a there are two departments who wants to use this Machinery Department a but this survey the supervisor service is given by outside third party or Department a a to rather Department B told to Department a I will only give you supervisory service will each each department we say is a profit Center will they give the service to other department at free of cost or they will charge profit margin check how much they have build B has build a department a how much 45 49500 actually the technician salary is only 45 but how much billing is done 4 your internal company Department profits that and all you will include in the cost of the asset no profit element should not be included okay so if you add 45,000 plus 10% if you add you'll get how much 45,000 plus 10% if you add how much you're going to get 49500 that's how the billing is done billing is not done at cost price billing is done at the including profit inter Department profit and all will you includeed in the purchase cost of the Machinery no this should be eliminated you should only consider how much is that 45,000 per month which we have considered here yes we will okay move along a machinary was purchased at 1 58 lak 34,000 sir Purchase cost can you add it to the cost of the asset yes but this includes igst how much rate 12% stop igst can you add it to the cost of the asset yes provided it is nonrefundable tax meaning ITC should be available or should not be Avil should not be available check what are they saying value is 1 58 lak 34,000 including igst for which input tax credit credit is available that means now can you add igst or you should not add you should not add but they already added so what we have to do excluding igst how much is the value we need to find out yes you can find out the tax value separately and deduct it or directly you can calculate how simple like this suppose the cost of the missionary is 100 means how much igst will be charged 100 12% which is 12 that means including tax how much is the value 112 correct so this 1 58 lakh is including igst I mean this 1 58 lakh 34,000 represents 112 we want including tax or excluding excluding tax represents how much 100 for 100 how much is the value like that you can Pro rate so when you Pro rate this how much you going to get 1 cr41 lakh basically 1 58 34,000 into 100 divided 112 if you do you'll get this particular value or if you you can find tax separately and eliminate that that is your choice how you want to press it that's all okay G done this is also good next to a transportation charges 55750 Transportation charges can we add Transportation charges can we add Transportation charges were incurred to bring the Machinery to factory site that means is this necessary to make the asset management ready so can we add it yes next what are they saying an architect was appointed at a fees of 30,000 to supervise missionary installation so installation charges supervisory charges can we add yes how much is that 30,000 this that means adding all this you'll get the total cost of the missionary how much that's that's all is this particular question all about simple enough okay this is done next 12th one so 12th one I'll keep it as an ldr last day revision question this is a question relating to as Lev same concept just they've asked it in a slightly different way so in fact uh make me happy by answering this question for me H legal limited one company is engaged in the manufacturing of a rub okay let them that's their headache for its plant it acquired missionaries of latest technology so it has purchased some Machinery with the latest technology okay it usually resorts to long-term foreign currency borrowing for its fund requirement so if they need any money will they borrow it locally or they'll take a foreign currency loan to they'll take a long-term foreign currency loan which concept which concept which concept concept 246 par of 46 46 a exemption so normally perfect sir if you have any monetary item that monetary item should be restated using closing rate and gain loss should go up to pnl account this as per as1 but there is one exception to that rule what is it if you have any long-term foreign currency loan that is monetary item if that long-term foreign currency loan if it is used to buy a depreciable asset then instead of transferring Forex gain loss to p and you can adjust this with a cost of the asset if this loan is used for any other purpose means you can park exchange gain or loss in one account in one Reserve called fcmi TD foreign currency monetary item translation difference and from fcmd you can transfer it to p and all over loan duration that's a concept that is what is being tested over here okay G you have taken a long-term loan and this long-term loan is relating to Machinery okay sir excuse me on uh and on 1st April 2023 you borrowed how much loan $1 million okay on that particular day on the same day the loan rate was how much $1 is equal to 63 and we know as1 says initially whatever transaction whether you have done a monetary item transaction or a non-monetary item transaction everything is recorded using tdsr transaction date spot rate what's a journal entry for loan taken bank account debit to foreign currency loan $1 million loan you took on the day you took the loan exchange rate was $1 is equal to how many Rupees 63 that means in INR the value is 63 million correct people okay now this loan will be used to by a missionary so the journal entry will be missionary account debit to buy okay this is the entry that's what has happened on the transaction date so far cool okay now this foreign currency loan is what item foreign currency loan is a monetary item at the reporting date monetary item should be restated using closing rate that's what they're going to say here next check the funds were used to acquire the missionary on the same day all the fund whatever you used you use that to buy a missionary that's the reason we passed the entry PP account debit to bank account fine to be used in three different plans fine that's okay the useful life of the missionary is how many years the Machinery that you have purchased will last for 10 years and it will have a residual value of 30 lakh this data is relevant for depreciation maybe here we have to calculate exchange gain as well as depreciation we'll see earlier also company used to purchase machine out of foreign borrowings so this is not the first time we are doing this we've been doing it since probably many years The Exchange differences arising on such borrowings were charged to P account so till now what the company has done the company has an option paraa 46 46a exemption is compulsory or optional you can utilize this option and adjust exchange gain loss with PP or you can transfer exchange gain loss to pendl account till now what has the company done done transferred to P till now that's what they have done one second H now see what the company wants to do the exchange exchange differences are arising on such borrowings were charged to pnl account and were not capitalized even though even though the company had an option to capitalize as per as1 as1 which para talks about this par 46 46 a exemption okay now check this is the history till now this is what the company has done now for this purchase now they have taken a new loan and this new loan is used to buy some new Machinery now what they want to do now for this new purchase of machinary the company legal limited is interested to Avail the option of capitalizing now do they do they want to transfer exchange difference to pnl or adjust with PP adjust with PP can they do so yes first you need to write that okay just because till now you have not utilized para 4646 exemption does not mean you can't take it now if company wants they can take exemption no even though if they've not taken it previously absolutely no problem they can take it no it's available on a transaction to transaction basis yes people so is is the company right can they Avail this option yes you need to write that as a things yes the capitalization of borrowing cost is allowed as per par 46a even though this exemption was not oped by the company previously first garam masala this you'll add okay okay done no no no no check sir initially you have converted the loan using tdsr how much 63 should weuse tdsr or closing rate at the end of the year monetary item should be restated and shown in your balance sheet using closing rate now check what is the closing rate the exchange rate on 31st March 2024 that is a year ending date that is only closing rate how much it has become $1 is equal to 62 sad face happy face happy Paka happy face why sir on the day sir if you have taken a loan in dollars means you have to repay dollars for you to repay dollars first you need to purch Chase dollars on the day I took the loan I thought to purchase $1 how much Gandhi note I have to give to purchase $1 I have to give away Gandhi note of 63 now by the end of the year $1 I can purchase just by giving how much Gandhi note 62 correct that means I have got a gain how much gain on $1 the gain is one Rupee on $1 the gain is one Rupee did we do the transaction for $1 or $1 million for $1 if the gain is one rupe means for $1 million the gain is how much the gain will be 1 million Indian rupees correct now the exchange gain is 1 rupees 1 million or 10 lakh Rupees if you don't want to if you don't want Millions you can convert in value 1 million is 10 lakh Rupees so the gain is 10 lakh Indian rupees easy comfortable okay sir whether it is an exchange loss or whether it is an exchange gain should you have to transfer this to pnl account under par 464 46a exemption or adjust adjust adjust where PP PP account correct all right now excuse me sir or if you confused whether should be added to the cost some students will get a confusion whether should we add this exchange gain to the cost of pp or should we reduce it in fact I've written that in the chartbook already if it is exchange loss means you will add if it is exchange gain means you will reduce it because of the entry or decoded through entry ALS sir initially you have converted the loan using what rate initially have converted this long-term loan using what rate tdsr rate which is 63 now should we show the loan in your balance sheet by converting it at 63 or 62 62 why 62 because closing rate is 62 that means this loan should be shown in your books at Indian rupees how much 62 million but currently the loan is shown in your books at what value 63 that means from 63 you have to reduce the loan balance and make it 62 that's the reason it's a gain correct all right so Lo balance if you have to reduce means what do a journal entry will pass loan has credit balance how do you reduce it debit so you'll you will debit foreign currency loan to the extent of 1 million Indian rupees and you will balance you will transfer this difference to where foreign exchange difference account yes people 1 million Okay g now this foreign exchange difference of 1 million company has a choice what choice is that this 1 million foreign exchange difference either they can transfer it to pendl or utilize par 46 46a exemption and adjust it with cost of pp why PP because this loan is related to depreciable asset now company wants to go for pel option or par 46 option so this exchange difference where will you adjust to PP account this exchange difference has credit balance how do you adjust it debited so entry will be foreign exchange difference account debit to PP account that's the reason I said now PP has what balance PP has what balance debit PP account has what balance PP is a an asset assets are what balance debit balance if you credit property planed equipment its balance will increase or it will reduce red that's the reason we say if you have exchange loss add it to the cost of pp if you get an exchange gain then reduce it from the cost of pp here it is an exchange loss or exchange gain exchange gain so hence we are reducing it from the cost of the asset Okay g that means cost is same or it got revised initially PP cost was how much 63 now exchange gain how much did you adjust 1 million that means the revised cost of the asset became how much 62 million Okay g that's all what are the requirement of the question check comment whether a limited legal limited can capitalize this exchange difference yes we already commented that is that option available to them even though they did not take up this option in the previous years now this year may can they take it yes it's acceptable if yes then calculate the depreciation amount also they're asking you need to calculate the depreciation for the current year so is the cost of the it now 63 million or it has got revised after adjusting exchange gain it has become 62 million Indian rupees or 6.2 Indian rupees now we need to calculate depreciation for depreciation we need three datas what are those three datas carrying amount 62 million minus residual value given previous par how much 30 lakh since this data is in million 30 lakh also you have to represent in million one 1 million is 10 lakh 1 million is 10 lakh so so 30 lakh will be how many millions 30 lakh you can also call it as 3 million okay so residual value is 3 million divided by useful life given in the question 10 years so calculate you'll get how much depreciation 5.9 million is a depreciation for the current year after reducing the depreciation that carrying amount at the end of the year will become 56.1 million Indian rupees for the cost of pp that's all a good question because is this concept new to us or we know we know just that they told that since the last year and all it was not that is a little bit of extra fitting so on that ground I said you can keep this question as a ldr question otherwise I think we have done and moreover probably one more difference in this question is till now we had got only exchange loss while questions now for a change they have given exchange gain that's all that way also this question could be treated as slightly different okay move on now all right this is also repetitive I think XY Z limited has set up its business in backward area for which they have received re a government subsidy of 20% of cost of investment stop there only this subsidy is government grant yes you have received this government grant for setting up up a business I means this government this grant is an income related Grant or Capital Grant Capital Grant grants received in the nature of promoters contribution only we call it as capital Grant all the capital Grant you will show it in pnl or under capital reserve capital reserve sir how much investment did you make 75 CR how much Grant will you get 20% of your cost of investment if you have invested 75 CR means how much Grand will you get 75 20% Which is 15 accordingly 15 CR subsidy you have received from the government the company wants to treat this receip as an item of Revenue item of Revenue means they want to transfer this to P account acceptable not acceptable you have to show it under where little Masala you need to add because it's a comment W question whenever they say examine whether action is Justified all here we need to go show our creativity this is where the question to put blade okay three four blade pointers you need to put okay all right now this is a repeat question as13 no change H 15th one as14 I'll keep it as it's an amalgamation question little good question I'll keep this as an ldr okay let's see following is the summarized balance sheet of Gan limited and Kiran limited as on 31st March 2024 they have given the balance sheet fine the face value of both the company shares Equity shares face value for both the companies 10 preference shares face value for both the companies 100 okay then we will dive in in Gan limited has acquired the business of Kiran limited so Gan is a purchasing company Kiran is the selling company and we have acquired the business on 31st March 201 24 on that day only they've given balance sheet okay in the scheme of merg that means it is a purchase Method or a merger method merger method you know merger method rules tell me make me happy let's see merger method what you'll do first step find out find out PC purchase consideration compare PC with paid up Capital accordingly you will get if it is a loss means under merger method loss you accounted as Goodwill or adjust in reserve adjust in reserve which Reserve usually we adjust it in general Reserve do we have General Reserve yes we do so if you have a loss we need to adjust in general Reserve profit means you can show it in pnl account okay and in merger method May purchasing company will merger merger method is is it really a business purchase or reorganization reorganization that means we will we take over selling company all assets at fair value or Book value all assets all liabilities will be taken over at book well only that or even reserves and surplus even the reserves and surplus of the selling company will also be taken over at book Val done people those are simple rules work fine looks so far good now they have given some following scheme I mean you have done a merger method but you have done few adjustments as well but one minute hang on who is the purchaser keep that point in mind first who acquired whom Gan limited has acquired Kiran limited okay now check the point Bank has agreed to wave off 50% loan of G g g is selling company or purchasing company purchasing company okay sir read the next Point G limited will reduce its share to 2 rupees we already read the data face value of each equity share is 10 from 10 it is reduced to two stop so all these are amalgamation activity or internal reconstruction internal reconstruction that's the reason I said this question is relating to both internal reconstruction and as4 the purchasing company is first doing internal reconstruction after that look at the adity they are only first of all suffering loss which un limited we know this internal reconstruction is done by profit making company or loss making loss making company how much is the loss 260 already loss after this they have audacity to purchase another company did they actually purchase or did they do reorganization reorganization that's the reason it's not they don't have that much osity they did a merger reshuffling they did that's all okay zaru all right so that means first you'll have to give the inter reconstruction effect then we will have to go for the amalgamation effect okay so now these two are what effects Gan limited will reduce it shares to 2 rupees and then they will consolidate shares that mean these two are your internal reconstruction effects okay then maybe can we finish off this yes okay tell me sir Bank agreed to wave off 50% means Bank are ready to sacrifice 50% do you have any bank loan in the question yes I underlined somewhere there check how much is the don't take Kiran limited car who's doing internal reconstruction Gan limited is giving the Gan by doing internal reconstruction how much is their loan 40 all the numbers are in lack Bank people are ready to sacrifice how much 50% what is a journal entry what is a journal entry if a liability sacrificed means liability balance will increase or reduce reduce so Loan account debit to Capital reduction account or reconstruction 40 lakh was a loan they're ready to sacrifice 50% so 20 lakh 20 lakh is a amount okay sir this is one next equity share Capital are reduced to two what was the original face value of the face value of equity shares 10 from 10 it's been brought down to two so now what you have to do old shares you need to cancel and issue new Equity shares because face value has changed so what is the journal entry to cancel old share Capital share Capital has credit balance which company is doing this Gan limited keep that in mind Jo sometimes don't people take k then whole thing going down yeah so G share capital equity share Capital was how much 650 so entry is equity share Capital account debit how much 650 how many shares we had all shares of face value initially was 10 that means we have 65 lakh shares of 10 each that we are cancelling yes now did we issue any new shares yes but new shares face value is only 2 rupees means we'll write here two equity share Capital 65 lakh into two which is how much 132 balancing figure is your reconstruction account balancing figure that they have written in next page which is how much 520 lakhs done this is one aspect okay this is done next after that they want to consolidate consolidate means they want to consolidate five shares into one five shares they want to pull it and make it as one after this they want to make five shares they want to make it as one and now this one share of face value initially it was how much two from two they again made it as 10 new shares again jobless people they're doing something at all leave it's okay no issues okay initially it was 10 they made it to two then again from two they have Consolidated and brought it to 10 just for the sake of uh adjustment I is giving all this practically people will are not that much jobless also okay now five Shares are got Consolidated into one sir do we have only five shares or we have how many shares we passed the entry also how many shares we have 65 lakh if five shares becomes one means 65 lakh shares will become how much can you tell me how much is this 65 lakh into 1x5 if you do how much is this huh 13 H correct and this we have 13 lakh shfs and now each face value is how much 10 so how much was the new share equity share Capital value 130 that means due to this consolidation is the sacrifice happening or same value same value just that two rupees value of the share has become 10 Rupees now earlier it was 65 lakh from 65 lakh now it has become 13 l so old share Capital you need to cancel and bring in new share Capital so entry will be equity share capital account debit how much 65 lakh into two which is how much 130 to what to equity share Capital 65 lakh shares has now has become how much how much we told here 13 H H 13 it has become and this 13 lakh shares each face value how much 10 so two equity share Capital 130 LS done sir okay next what did they tell in adjustment Gan limited will issue two Equity shares for Kiran limited all these are PC so PC is internal reconstruction adjustment or amalgamation right now we are doing internal reconstruction okay let's first do that so whether the problem says or not Whenever there is an internal reconstruction few things compulsorily we will cancel what are those One pnl debit balance preliminary expense miscellaneous expenditure if any right if still if your reconstruction account or Capital reduction account has a balance what do we do with that balance that balance is transfered off to capital reserve now come back to the question how much balance do we have in internal reconstruction here here we had 20 here we credited by 520 what is the total balance in reconstruction account 540 lakh yes sir how much who's doing in this internal reconstruction Kiran or gan gan limited has how much debit balance in pel 260 so will we keep it or we will write it off we will write it off what is the entry to cancel pnl debit balance pnl has debit balance how are you cancelling it credited what are you debiting reconstruction so the entry is reconstruction account debit to Pendle account 260 after this also does reconstruction account has any balance or yes how much more balance it has 28 that will be transferred to which account capital reserve many students will forget they will also also ask you to prepare balance sheet do not forget to show this capital reserve in balance sheet this pnl will it come in balance sheet now or canel canceled instead of that what will come Capital Reser do not forget because lot of amalgamation entries will come now we will forget all this that's the reason that one we will Mark and keep it okay these two are internal reconstructions so internal reconstruction is fully done now now check now what happened Gan will issue two Equity shares new for three Equity shares of Kiran limited since Gan has purchased Karan limited they have to issue PC now PC is given in straightforward manner or ratio ratio what ratio is that if Kiran limited has two shares means how many shares will be given as PC three Kiran limited has only two shares check Kiran limited equity share capital is 600 lakh each sh face value is how much 10 that means how many shares does Kiran have 60 lakh shares Kiran limited has yes okay if you have two shares means we will give 3 S PC if you have 60 lakh shares means how many PC correct no or actually ult G limited will issue two Equity shares for every three shares of Kiran so means Ulta ratio for three shares acquired if three if you if purchasing company buys three shares of Kiran limited how many shares will be given as newly PC two shares pter equation hope this is okay you want me to read that sentence again Gan will issue how many new Equity shares two Equity shares for every three shares of current so Kiran if Kiran has three shares means they will get two shares as PC but Kiran has how many shares 60 lakh for 60 lakh how much 60 lakh into 2 by3 is how much 40 lakh shares will be issued as or 40 lakh Equity shares will be issued by G limited as PC okay but are these shares face value is how much now the new shares to be issued at a price of 20 their face value is how much 10 Rupees I means their face value may be 10 but it's considered for valuation purpose 10 or 20 that means what is the value of new Equity shares issued 800 okay Z yes yes yes yes okay that's the first part of PC issued in the form of equity shareholder Equity shares is 800 LH Okay g now do we have what and all they told check sir this was given only to the equity shareholders does a selling company have an equity shareholders or they also have preference shareholders preference shareholders PC means what you give to the owners of selling company who are the owners of selling company Equity shareholders and preference shareholders Equity shareholders of selling company what they got we already got to know they got 800 lakh worth of new shares what about preference shareholders the prefering shareholders of the selling company that is current limited will be paid off by what by issuing equivalent number equivalent number means same number of what percentage preference shares 10% preference shares of yan limited of what each 100 each but at a price of5 that means these new preference Shares are issued at par or at premium PR premium okay all right how many how many new preference shares were issued equivalent number so go back what is preference share capital of Kiran limited 200 each preference Shar face value is how much that means how many how many preference shares does this Kiran limited have they have 2 lakh preference shares correct sir if Kiran limited has a 2 lakh preference shares means how many new preference shares will be given 2 lakh new preference shares of G limited face value may be 100 but it is ised at 100 or 105 105 how much how much is the value 210 lakhs correct the new preference shares issued by the new company value is how much 210 this also is part of PC correct no means what is the total PC issued by the new company one one lakh format at all you can take care now if I review this it's good enough I believe yes so PC working not is this that's a first step in your amalgamation find out the PC second step in merger method is what compare PC with paid up Capital right paid up Capital we have to find or given PC is 1,00 1010 lakh just now we found out paid up capital of the selling company you go to selling company is Kiran Limited what paid up Capital means what paid up equity share Capital plus paid up preference share Capital both both if you add how much is it 800 LH so paid up capital is it went 800 lakh PC is 1010 but paid up capital is only 800 I told you for your understanding purpose paid up Capital you can treat it as net worth the worth is how much 800 but how much was settled 1010 that means a purchasing company has made a profit or loss this loss it's a merger method loss you account does Goodwill or adjust in reserve so difference between these two is loss how much is our loss 210 this 210 we will adjust it in general Reserve okay zaru now does Kiran limited have any general Reserve check does selling company have any general Reserve yes how much General Reserve they have 360 General Reserve they have in that how much are you adjusting 210 if you're adjusting means The Reserve balance for takeover purpose will only be 150 yes people Okay g uh but one more thing you need to keep in mind here is Sir Equity shareholders were given PC how Equity shareholders of selling company received what new Equity shares but this new Equity shares was issued at par or at premium this new Equity Shares are also issued at premium preference shareholders of selling company got what new preference shares but these new preference shares was issued at par or premium means in this problem new Equity Shares are also issued at premium new preference Shares are also issued at premium and they'll ask you to pass General entry in case Shares are issued at premium means that premium element will go where Securities premium there is Securities premium relating to new Equity shares also there is Security Premium related to new preference shares also if you want we can calculate it here only I think we we did our PC working no where did we right where it went ah here how many Equity shares were issued how many new Equity shares were issued 40 lakh each value were considered as how much 20 that means the total value of equity shares is how much 800 lakh in this entire 800 lakh will you treated as equity share Capital no equity share Capital always shown at face value how much shares issued 40 lakh each sh of face value is how much 10 so in this 400 lakh will be taken as share Capital balance will be treated as Securities premium how much is Securities premium relating to equity shares relating to new Equity shares issued Security Premium is 400 LH got it all similarly did you also preference shares yeah I think we calculated that also somewhere where is it here okay sir how many preference shares new preference shares have you issued selling company had a 2 lakh preference sh so the new new company issued equivalent number of preference shares so how many new preference shares were issued 2H 2 lakh but they were valued at 100 or 105 105 that means to preference share Capital you will value it at what for preference share Capital you'll always take face value how much is the face value of each preference shares 2 lakh into 100 how much is that 200 lakh so in this 210 lakh preference share Capital will be credited only to the extent of 200 balance will be Trad as Securities premium how much is that 210 lakh minus 200 lakh which is 10 lakh that means what is a total Securities premium 10 lakh here and to relating to equity shares 400 total Securities premium should be 410 it'll come in journal entry I'm just saying okay there's one more point you should not forget over here next what have they told PR this point is also over dividend of Kiran limited dividend of Kiran Kiran is a selling company do they have any dividend huh check their balance sheet yeah they have something called dividend payable how much 60 lakh selling company has a dividend of 60 lakh currently what happened to that dividend of current Li Kent limited will be paid after merger to the shareholders dividend is being settled so what is it currently you're showing dividend payable on the liability side current liability that liability is kept now or it is settled settled is a journal entry for that after merger you have paid this liability what is the journal entry for liability paid dividend payable account debit to bank account that's all that is simple enough okay that's fine trade payables of Gan limited include 50 lakhs to Kiran limited this only what do we call it as the transaction between purchasing and selling company only we call it as Mutual Owings should we show this or eliminate eliminate from what both from trade payable as well as from trade receivable this elimination will happen in you either you can show it in journal entry format or you can show it in balance sheet where what know they've asked in fact here they've asked you to prepare journal entries in the books of Gan internal reconstruction entries we have already passed now we need to pass amalgamation related entries and also you need to prepare balance sheet after merger so can we do it now merger as14 merger method entri they asking so whenever you purchase the business whether it is purchase Method or merger method three entries to will commonly come what are those first ones first is business purchase account debit to Liquidator of selling company which is Kiran Limited at what price did we purchase the business here what is our PC total PC is how much one Z one0 one0 lakh so that means the entry you will pass is what business purchase account debit to Liquidator of Kiran limited one one0 L Okay g when you purchase the business what at all you'll get when you purchase someone's business what and all you'll get you'll get assets liability the actual business is purchase Method or merger method in merger method you will take over assets liability and reserves and Supply add to what value book value so all the assets of Kiran limited we have to debit one by one what an all assets Kiran limited has 900 250 135 40 correct remember this 900 250 135 40 900 250 13540 all assets debit at what value at the book value right only assets or even liabilities first we'll take care of the outside liabilities what and all outside liabilities Kiran limited has uh dividend payable trade payable debentures correct these are all the outside liabilities sir dividend payable is paid no sir it's paid immediately or first you have to take over this is paid after merger so take over and then settle so 100 105 and 60 take now 100 105 and 60 Okay g this is your outside liabilities only outside liabilities are taken over or even reserves reserves what and all reserves in Surplus selling company has they have only one Reserve called General Reserve can we take over at 360 or there is an adjustment since PC was greater than paid up Capital we have to adjust the loss in general Reserve how much adjustment we have to do in general Reserve we already calculated that we have to adjust how much 210 though General Reserve has 360 balance if we have to adjust 210 that means how much General Reserve is available for takeover purpose 150 so you will you will credit General Reserve only to the extent of 150 okay now this business purchase is actual account or dummy how do you cancel it credit it here that's your second entry yes yes yes s stars arear or there are s there next is settlement entry whom will you settle when a business shut down we have to give the PC to the Liquidator so the next entry is Liquidator of Kiran limited how much is the PC we have to settle the Liquidator 10 0 1 0 what in all we give it as PC we give new Equity shares and we give new preference shares that means you have you have to show will we write Equity shares or equity share Capital equity share Capital that value we already know how much is equity share Capital you'll show Merit vend where it went somewhere we calculated no finding only is a problem anybody remembers no here only it is equity share Capital you will credit how much sir 400 LH okay so to page number this huh to equity share Capital 400 L for preferen share Capital how much will you debit sir where is a preferen share Capital preference share Capital face value is how much 200 lakhs so to preference share Capital you will credit 200 lakhs balance is a Securities premium 400 was a Security Premium relating to equity shares 10 was a Security Premium relating to preference shes both put together 410 like this entries Okay g okay these are the three basic entries after this extra entries like stock Reserve Mutual Owings all this here mut is two adjustments are there here what are the two adjustments one you paid the dividend how much was the dividend payable for Kiran 60 is this dividend payable there or settled what is the entry dividend payable account debit to bank account how much 50 uh here 60 60 correct other than that we also have a mutual Owings how much was a mutual Owings amount as given in the question 50 you have to eliminate Mutual Owings both from trade payable as well as from trade receivable pble trade payable has it's a liability has credit balance how do you adjust debit it so the entry for mutuals here will be liability will be debited asset will be credited so trade payable account debit to trade receivable account 50/50 is your journal entry yes people okay now they've asked you to prepare balance sheet huh balance sheet you need to be careful because there is internal reconstruction adjustment also amalgamation adjustment also 99% people will do some mistake in balance sheet because you have to observe many many working notes few mistakes here and there will happen don't freak out it is okay I told no one or two marks learn to donate to Mother body also you should keep Mother also happy so it is okay you should not be so selfish that we want 100 on 100 no it's okay right so how but here we will be selfish and try to do everything in exam it is okay all right now Gan limited has done I think I'll have to eliminate all this first take your calculator one simp simple trick of balance sheet is you the majority of the data will be there in your journal entries okay first we will do it for Gan okay all right what was Gan limited equity share Capital before 650 can we take this or they did internal reconstruction so when they did internal reconstruction capital and all changed so their Capital was 650 lakh and they cancelled this and how much became share Capital 130 LHH from 650 it became 130 great then they did some consolidation did the value change or still 130 only still 13 only take your calculator now G limited G limited equity share Capital how much 130 lakhs now where and all extra have you credited equity share Capital check and add that here you credited by how much 400 lakh so I had it that's all no after that did you credit anywhere equity share Capital no that means what is equity share Capital value 530 so we in balance sheet will you show equity share capital or total share capital I'll do it at total level okay so preference share Capital also we will do so where and all have you credited preference share Capital here you credited by how much 200 add it anywhere else did you debit or credit preference share Capital no where only this no correct no so that's the number showing this is the new preference shes this is the new preference shes issued correct but did Gan limited have any preference shes already yeah how much preference sh they already had did we do any internal reconstruction for this no no change I mean this will remain as it is so add 150 how much is that uh totally are getting how much huh a full number you tell huh 880 P so 880 is the total share Capital that's how you start doing it at total level in note number one they have given separately how much is equity share Capital how much is preference share Capital everyone got at no next is what sir reserves and surplus now come back to the question reserves and surplus now gan limited had pnl 260 negative but did they do internal reconstruction yes so is this there or it was written off written off but did you get any capital reserve yes you got capital reserve check the entry how much capital reserve you got due to internal reconstruction we got a capital reserve of 280 punch that number in your calculator 280 okay all right we did a merger in merger method may even selling company reserves and surplus will be taken over selling company had how much General Reserve 360 but we adjusted also no we adjusted and we took over how much General reserve of the selling company 150 add 150 now so 280 plus 150 if you add how much are getting huh 430 430 okay and there's Security Premium also I think no how much is Securities premium 410 add 410 Securities premium 840 is a reserves in Surplus so everything will be there in the journal entry only over here okay balance sheet value you need to check and journal entry value you need to check and accordingly you'll get to know whether it is increased or reduced that's all okay next what do the next one know ah this reserves and surplus done this P also done what about 12% debentures any change or no change no change add the two how much is it 75 plus uh this one is 175 uh this is 175 or did we issue any new debentures of people no no right how do they say me value change or oh one minute hang on okay there is loan from bank now in fact under long-term borrowings we show all the longterm borrowings will we show only debentures or we show other bank loan also so that means these two we have to add these two we have have to add put together it becomes long-term borrowing yes or no okay 75 + 100 is how much 175 how much was loan from Bank 40 but loan balance is still the same or 50% Bank sacrificed 50% Bank sacrificed that means what are the loan value now 20 so 75 plus 100 plus 20 you do how much is that 195 so the value of the long-term borrowing is 195 that's how they got it break up they've given in notes to accounts I'm just quickly doing it at total level just to give you an idea as to how it works yes okay next uh next is what they have given come back to balance sheet this is done next Bank overdraft 15 plus trade payable how much first we do trade payable how much is trade payable 95 plus 105 but is there any Mutual o yes there is a 50 Mutual owing so how much is trade payable 95 + 105 minus 50 you do how much is trade payable are you getting 150 Bank overdraft shown as it is at 15 dividend payable is already settled so it will come or not come not come so that way balance sheet total liability side of balance sheet matched out okay people any problem wait or carryon carry on carry on now the assets assets may I think there is no adjustment anyway merger method so you have to worry about fair value or Book value only book value so PP 900 plus 700 plus 900 you do how much is that 1,600 so investment any change or no change 1,600 and 250 shown now 1,600 and 250 shown as it is now next what what else is there in the question we have current assets trade receivable 6 plus 135 but hang on is there anymo yes from trade payable how mucho you reduced 50 only trade payable or also reduced from trade receivable also so 65 + 35 minus 50 you do how much is that 1550 okay cash cash at bank 140 check your journal entry did you pay anything I think we paid dividend now dividend payable how much we 60 that means in 160 60 lakh rupees was used for dividend paid means the cash should be how much 80 I think other than that I don't remember being any cash transaction so it should be how much 150 and 80 check 150 80 is there yeah 15080 balance sheet matched up like this so it will happen one or two adjustments will get missed out so don't worry so keep the options open all right in case time up means move on it's okay right if time is there means you can review it and find it out but the trick is very simple you have to check question data compare it with journal entry accordingly you'll get to know whether the balances have increased or balances have reduced that way if you follow you should not go in this okay ah now one question is saying is Bank overdraft normally we show under cash and cash equivalent sir why do we do this now IA you know for Bank overdraft they're doing a slightly slightly different treatments okay ideally Bank overdraft sir should be coming under cash and cash equivalence okay so ideally in my view this Bank overdraft they shown here separately borrowings that should be reduced from bank here all right that they are doing only in if it's a sole internal reconstruction I don't know why I don't know the logic I'll just tell you how you can present in examination and remember if it is internal listen to this carefully if it is an internal reconstruction topic if it is an only internal reconstruction topic if you have Bank overdraft means then you adjust it from cash and cash equivalent provided cash and cash equivalent has enough balance in all other topics they're showing Bank overdrift separately in current liability site don't ask me I'm the messenger Don't Kill the Messenger this way you can follow for Examination for all other topics Bank overdraft they're showing separately under current liability I suggest follow the same what else can be done because invigilator will not know all this drama no he'll just compare and give you the marks so this is the trick you can follow to get the right marks because this is what ICA currently study material they are doing if you don't like it write a mail to ICA please change your material I will also change my explanation but the correct way is Bank overdraft according to me should come under cash and cash equivalent but for exam you know what to do have I answer your out ma can I move on yes so this is done so this is a good question simple only but just that since there are few one or two adjustments we need to be a little careful are we considering all those adjustments that's all so over sir you're almost over if you want we can make it over now only other questions if you are ready to tackle on your own okay 16th borrowing cost ideally repetitive question anyway 2 minutes we'll review of U limited has obtained a Term Loan of 620 lakh for a renovation and modernization of a particular Factory and we have taken this loan on 1st April 2023 the plant and missionary was acquired under modernization scheme and installation was completed on 30th April 2024 sir the missionary is getting installed when sir you started the renovation on 1st April 2023 and the missionary is finally getting installed on 30th April 2024 that means it's taking more than one year so is this missionary a qualifying asset yes how much loan totally have you taken 620 so entire 620 was spent only on the missionary no how much was spent on missionary 510 was incurred on the missionary it's a proportionate drum okay so out of 620 lakh 5 L is Factory modernization a qualifying asset you can write it as Factory modernization or you can write missionary whatever you call okay excuse me how much was spent towards that modernization out of 620 lakh how much was spent 510 lakh was incurred for installation of plant and missionary great is this a qualifying asset yes 54 lakh has been Advanced to the supplier for assets which was also received and installed before 30th April 2024 that means that is also taking substantial period of time because installation of additional asset also is happening when 30th April that means it is taking more than one year so is that means is this additional asset or I'm calling it as missionary you can call it as additional assets it's okay is that a qualifying asset yes if it is a qualifying asset then borrowing cost you'll transfer to pnl or capitalize capitalize okay how much was used for this uh additional asset 54 lakh take your calculator totally how much loan you took 620 lakh in 620 how much you used for this modernization or machinary purpose 510 for additional asset purpose how much you spent 54 minus that how much remains 56 lakh the balance loan of 56 lakh was used for working capital purpose is working capital A qualifying asset or not a qualifying asset not a qualifying asset okay so totally you took 620 lakh and how much interest have you paid in total on 620 lakh loan totally you paid interest of 68.2 entire interest can you capitalize no in this loan may only some loan has been utilized to purchase a qualifying asset is working capital A qualifying asset or not a qualifying asset so working capital related interest will you capitalize or transfer to P transfer to P proportionate it how simple sir how much is the loan amount loan amount is 620 lakh okay how much was how much is the total interest paid 68.2 on 6 20 lakh worth of loan you are paying interest of 68.2 how much was used for this modernization purpose missionary modernization purpose how much out of 620 lakh only 510 was used for this purpose so if 520 is a loan amount means how much is the interest I think we have done two three questions on this right so when you Pro rate how much you going to get 56.1 since it is a qualifying asset this 56.1 you will capitalize is this additional asset qualifying asset yes how much was used for additional asset out of 620 lakh you have used only 54 lakh for additional assets again Pro rate if the loan is 620 lakh means interest amount is 68.2 entire 620 lakh loan was used for additional assets or only 54 lakh for 54 lakh how much is the interest when you proportionate how much you're going to get when you proportionate this when you cross multiply 54 lakh into 68.2 divided by 620 if you do you'll get 5.94 L that you'll do what borrowing cost you will capitalize working capital related loan you'll transfer it off to pnl I think this is okay I don't think so this is actually a new thing for us yes okay 17th one it's the same question we have done in Marathon also it's there in our regular class notes also it's a repetitive so I'll not bother as9 it's a repeat question we did in this Marathon also same question we took or a similar one that's okay 19th one is also repeat but they've given the data in a slightly different way because of that quickly I will do it okay following information relates to XY Z limited for the year ended 31st March 2024 great net profit for the year after taxes 37h 50,000 this is Pat for we need to calculate as20 this is as20 question for APS purpose we need Pat or we need is is so if preference dividend is not there means P only will become is okay here if you just check quickly if you just check is there any preference shares or no preference shares okay so basically you need to calculate deps and deps okay so how much is is 37h ,000 how many Equity shares do you you have outstanding P date given or not given if date is not given should we have to worry about weights card raama no even if you assign the weights you'll write 12 by 12 so is is for basic APS purpose 37h 50,000 WS is 5 LH so how much is basic APS 7.5 very straightforward next convertible debentures stop convertible debentures only we call it as POS potential ordinary shares so if you have convertible if you have POS means should we calculate depths separate yes that's what they are asking us to calculate we have convertible debentures issued by the company and these debentures are issued at the beginning of the year that mean should I have to worry in one of the marathon question we did debentures was issued for whole year or only 9 months N9 months they had given that or or we found it out we found it out should we have to worry about that or here clearly given debentures are issued at year beginning only means the weightage is 12 by so we don't have to worry about weights in this problem okay these are 8% convertible debentures and they have given the number how many debentures we have 50,000 let's calculate the interest we have 8% convertible debentures of 100 each okay face value of each debenture is 100 and we have 50,000 debentures calculate interest for me 50,000 debentures each face value 100 if you multiply this you'll get 50 lakh the total face value of the debenture is 50 lakh and debentures carry an interest rate of 8% multiply 8% how much is that 4 lakh is the interest okay now if you convert this debentures into Equity sharees should we have to pay this interest or we will save we will save so should we take interest or after tax interest after tax interest how will we get that interest into one minus tax rate have they given tax rate yes 30% so interest is 4 lakh into one minus tax rate you do you'll get how much 280,000 that is a dilution adjustment in your numerator correct yes people okay sir it's a convertible debentures means you have to issue Equity shares also how many Equity shares Equity shares to be issued on conversion is they only given if you convert the debentures into Equity shares how much extra Equity shares you have to issue 55,000 this is your dilution adjustment in wains so in your denominator WS the dilution adjustment is 55 so these two you add you'll get is for depths purpose which is 40 lakh 30,000 these two you add you'll get wains for diloted APS purpose which is 5 lakh 55,000 these two if you divide you'll get diluted APS of 7.26 what always check basic APS was how much 7.5 diluted APS has become 7.26 that means it is anti-dilutive or dilutive only dilu because anti-dilutive EPS do we report or we don't report we don't report here it is anti or normal only normal so that means can both these data be shown yes we can shown okay that's all now the last question relates to as29 okay uh yes uh Sahar limited is engaged in manufacturing something and okay year is ending on this date that's okay the company has three plants at different location it has to shut down one of its plant due to internal reasons one plant there shutting down whatever reason fine the said plant site is under rental agreement so we don't own that factory we have taken that factory on rent so and the rental agreement will go on until 31st March 2024 So currently we are in which year currently our year is in ending on 31st March 2023 the rental agreement of this plant which we are planning to shut is it getting over this year or it goes up to one more year we are in this year the rental agreement goes till one more year now you know if you cancel this rental agreement lesser will keep qu or ask penalty check the rent per month every every month is 80,000 the rental agreement will last for how many more months 12 months okay the company canel if the company cancels agreement it has to pay a penalty of uh penal amount of six months rent penalty is not charged directly we have to pay six months rent and then cancel okay company also has an option to sublet the site at rent for 45,000 we have another option where we don't have to cancel the lent agreement we can continue it anyway we are not going to use it we can let it out to somebody else we have taken this Factory on rent okay since we are not using it we can sublate it we can give it to another per pery and collect how much rent from them 45,000 I mean this is cost for us or this is benefit for us benefit for us how much benefit we'll get every month 45,000 sir I'm saying this is owner's contract I'm saying this is owner's contract how sir if you exit the contract you have to pay penalty so it's a loss if you continue to continue with the rental agreement you have to continue for how many year one more year you need to continue and you have to pay how much rent this is cost cost is how much 80,000 per month and you have to pay it for 12 month means this is 960,000 correct if you continue with the rent are you going to use the factory no that means will you keep the factory idle or can you sublet it sublet it if you sublet it means you will get rent that is benefit how much by letting out how much we will get 45,000 45,000 you'll get every month since rental agreement will come for 12 months you can sublet it for 12 months so how much is this 5 lakh 40,000 so you're getting excess benefit or excess cost you're getting ex's cost how much ex's cost 4 lakh 20,000 this is the first part if you continue with the rent means you will have to incur an excess cost of 420 if you cancel the rental agreement means you have to pay a penalty how much penalty penalty is six months rent 6 months rent how much is rent every month 80,000 so you have to pay 6 months current and can cancel how much is 6 months current 48 so whether you go for continuing operation you if you continue the rent you'll incur a loss of 420 if you cancel the rent you'll incur a loss of 480 whichever door you open it is loss and loss and more loss so hence what is C contract this is owner's contract and you know the provision for owner's contract penalty will make it higher of the two or lower of the two obviously finance manager will choose the highest loss option or the lowest which is the lowest in this 420 so you'll have to make the provision at lower of the two which is 420 owner's contract good question but easy only yes people hence on that because of this question I'll mark this question as an LD last derivation because of this adjustment one uh few more is there a case has been filed against the company NeXT they've given three cases in the same question first all are independent separate separate cases a case has been filed against the company in the consumer court and a notice for penalty of 20 LH has been received somebody has filed a case against us and how much penalty is expected 20 lakh the company appointed a lawyer to defend the case and lawyer is charging how much fees 2 lakh 50% of the lawyer fees has already been paid balance 50% will be paid after the finalization of case lawyer is saying there is 75% chance that the penalty may not be lied there is 70% chance that penalty may not be lived means we will pay this penalty no there is a 70% chance that there is no outflow there is 75% chance that there will be no outflow that means how much chance of outflow is there 25% chance that outflow can happen correct if 25% chance is there means it is probable or POS for posible will you make provision or no provision so for penalty that's what they asking here for penalty the obligation is what not probable I mean should we make provision or no provision that is the requirement of the question should we make provision or not so no provision is required but you can disclose it as contingent liability yes people that is one but what about lawyer fees lawyer fees anyway you win the case or you don't win the case lawyer to will definitely go home Happy only okay how much is the lawyer fees 2 LH in that 50% fees you already paid how much is yet payable 1 L for that you need to make the provision cor now that's what you need to write same question okay sir can I move on that's all is a Crux okay next company had committed to supply Consignment worth 1 CR Rupees to one of its dealers to by the year end we had to supply goods worth one CR Rupees to one of our dealers okay as for the contract if delivery is not made on time a compensation of 15% of the value has to be paid if we don't deliver the goods to that dealer on time we have to compensate the dealer how much 15% okay while the consignment was in transit one of the trucks carrying goods worth 30 lakh met with an accident stop sir if the goods is met with I mean if the truck is met with an accident means this 30 lakh worth of goods can we deliver on time or there will be a delay if there is a delay should we have to compensate the dealer yes how much 15% Okay g okay stop and we'll see read the data fully and then see however it was covered by insurance we have we are smart and we have taken a insurance though we have met with an accident or the train not we the Train the truck as such has met with an accident but we have taken insurance policy and according to that surveyance report or Insurance report policy amount is collectable subject to how much deduction 10% insurance company will not give us the full amount they will reduce 10% and give the balance before closing the books of accounts meaning before the current year the company has received information that the policy amount has been processed policy amount is processed that means this is what if insurance company has sent us a mail that your claim is processed it becomes virtually it becomes virtually certain that means can we go ahead and recognize this insurance claim yes we have studied this in as9 also you'll recognize Insurance claim provided it is virtually certain there should not be any uncertainty in collecting the amount here insurance company only has told that your claim has been processed so can we recognize yes sir how much Goods have you lost 30 LH will you get 30 lakh compensation from insurance company or 10% reduction 10% so how much we will get 27 lakh that means in the current year did we actually suffer any loss yes goods are worth 30 but how much compensation we are we will receive from insurance company 27 that means current year may we have to book how much loss 3 lakh rupees loss because that insurance company will not compensate as subject to the deduction Clause yes people okay next uh and the dealer has also claimed for compensation since our truck met with an accident did we deliver the goods to the dealer on time no and is the dealer asking for that compensation amount yes can we escape from it or contractually we are obliged so we have a legal obligation here should we make provision for it yes so how much goods worth did we not send to the dealer 30 lakh how much is a compensation we need to give 15% so calculate 30 lakh 15% so we need to make a provision for compensation to the extent of 450,000 book a loss of three lakh and may also make a provision of 4 and a half lakh rupees yes people so overall easy RTP only except two or three good questions has been asked I marked which are those ldr questions remaining everything I think you can manage yes people that's it with respect to this particular RTP thank you okay yes people welcome back after that short break so we'll get started with the next revision topic which is accounting for branch or Branch accounting as we to call it okay so branch is basically One Division which we have at another location like here our Pro we have our main office main unit in bangaluru we have another Branch or another unit in Chennai so branch is just basically an additional premises that we have usually the branches are located not probably in the same region but in a different region but not a mandatory but usually that's the case now we'll have to do think about some accounting relating to the Branch so obviously the main unit we call it as head office the other unit we call it as Branch preparation of financial statements and all is a duty of the head office okay Branch know we have to maintain their records so before we go into the accounting aspect you need to check whether what kind of a branch is it it's a dependent Branch or an independent Branch independent Branch means they do their accounting on their own they are not dependent on the head office okay they do the accounting on their own depend Branch means they are dependent on the head office for the accounting first figure out this whether it's a dependent Branch or an independent Branch okay they'll mention usually in the problem whether it is dependent or independent so if it is independent branches what to do we'll run through that first and then dependent Branch what to do we'll run through a few questions there are like three to four types of questions that can come from this particular aspect okay from this particular topic as such one is if it is an independent Branch ner usually what they'll give you is they'll give you various scenarios various transactions will be given to you and for those transactions we need to pass journal entries that is one kind of problem that could come okay now let's look at some of the sample cases of journal entries one normally branch no sir they don't purchase the goods from Outsiders not a mandatory it is just the customary in these our our syllabus usually head office will send the goods to the branch and Branch will sell it Branch will not purchase the goods from Outsiders they will get the goods from the head office mandatory or just convenience convenience generally our syllabus transactions are structured like this ho will send the goods to the branch and Branch will sell those goods okay so first scenario or first transaction is Goods sent by the branch now all we need to do is I'll give you a case for that case what journal entry you need to pass in the books of ho what journal entry you need to books pass in the books of Branch that's all we need to look at it here Goods sent by the branch to the goods sent to Branch by head office ho has sent Goods to the branch that means H it is like sales what is the journal entry for credit sales sir dat to sales now is a will we call it as a datar or it is head branch is our own our own unit only our own unit only so instead of dats to sale the journal entry will be instead of debiting De R we will debit Branch account ho will debit Branch account instead of crediting sales because when you use the term sales sales is something a terminology which we use when we sell it to an outsider did head office sell the goods to an outsider or or their own unit their own unit that means instead of sales they will use Goods sent to Branch account so the journal entry will be Branch account debit to goods and to Branch account now for branch Branch it is like a purchase what's the journal entry for credit purchase purchase account debit to credit instead of purchase when we say purchase it means like you have purchased the goods from Outsider here have we purchased from Outsider or from our own head office our own head office so instead of purchases we will say Goods received from head office account debit instead of crediting credit hours now branch has to pay who now head office instead of crediting credit hours they will credit HED account that's a journal entry Branch will pass for this particular scenario for Goods return what will be the entry Ulta entry whatever entry you passed above you reverse it that's all as simple as that yeah next Branch expense paid by the head office whose expense Branch but who paid it h whose money whose money Bal bank balance is reducing hok that means HOV credit bank account what's the journal entry for expense pay expense account deit to bank account whose expense is it branch that means who should show that expense branch that means ho will say they will not H will not pass expense account debit to bank account they will write Branch account debit to bank account because it is Branch expense paid by the head office so instead of expense to bank ho will say Branch account debit to bank account all right whose expense it is Branch car so who will account that expense branch that means branch in their books they will say expense account debit but did branch pay no h off h of pay so what will you write instead of writing expense to bank we will write expense account debit to head office account that's the entry Branch will pass next collections from datar of the branch received by head office whose datar money is been collected Branch cetars but who collected that money head office head office collected money from Branch cetars what is the journal entry for money received from datar bank account debit to datar account who collected the money head office that means head office will WR cash or bank account debit will they credit dears it is whose dears Branch datar so instead of crediting dears we will credit Branch account okay what will Branch say can they debit cash or Bank did they collect the money or head head office collected head office that means instead of crediting cash or bank branch will debit ho account all right they will credit what account dat's account because dat's account is maintained who by whom datas account is maintained by whom whose data is Branch car so that means Branch will credit their datas account since they did not receive money ho received the money so we will write we will pass the journal entry H account debit to dat account later on Branch May collect this money back from head office because branch and head office will do a lot of transaction later on they will settle the money whatever is needs to be done okay that could be done yearly once quarterly once 6 months once whatever that is as per their convenience next is remittance of funds by the head office to the branch who's giving the money head office to whom Branch so that means what is a journal entry for credits paid in cash credit ARS to bank who paid the money now head office so to whom was it paid to Branch so instead of creting credit ARS to bank the head office will pass the journal entry Branch account debit to bank account is that okay then what entry Branch will pass they receive the money from head office so the journal entry will be bank account debit to head office account because they received it from ho no so Bank to Ho will be the journal entry it's like Branch for branch it will be like moneyed from datar the journal entry is bank to datar instead of bank to datar here we will say bank account debit to Ho account like that then remittance of funds by the branch to the head office who remitted the funds Branch to the head office that means head office is collecting the money so in hob books what will be the journal entry they receive money so the journal entry will be bank account debit whom did they receive it from Branch so entry will be bank account debit to Branch account what entry Branch will pass they pay the money to head office now means the journal entry will be ho account debit to bank like this they will give you some 8 to 10 transactions which you need to pass journal entry this is one kind of a problem easy straightforward one okay next sir next usually sir in these sort of problems no usually in these sort of problems closing stock will be missing closing stock will be missing so do you know how do you find out cogs cost of good sold how do you find out cost of good sold opening stock plus purchases plus direct expense direct expense will not be there so leave it out minus closing stock okay sir you know the value of cogs you know know the value of opening stock you know the value of purchase can you find out the value of closing stock restructures is equation for me therefore how do you get closing stock opening stock plus purchases Minus cost of goods sold correct that is what I've written over here done so if you do that you're going to get closing stock because in some problems May closing stock will be missing so that is what we are doing over done sir okay let's take up one question on this immediately okay this question was I think there in MTP question I think just check over here following is the information of jamu branch of best New Delhi so head office is there in New Delhi but the branch is there in jamu okay for the year ending 31st March 2023 so okay Goods invoice to the branch at Cost Plus 20% sir ho and Branch may be transacting but these sort of transaction will not happen at cost price ho will always send the goods to the branch at Cost Plus profit usually it's not mandatory usually ho will send the goods at invoice price itself not at cost price here how at what value is the goods sent sir goods are sent to the branch at Cost Plus 20% what is the cost to the head office theyve given percentage percentage when you're doing the calculation you'll always take the cost to be 100 you'll express it in 100 correct so what is the cost sir 100 cost to head office because if H has to send the goods means first they have to purchase so if head office purchases the goods at 100 rupees means will they send the goods to a branch at 100 rupees only or they will add profit margin they will add profit margin how much profit margin they will add 20% on cost 100 20% is how much sir 20 rupees that means the what at what value will head office send the goods to the branch 120 any problem so head office will send the goods to the branch at 120 means what is the cost to the branch what is cost to the branch H sent to the goods to Branch at 120 means the cost to branch is 120 so after receiving the goods what will the branch do they will sell so that's why they've given over here selling prices Cost Plus uh50 50% whenever they use the word cost here no if they don't tell what sort of cost is this always assume this is the cost to head office always assume this cost is a data relating to head office after receiving the goods what will the branch do they will sell at what price will they sell this Goods at Cost Plus 50% whose cost I told you should take head office what is the cost to the head office 100 so Branch will sell it at what 100 plus 50% yes that means they will sell it at what price 150 that mean a profit in this transaction made by Branch will be what 30 is that okay that profit will hold good provided the cost is 100 this just a parameter that we use for few other workings so far good okay next check sir so given other information stock as on 1st April sir year they told is ending on 31st March 20223 they have given stock on 1st April 2022 that means what sort of a stock is this it is opening stock opening stock has shown at invoice price of how much 220,000 good sent during the at invoice price how much 11 lakh sales made by the branch how much 12 lakh okay if you just check have they given opening stock yes have they given so I told Branch will purchase the goods or they will receive the goods they receive the goods from whom head office so if head office is sending the goods means Branch will obviously receive it that means for branch it is like purchases because Branch will not make a separate purchase They will receive all the goods from head office so do you know opening stock and purchase yes do you know sales yeah but if you just check information nowh they've given closing stock nowh they have given closing stock so expense incurred at branch is 45,000 what you need to know is you need to earn know the profit earned by the branch you need to Simply prepare trading P account need to Simply prepare a trading and P account because they're asking what sir profit earned by the branch but the problem here is Sir should we prepare it in P in schedule three format sir no sir Branch oh and all no sir it's internal branch and all Branch data and all is internal record what do we give it in financial statements when we say financial statements we present only Branch data head office data or full company data full company data full company data you should always present it as per schedule 3 that is a format is that okay now this is a branch and all means it's an internal data internal data you can present it in a golden days approach in your golden days how you used to prepare your pendl first you used to prepare trading account then pnd and then balance sheet balance sheet in schedule three format or assets liability amount assets amount liability amount assets amount so in that format may you can present all this because these are only for internal records these we don't publish that's the reason schedule three format of format is not required understood so we will get profit or loss by simply preparing trading account and pendl account but the problem is to prepare trading account we need a closing stock closing stock is Missy just find out that find out the closing stock and you'll get profit or loss another one is Branch stock Reserve in respect of unrealized profit okay I'll come to that in a bit first can we prepare trading account all right so first we let's plug in the data that we have it already you get profit or loss by preparing trading account no so do you know opening stock sir yes how much is opening stock 220,000 that will come on the debit side of trading account okay next is purchases do we call it as purchases or we'll call it as Goods received from head office Goods received from head office how much is that 11 LH that is nothing but what sir like purchases only this is correct no this your purchases okay next what did the branch do did they sell yeah how much sales they made 12 lakh where will sales come in the trading account debit side or credit side credit side you'll write it as sales how much sir 12 lakh rupees okay next what sir expense incurred at the branch you can prepare trading pandle together you can prepare trading pandle together first you don't have to prepare trading and cl if you want you can first prepare trading account close it then prepare pnl account and do it study material is directly preparing in one go so this is your trading pnl account prepared together in one go they're not splitting between gross profit and net profit is that okay with you if you want you can also present like that no harm but if study material is giving shortcut we should utilize okay like that so how much is the expense of the bran sir 45,000 expense will come on the credit side or debit side debit side accounted yes no so the only information is missing if I find that I know brancha profit or loss which is what closing stock can we get that you know the equation of already no sir how do you get Cog CS opening stock plus purchases minus closing stock so with this you can get closing stock how opening stock plus purchases minus C GS agreed now sir how much is opening stock in this data we already know opening stock how much is that 2 lakh 20,000 how much is purchases here we have purchases or Goods received from head office that Goods received from head office is only like our purchases how much is that 11 lakh add these two we have added then what do you need to deduct you should not deduct sales you should deduct cost of goods sold have they given cost of goods sold or have they given sales sales they have given sales but we need cost of goods sir sold okay how do we present that it's like this cost price selling price sir what is the cost to the branch what is the cost to the branch 120 how much will they sell it for 150 it's like this so if the cost is 120 means selling price is 150 agreed now has Branch made the sale yeah how much have they sold goods worth 12 lakh will they sell it at Cost price or invoice price will they sell it at Cost price or selling price selling price that means this 12 lakh represents selling price this 12 lakh represents selling price we want what cost price so find out this how do you get X here so that is nothing but 12 lakh into 120 divided 150 yes no sir that is nothing but what what is this x this is nothing but your cost of goods sold understood you can do it in one liner also 12 lakh represents 150 it represents selling price meaning it's on 150 platform we want cost to the brand Branch what is cost of the branch 120 for 120 how much so multiply by 120 and divide by 150 you'll get cost of the goods sold how much is that sir 960,000 any doubt till here any doubt or okay all right so opening stock Goods we got CS you got so that means you'll get closing stock as a balancing figure opening stock plus Goods received from head office Minus cost of goods sold will give you closing stock understood if you know closing stock can you finish trading pnl yeah closing stock you got it as 360,000 which we plugged it in here so that means net profit is a balancing figure which is 1 lakh 95,000 easy aaru any problem or good good okay next what did they ask they asked you stock Reserve what do a stock Reserve is stock Reserve means some profit element included some profit element included now what is this profit element check we have already done this in amalgamation and all okay sir what is the cost of this goods from head office prospective 100 but did did the branch send these Goods did the branch send this Goods at 100 or 120 20 that means what is the value of closing stock we got it here sir what is the value of closing stock we got here one second closing stock we got it as 3 lakh 60,000 can I say this 3 lakh 60,000 is on 120 platform is on 120 platform but what is the cost to the cost of these goods from the company perspective cost of this Goods is only 100 that means can I say 20 Rupees is included and in the closing stock the 20 rupes of profit element is included in closing stock can I tell like that so it's like that so that means 3 lakh 60,000 represents 120 for 20 how much if you calculate that how much is it into 20 divided 120 how much is that sir 60,000 the 60,000 is what a profit element included in closing stock which we need to eliminate not only they're calling it as what sir stock Reserve in the respect to unrealized profit understood any problem no or if you want it another way also you can get it what is the cost the cost to the head office is how much 100 rupees but how much did they send it to the branch at they invoice to the branch at 120 they sent it to the branch at 120 this closing stock is on which platform this closing stock of 360,000 is on 120 yes no we want cost to the overall company cost to the overall company is how much if this is 120 means this is 100 if this is 360,000 means how much is X if you calculate that it'll be what 360,000 into 100 divided by 120 how much is that sir 3 lakh rupees that means overall cost of that closing stock is not 360 it is only 3 lakh but branch is currently showing it at 3 lakh 60,000 so how much is a profit element The Profit element or included in closing stock is 3 lakh 60,000 minus 3 lakh which will be 60,000 rupe that is one actually stock Reserve means profit element included in opening stock and closing stock stock Reser means profit element included in stock stock you would be opening stock or closing stock but here they're specifically asking stock Reserve in respect to unrealized profit so opening stock sir it is there from the year beginning year beginning Goods will you still have it or you would have sold off sold off so here when they say in respect of unrealized profits specifically they are asking you closing they're asking you stock Reserve with respect to closing stock alone they're not asking you stock Reserve with respect to opening stock hence the study material is only calculated stock Reserve with respect to closing stock okay is that fine with you people but stock Reserve in reality means what profit element included in stock and stock are of two types opening stock and closing stock is that okay any problem here okay uh what is the breakup of this question now closing stock was missing how did we find that closing stock simply we took opening stock we added purchases but Branch will not have purchases rather they will have Goods receive from head office deduct sales or deduct cost of goods sold you have to find out cost of goods sold but what information they had given in the problem is sales sales is on 150 platform we want cost to the branch because all this data is on cost to the branch platform what is the cost to the branch 120 this 12 lakh is on 150 platform for 120 how much find it out we got that is your cost of good sold that way you'll get closing stock as a balancing figure once you know closing stock easily you can find out the profit or loss made by the branch then they also asked how much how much profit element is included in closing stock okay because head office sent the goods to the branch at cost price or invoice price invoice price that means some profit element is included in brancha closing stock that's what we need to find out so so this 360,000 closing stock is there on which platform it is on 120 because Branch purchases Goods at 120 but cost of the head office only is 100 that means indirectly 20 Rupees is the profit element that if you find out that is nothing but your stock reserve on closing stock this is one kind of a problem okay now yeah this is one next next sir a common question this may not come that popularly from this particular chapter what generally comes is the dependent branch a question more often than not they ask dependent Branch till now what we did Sir independent branch in independent Branch generally they'll ask you to prepare journal entries and they ask you to prepare trading pnl account trading pnl account usual we just did now same format some extra data will be given here the data was very less there in probably in examination question you may get three four more expense three four more direct expense three or four more indirect expense and ask you to prepare trading or Pendle account that is one type of question but more popular question is with respect to the indep or dependent Branch more better question is related to dependent Branch so dependent Branch means what dependent Branch means what they are dependent on the head office for the accounting they're doing their activities but accounting activities of all the branches maintained by whom head office itself head office only maintains all the accounting records of the branch okay now sir excuse me head office no sir do you think you should have only one branch or you could have many branches second getting constant messages I don't know why some problem okay all right we'll see we'll figure that out later uh but for online everything is looking good now just give a quick confirmation people I'm getting some popups is everything okay is the audio part and the video part clear can you give me a quick confirmation it's fine now great thank you okay so let's go for uh the next one sir head office is it necessary we should have only one branch or we could have many branches many branches now if head office to now head office is maintaining Branch call accounting records now one conventional way to know profit or loss made by the branches prepare trading account and pnl account of the branch Branch will have one expense or many many expenses many many expenses correct and if you have like 10 15 branches to do Trading pnl balance sheet of every branch is a big task yes no hence in this dependent Branch now there are some Shortcut methods to get to know whether Branch made profit or whether made Branch made loss there are certain shortcut method conventional way to know profit or loss is what sir prepare trading account and prepare pel account because trading pendl is little lengthy because you'll have 101 expenditure right hence we have shortcut method the first shortcut method which head office can utilize to know profit or loss made by the branch we call it as datar method we have something called datar method in datar method what head office will do is all accounting all this accounting is done by whom all this accounting will be done by head office data relates to whom Branch but accounting is done by whom head office okay head office will use shortcut method and one of the shortcut method is what sir dat's method in datar method what is the shortcut is head office prepare something called Branch account head office prepar something called Branch account they instead of preparing trading Pendle they'll prepare Branch account this account is prepared to know whether Branch made a profit or they made a loss okay the rules of this shortcut is very simple in fact in regular class I had given you a logic whether you prepare under normal conventional trading pnl method or datar method answer will be same now I will not go into all that now because little less shortage of time so in dat's method what is the rule is what BR what head office will do is listen to this carefully and we'll straight away apply it in one question after this all assets of the liability will be shown on the debit side of Branch account all the assets of Branch account will be shown on the debit side of Branch account whatever assets branch have they could have some cash or furniture or machiner dats whatever stock whatever all the assets will be shown on the debit side okay all opening balance of all assets will be shown on the debit side closing balance of all assets will be shown on the credit side or if you want it in little more uh different way opening balance of all assets where it will come when you prepare datar Ledger where will you show the opening balance on the debit side you'll write it as what two balance brought down closing balance where will you write byy balance carry down same here also so you write two balance brought down for opening balance of all the assets you'll write buy balance Carri down for closing balance of all the assets okay what about liabilities where will if assets opening balance on the de debit side means liability opening balance on the credit side usually liabilities is very very rare I've not seen one or two question rare question may this has come liabilities okay so if at all it has liability opening balance you posted on the debit side closing balance you posted on the credit side this this is the first Ru first capture all the opening balance of assets and liabilities and closing balance of all the assets and liabilities only few things will come in this Branch account second is what will the head office do will Branch purchase the goods or they will receive goods from head office receive what is the journal entry for uh what is the journal entry for goods sent to Branch account sir if head office sends the goods to the branch what is the journal entry Branch account debit to Goods sent to Branch account are you preparing Branch account here yeah if head office sends the goods the journal entry what will you post it as Branch account debit to goods and to Branch account that is this entry is that fine sir it's a dependent Branch it's a dependent Branch means do you think they will keep all the cash or they will remit all the cash to head office they will remit all the cash to the head office on a periodic basis that's one of the feature of a dependent Branch okay they are dependent on their head office so when head office when The Brand sells the goods they will get money no they will not keep the money with themselves they'll remit it back to the head office what's the journal entry for money received from Branch what's the journal entry for money received from branch bank account debit to Branch account so what will be the posting by bank account this is what sir remittance received by the remittance received by the branch to the head office or remittance received from Branch can I call it like that head office has received money from Branch so the journal entry is bank account debit to Branch account so the posting will be by Bank this is one now it's a dependent Branch means they will remit all the money to head office but they will also have their expenditure they will also have their expenditure does branch have the money to pay that expenditure does branch have the money to pay this expenditure no most of the money they remitted back to the head office so major expenditure payy cash expenditure Branch will make so suppose Branch wants to buy one asset one furniture they want to buy one laptop they want to buy who has will they have that kind of money probably no that means all this expenditure who will head office so if head what is the journal entry for branch expense met by head office branch expense met by head office what is the journal entry Branch account debit to bank account so what will be the posting in Branch account what will be posting as to bank account this is what branch expense paid by the head office okay all this transaction will come may not everything may not come I've given us complete summary in this maybe 80% of the transaction you will see it in the question this is one done aaru okay sir what if some money has has been sent by the head office to the branch to maintain some to take care of pity pity expenditure some money head office gave to the branch okay money has been given to the branch what's the journal entry for money given to the branch head office gives a money to the branch what is the journal entry Branch account debit to bank account that will be the posting for this entry that's what I've written here done now okay all right this is a rare it's okay so this will not come it's okay so cut off this now sir it's a dependent branch in case of dependent bran branch no sir now you tell me who's doing all the accounting who's doing all the accounting head office now do you think goods are invoiced to the branch at cost price or invoice price they will tell in the transaction that head office send the goods to the branch at invoice price but who's doing all the accounting head office so in case of this dependent branch no sir that profit element or loading element or stock Reserve element has to be removed on three things has to be removed on three things what are those three things opening stock closing stock as well as Goods sent to Branch account because who's doing all this accounting head office correct so head office only is maintaining all their record so that means if they say in the question all the goods are sent to invoice price all that profit invoice price means it includes profit element or excludes the very invoice price means selling price how do you get selling price cost price plus profit yes or no in case of dependent Branch if there is any profit all that profit should be eliminated because who's doing all this accounting head office so if you show all this profit it look like head office made the profit with itself because head office only is doing all the accounting no so we'll remove the profit element on three things one is the opening stock another one is closing stock another one Goods into to Branch account so practically will people follow this doubtful practically will people all do this doubtful but we are not worried about practicality we are more worried about marks in examination so all these are there most for the marks practically accounting is very very simple Branch accounting is not complex as it is given over here and all this much of drama no body does okay but uh all that we will not worry about it right now we have to focus on our Examination for the sake of marks what needs to be done we will use that okay so what did I said over here since ho is doing all this accounting any profit element should be eliminated and that profit element should come eliminated on three things opening stock closing stock and goods into Branch so opening stock comes on which side here in this account all assets opening balance you are recorded on the debit side now opening stock will be recorded at invoice price they'll give you in the question opening stock is shown opening stock invoice price is 1 lakh that means on this side how much have you shown one lakh which is the invoice price invoice price means it includes profit that means what we have to do eliminate it that means opening stock you have to increase or you have to reduce reduce in some a component which is coming on debit side you have to reduce it instead of reducing that component from the debit side you show the component you show the profit element on the credit side that profit element on opening stock only we call it as what sir stock Reserve so you'll write it here as by stock Reserve we have to reduce opening stock no instead of directly reducing it we show the stock reserve on the credit side effect is same understood sir so you'll write here by stock Reserve this is a stock reserve on which stock opening stock you'll have stock Reserve only on opening stock or also on closing stock closing stock where will closing stock come on the credit side if closing stock comes on the credit side The Profit element removal on that will come on the debit side so you'll write it as what two stock reserve on closing stock D only these two are even one more good and to Branch account where is Goods sent to Branch coming on debit side I means you have to this is shown at invoice price usually they will tell that this is goods are sent to the branch at invoice price can you show it at invoice price or only cost price cost price but this this is at what value this is currently shown at invoice price hence what do we do reduce it instead of reducing you show the component on the credit side you'll write it as what sir buy Goods into Branch account whatever is a profit element all that I'll calculate don't worry about calculation part I'll tell you all this so fair enough everybody after doing all this any balancing figure that you get is nothing but profit or loss made by the branch if balancing figure comes on the debit side it is a profit made by the branch because this Branch account is nothing but your trading Pendle account prepared in another fashion I proved it to you with numbers in regular class I'll not bother about all that no is that okay so this Branch account is nothing but your trading and pendl account sir if you're getting balancing figure on the in trading account on the debit side what will you write it as in trading account you'll write it as gross profit in pnl account you'll write it as two net profit so if you're getting balancing figure you'll write as to Pendle account as arrived as balancing figure this is the profit made by the branch a shortcut method of arriving the same thing easy enough now can we quickly go ahead and take it up in one question but before that can you quickly summarize this method for me so what sort of uh branch is this dependent or independent what sort of a branch this is a dependent Branch dependent Branch means branch is dependent on the head office for their accounting since Branch will have a lot of expense and lot of income preparing trading pel account is a little hectic task hence we have a shortcut method what is that shortcut method datar method under datas method what do we do sir head office will prepare One account what is the name of that account Branch account be preparing Branch account the head office will get to know how much profit or loss is made by the branch for this Branch account there are certain rules what is the first rule show opening balance of all the assets on the debit side show closing balance of all the assets on the credit side if you have liabilities opening balance showed on the credit side if liability closing balance will come on the debit side very rare liabilities but still if it is there you can bring it then Goods sent to Branch account will come on the debit side because the journal entry is bank account debit or Branch account debit to goods and to Branch account that's the reason and see if there is any remittance made by Branch to ho or ho to remittance that will come accordingly yes sir more importantly since ho only is doing the accounting over loading element or profit element should be removed from three components what are those three components opening stock closing stock and goods into Branch account opening stock comes on which side debit side that opening stock is overstated because it is shown at invoice price but it should be shown at cost price hence instead of reducing opening stock directly you show stock reserve on the credit side closing stock where it will come on the credit side so that is shown at invoice price so instead of decreasing the closing stock we show stock reserve on closing stock on the debit side Goods sent to Branch account where does it come in Branch account on the debit side instead of directly reducing that we write buy Goods into Branch account on the credit side there is a loading element removal yes sir okay let's take up one question this one vishwak Karma of Delhi this is our class notes itself okay don't worry about Karma only yeah karmaka that one only it's okay don't worry about the question you can take any question but the rules are important you just need to remember the rules over here all right so this and one more method is there these two method purely runs on the rules just remember the rules and blindly apply them I will not go into the logic of each of them right now because shortage of time if you want full rules alone you can refer to the regular classes there I explained to you why we do it like this okay vishwakarma of Delhi Branch uh vishwak Karma of Delhi has a branch in Jaipur so head office is there in Delhi branch is there in Jaipur goods are invoiced to the branch at Cost Plus 25% okay so head office is sending the goods to the branch at cost price or invoice price what is the cost to the bran cost to the head office 100 will they send the goods to the branch at 100 only or some profit element how much is the profit element 25% on cost so profit will be how much 100 25% which is 25 so what will be the invoice price 125 any any problem till here no branch is instructed to deposit every day in hedo account with the BR whatever money Branch gets know they are asked to deposit to the head office this is one of the feature of what branch dependent Branch because if it is independent branch Branch will take all their decisions independently why will they remit yes no so they've been asked to instruct to deposit means this is a in this is a indicator that it is a dependent Branch they will specify but just saying for your reference all the expense are paid through check by the head office so Branch all expense who will pay head office because Branch does not have cash all its cash it is giving away to hedo so that's the reason all the expense has to be taken care by H only except petty cash expense small small expenditure Branch will maintain okay which are paided by the branch from the following information prepare Branch account so under which method you prepare Branch account dat method so sometimes they will use a term under datar method find out profit or loss made by the branch so what do you do prepare Branch account like that or sometimes directly they will say prepare Branch account in the books of head office that is another way to ask the question here directly they asked prepare Branch account so let's see sir they've given the data so one good thing is as in when we read we know the rules as in when we read the data can we punch in the data okay first they have given stock at invoice price not cost price stock at invoice price but on 1 April 1 April means year beginning year beginning of stock is what sir opening stock so how much is opening stock 1 lakh 64 so what is the rule of Branch account here show opening balance of all assets on the debit side so first thing you'll write is two balance in the books of head office you'll prepare Branch account what is the branch name here jaur Branch account you can also call it as instead of just Branch account you can write Jaipur Branch account that's fine or simply call Branch account it is fine so the first component is what sir to show all the assets opening balance you'll write it as what two balance brought down how much is the opening balance opening balance of opening stock 1 lakh 64 has it captured yes that's the first thing next what is that stock at invoice price on 31st March meaning at year end that means this is your closing stock so closing stock where it will come it is assets closing balance where it'll write on the credit side you'll write buy balance brought down closing stock 1ak 192,000 given which we ticked off yes okay next uh what is next one these two are over the dats on 1st April and datar on 31st March so dears on 1 April is what sir opening balance dears on 31st March is your closing balance so they given opening balance of dears and closing balance of datar where will opening balance of datar come under debit side 63 400 taken up two balance brought down all assets put together you caned as two balance brought down one by one is that okay de opening balance 63400 de closing balance 84 300 given ticked off yes okay next these two are over next furniture and fixtures on first April first April Furniture means it is opening balance how much is opening balance 46 800 so you'll write two balance brought down under Furniture 46800 but Furniture closing balance given or missing have they given below this no so Furniture closing balance is missing maybe we have to calculate that we have to calculate that let's see maybe we have to prepare Furniture called Ledger as a working note and get furniture car closing balance we'll come to that as when we see we will take it off then we'll figure out about the missing components now cash sales cash sales okay how much is what is the value of cash sales sir 8 lakh 2,600 what is head office being what is a branch instructed whatever cash they get daily they have to give it to the head office so Branch sold goods worth how much sir 8 lak 2,600 can branch keep this money or they have to give it back to give it back to whom head office that means head office will receive this money so what's a journal entry for money received from head office what's the journal entry for money received from head office bank account debit to Branch account how much value 8 lak 2,600 so I've written by bank over here they written a working note one minute we'll figure it out okay how much is that value sir 8 lak 2,000 or one moment let's probably I think there are some expenses also over here okay one minute let's let's hang on instead of doing it directly here let's prepare a working note only it'll be better better over here okay so first uh here do you know the opening balance of cash sir opening balance of Branch cash do you know not given so two balance brought down zero Branch sold the goods Branch sold the goods what's the journal entry for cash sale what's the journal entry for cash sale cash account debit to sales account how much is that 2 lakh 8 lak 2,600 because sir uh whatever money has entire money branch has to give it to the head office so entire money will find out in one go and transfer it you can transfer it individually also but this way is little better is that okay sence we'll prepare it a ledger we'll get to know how much money branch has which they have to totally remit to the head office yes sir so who has this money 8 lak 2,600 the branch has this money yes sir okay next we look at the next Transaction what is the entry for this credit S one second hang on sir do you know datar opening balance yes do you know datar for closing balance yes do you know credit sales yeah but have a quick click through have they given anywhere money received from datar no sir here have they given anywhere money received from datar no that means what if you have sold the goods I mean nothing we have received sir this is whole year transaction whole year you have sold the goods to datar not even one rupe would have received so that means what is the logic money money has been received from datar but how much is it given or missing missing so what we have to do prepare datar Ledger and find out how much money is received from datar can we first do that okay so datar let's prepare a working note do you know opening balance of datar yeah given to be 64300 what is closing balance of de are 46 800 that do have captured here okay do you know credit sales yeah how much is credit sale 7 lh44 20000 what's the journal entry for credit sales sir datar to sales captured okay check anywhere over there have they given bad debts so discount allowed anywhere here check only this data is there any more data relating to datar is there or that's all that's all so that means this side total is what sir 7 lakh 44200 plus 63400 if you do you're going to get 8 lakh 7,600 that's why also be 8 lak 7,600 okay but that's how total is only 84300 that is something as balancing figure how much is balancing figure 723 300 something should come on the credit side what is that sir that is nothing but money received from datas what's the journal entry for money received from datar bank account debit to datar account this your branch cash understood yes sir if this information was given maybe preparing Branch datas account was not necessary since that information was missing we prepared that leer to get to done now okay sir this will affect only datar Ledger or Branch cash Ledger also Branch cash Ledger also what the what is the posting you'll pass in Branch cash ledger to datar 7ak 23300 manageable so there are some cash sales also there is some cash received from datar also both are there okay let's proceed further then goods are invoiced by the branch to or goods are invoiced to the branch by the head office head office is send the goods to the branch what is the journal entry head office has sent the goods to the branch what is the journal entry Branch account debit to goods and to Branch account how much value 12 lakh 56,000 so will it come in your branch account yeah you'll write it as goods and to Branch account how much sir 12 lak 56,000 manageable okay next expense paid by the head office whose expense Branch because they clearly told whatever cash branch has they will give it off to head office so what is the journal entry for expense paid by the head office branch expense paid by head office so the journal entry is Branch account debit to bank account how much sir 264 4,000 what is the posting of this entry in Branch account you'll write it as to bank account this is your 2ak 64,000 what is this narration for this or what will you write for this this is Branch expense paid by Branch expense paid by head office account okay all right next is what sir Petty expense paid by Branch Petty expense paid by Branch but do you have any petty cash balance H you have any P cash balance no that means how did Branch incur this that means what branch has two monies now branch has two types of money what is that one they sold some Goods on a cash basis and received some money Branch also received money some from datar correct so entire cash sale value cash received from datar Branch will give it to head office or there are some small expenses small expense how much is that small expense 20,900 first Branch will deduct that 2900 balance they will give it to head office understood okay people so whose what expense is this Petty expense paid by the branch so are you preparing Branch cash account yeah what's the journal entry for expense paid sir expense account debit to bank account so you'll post it as what sir buy expense 20,900 understood so entire money I what is all this add both of this 723 300 plus 8 lakh add these two 723 300 plus 82600 if you add you're going to get 15 lakh 25,900 so how much cash the branch hash with itself now 15 lakh 25900 entire thing they'll remit or some they will utilize some they have utilized for petty expense for petty expense how much did they utilize 20,000 manageable so that's the reason that's balance will reduce okayu okay great next sir next check what happened Furniture acquired by the branch Furniture acquired by the branch but no no furniture acquired by the branch payment was made by Branch see they've given you more clarity for you Bran who Furniture Branch car who paid for that furniture Branch who paid for that furniture who paid for that here GE gear G payment was made by the branch Branch does not have money no no no they have money how much money they have 15 lakh 25900 so out of 15 25900 20,900 they utilize for petty expense 5,000 they utilize for furniture purchased what's the journal entry for furniture purchase sir Furniture account debit to Branch branch only paid this no so Furniture account debit to instead of writing Furniture to cash we will write Furniture to Branch cash so in Branch cash the posting posting will be bu Furniture understood sir okay that means out of 15 lakh 25900 how much did Branch utilize 2900 they use for expense 5,000 they utilize for furniture how much money remains 15 lakh any more utilization is there or that's all that's all so that means whatever money now is remaining with the branch how much money is remaining with the branch now 15 lakh that's they will give it off to whom head office understood that's all so this is the remittance made by the branch to the head office this done what's the journal entry now who's doing the accounting now branch is doing the accounting or head office is doing the accounting so from head office you think this 15 lakh head office is paying or receiving receiving from whom Branch what's the journal entry for money received from Branch bank account debit to bank account debit to Branch account head office is doing the accounting so bank account debit to Branch account so in Branch account what will be the posting by bank account 15 lakh that only we arrived it as working note okay sir sir if these expense and if this furniture purchase was not there no then whatever money you receive from datar whatever cash sale money Branch received Total Money would have remitted okay here since these two expens are there first Branch will adjust that that much from the money balance only they will remit to the head office like this understood sir sir what about this Petty expense and all sir it will not come in Branch account no under the shortcut method only only whatever we discussed only those will come any expense of branch and all will not come how much is a pett expense of the branch sir 20,900 all that if you just check over here will it come in your branch account no okay that all that will not come in your branch account hence that's the reason it's a shortcut because expense means Branch will have one expense or they will have hundreds of expense hundreds of expense we don't want to prepare trading pnl account to get no profit or loss we want to prepare Branch account okay so all this expense and all will not come under this method okay saru okay so all this we have captured but three things we should not forget under Branch accounting what are those remove the loading element on three things opening stock closing stock goods and to Branch account so was the goods sent to the did head office send the goods to the branch at cost price or invoice price invoice price that means this profit element included yes okay now sir how much is a opening stock 1 lakh 164,000 so that means this 1 lak 64,000 is invoice price so some profit element is included what we have to do we have to reduce will you directly reduce it from opening and show it on the opposite side you'll show it on the opposite side as what by stock Reserve so by stock Reserve how much 1ak 164,000 represents invoice price meaning it rep it is on what platform 125 we want what we want profit element profit represents how much 25 so for 25 how much so 1 64,000 into 25 divid 125 or if you want it another way around like this invoice price profit if invoice price is 125 this equation if invoice price is 125 means profit is how much 25 so you can Pro rate and put it up in this du also this box can be done if this is if invoice price is 125 profit is 25 what is the value of closing stock 1 lak 64 what uh this opening stock is what Val shown at what value they told in the question at invoice price so if invoice price is 1ak 64,000 means how much is profit so when you pro rated how much how do you get X 1ak 64,000 into 25 divid by 125 like this you can do or you can simply do in logic I mean one line 1ak 64,000 is on 125 C how much for 25 like that if you calculate you'll get stock Reserve how much 30 to800 yes sir so this is a stock Reserve getting eliminated on opening stock NOW same elimination you have to do it on closing stock because closing stock is also shown at what value invoice price how much is the invoice price of closing stock 1ak 192,000 directly you'll reduce closing stock and show it on the opposite side show it on the opposite side as what to stock Reserve to stock Reserve this is on the closing stock what is the closing stock of K invoice price lak 92,000 1 lak 192,000 is on which platform invoice price car platform which is 125 we want profit profit is on which platform 25 1ak 192,000 is for 125 for 25 how much if you do that you're going to get how much sir 38,400 like that two over then the third one what is the third loading element we need to remove Goods send to Branch account did you send Goods to Branch account yes how much did you send 12 ,000 56,000 that is also shown at what platform invoice price for this don't write stock Reserve stock Reserve means the profit included profit element included only in stock hence if you this you have to reduce means use the same name here you have written Goods into Branch account no show it on the opposite side also as what goods into Branch account so 12 lak 56,000 represents invoice price meaning it is shown on 125 how much is the profit element of platform which is 25 how much is this 2 lakh 51200 okay yeah thank you so much for your comments PA all right so are we good with this this is a fund okay sir so Suppose there is a Goods returned means what to do sir uh first what you can do is Sir Goods sent to Branch account where will you show debit side so Goods return you will show it on the opposite side that means on returns if you are showing SE if if you are showing Goods return separately means Goods return will be shown at cost price or invoice price that means on this also you have to calculate loading element on and show it on the opposite side yeah you have to do it why I mean I'm saying if you show it like that you have to do it like this but better approach is whenever there is a return no whenever there is a return don't show the return on the credit side rather you reduce the return from Goods into Branch account itself that way you don't have to calculate loading element again two two times loading element need not be removed okay so always take Goods into to Branch account and net amount so if there is any return reduce it directly from here so that double adjustment will you can avoid it comfortable asaru okay this is all the overall rule so anything is missed ticking or everything ticked off everything take off but one second hang on furniture closing balance we have or we don't have we don't have so Furniture depreciation data they've given H yeah you have to depreciate office furniture by how much 10% on what basis wdb basis but one second hang on did you purchase any furniture yes more importantly did you purchase it on the first day of the year or first October sir year begins on April you purchase Furniture only on October that means on this new furniture you will depreciate it for whole year or only 6 months October November December January February March so you'll calculate depreciation only for 6 months so let's open Furniture Ledger do you know Furniture opening balance yeah Furniture opening balance is given to be 46800 did you purchase any furniture yeah who paid for this furniture head office or Branch Branch sir when you write bank account here no when you write just bank account this bank account relates to head office because who's doing all this accounting head office so if you just write Bank it means it is H Hoka Bank when you write Branch cash or branch Bank it it is a money belonging to the branch like that so be specific is that okay with you now who paid for this furn head office or Branch branch that means you should write Furniture account debit to bank account or Branch cash account you can't write Furniture to bank you should write Furniture account debit to Branch cash because if you write Bank it look like an indication that head office paid for it did Ho pay for it or Branch paid branch paid that means you'll write the entry BR Furniture account debit to Branch cash yes saru that's what you posted here also any doubt no on furniture you have to depreciate on this 46800 full year depreciation at 10% and in this 5,000 you'll depreciate only for 6 months if you add total depreciation you're going to get 4930 so after all this what no other adjustment is there in Furniture account so remaining is what balancing figure is what closing balance how much is closing balance 4687 so depreciation will not come sir no under this method no sir under this method expense and all will not be recorded only asset car opening and asset car closing what is asset Furniture closing balance 46870 show that on the credit side is that fine anything else or all the rules taken care of all the rules taken care of so everything we have ticked any balancing figure in the branch account represents either a profit made by the branch or loss made by the branch you're getting balancing figure on the debit side so that means what it is a profit made by the branch okay sir or 2 minutes may can I explain that logic once again of this method instead of his formula you want it you forgotten this this method of logic why do we do like this you don't want it this is okay he saying giving look that guy is telling what is your problem let him tell no this time I can't even use that dialogue you paid full fees because you paid no fees rision free no yeah okay no problem or 2 minutes I'll quickly spend it's okay because if you maybe know the logic even if you forget the rule maybe you can construct it so now sir let's assume for Simplicity I'm not going to take the whole data you received some Goods at free of cost let's assume that for Simplicity okay you have some Goods you had some Goods it's possible no sir let's say I want to start I want to start selling this bottle I want to sell the bottle my business is to sell the bottle I already have 100 bottles with me I already have 100 bottles with me sir Capital can be introduced in the form of cash or Goods also you can introduce as capital possible no okay this Goods I already have okay that I want to sell now h so let's do a thing let's test this method logic so datar opening balance let's say opening balance of datar is 1 lakh closing balance of datar is let's say 2 lakh rupees okay now uh sales is sales is let's say here taking okay this I'll take it as three lakhs okay maybe I'll make it as 350,000 sales I'll make it as 3 lakh 50,000 so what is the total decide 4 and a half lakh this side also should be how much sir 4 and a half lakh okay then we have some bad BS let's say ,000 we have some bad debts to the extent of 50,000 or how much I'm getting as balancing figure 2 lakh no okay that means I'll make the B bad debts 75,000 okay now is the journal entry matching or there is a balancing figure balancing figure how much balancing figure you're getting sir 4.5 minus 2.75 you how much you're going to get 1 lakh 75,000 is a balancing figure what is that balancing figure money received from Nar yes that means you'll write it as by bank account any problem till here good everybody okay sir if you prepare Pendle account if you prepare Pendle account okay trading Pendle account what will you write it as you receive this Goods at free so that means you'll write it as what sir by sales if you prepare normal pnl you'll write by sales how much three and a half lakh this this Goods let's assume that you received it free of course for Simplicity purpose okay so by sales you'll write three and a half lakh is there any bad debts is there any bad debts yeah how much is bad debts 75,000 so bad debts will come on this side that means what is the final profit made by the branch what is the final profit made by the bch 350,000 minus 75,000 which is how much sir 2 lakh 75,000 understood 275,000 manageable so finally if you receive this Goods at free of cost if you do trading pendl account in normal way you'll get a profit of 270 5,000 yes let's try it out in this method in this method May what do we do sir we prepare something called Branch account what is Branch account C rule show opening balance of all assets on the debit side here do you have any asset yeah one asset we have called dear so dear opening balance will come on the debit side so you'll write it as what one L yes sir that's all no closing balance of all the assets will come on the credit side what is the closing balance 2 lakh so you'll write it as 2 lakh yes any problem any problem or good good how much money you receive from from DS 175,000 sir it's a dependent Branch what will the dependent branch do will they keep the money with themselves or remit to the branch remit to the head office the branch will remit to the head office what's the journal entry for money received from branch bank account debit to Branch account so that means you will post this as what sir how much money you collected from datar how much money Branch collected from datar 175 that money Branch will give it to head office so that means you will posted as buy bank account 175,000 yes or S any problem so what a rule of this entry once again you tell me all the rules opening balance of all the assets on the debit side closing balance of all the assets on the credit side head if branch has incurred any expense of Branch it will come on the debit side is in my example all that is there are no Goods sent to branch is there or you ignored it ignored it okay all that I've ignored it okay stock reserve and all is there or have ignored that also I've ignored all that for the sake of Simplicity okay that means all the things whatever I had to do as per the rule I've already done so check sir total is this side is how much 3 lakh 75,000 this side total also should be how much 3 lakh 75,000 is the branch account matching or you're getting balancing figure how much balancing figure you're getting 2 L70 5,000 sir any balancing figure in Branch account what do we call it as profit or loss made by the branch how much are you getting as profit 275 in the previous method how how much did you get as profit 275 whether you do it under conventional way or under datar method answer will be same but this is a shortcut method so under this method check under this method there was bad debts under this method there was bad Debs did I post bad dats anywhere here no because under this method expans and all will not post only asset opening asset closing remittance made Goods sent to Branch account whatever we discussed only those will come only those if you post the final answer that you get under normal method and this method answer will be same so rules will work out is that okay with you I'm just proving it to you with the example there yes sir work so this is one method this is one shortcut method where head office can find profit or loss made by the branch this method name is what sir datar method in datar method which account do we prepare Branch account to know the profit or loss made by the branch there is another method can I get to that method another method is little crazy it is called stock and datar Method it is called stock and datar Method okay don't ask me whether they follow all this most probably no I have not seen at least okay I have not seen after my qualification I have not seen any of this okay probably you'll also not see okay but all these are for the sake of marks how many marks how many marks at least for 8 to 10 marks at least eight marks in my opinion because these could be a little bit of lenier side okay so another shortcut method is there same it's what branch again sir dependent branch that means all this accounting will be done by whom head office so to no profit or loss made by the branch there is another method called stock and datar Method under stock and datar Method no sir many ledgers will be prepared by the head office of the branch first Ledger will be prepared is brancha stock account then brancha datar account then we usually prepare brancha cash account Goods into to Branch account Branch adjustment account and then finally Branch pel account these ledes will be prepared okay now what is the thing is Branch stock account sir I had given you notes if you remember my notes I had given you Branch stock account resembles your trading account Branch stock account is like your trading account except all the components are shown at invoice price if you flip your notes back and refer I've told all this i' given you this things yes so here know brand stock account is prepared like trading account now visualize opening stock where it will come on the trading account debit side so opening stock you'll write it as two balance broad down okay now and purchases where it will come debit side Sayes sales where it will come credit side so you have to prepare this Branch stock account in the same fashion you have to prepare this Branch stock account in the same fashion now you have to think if Branch receives the goods from head office stock balance will be same or it'll increase when if Branch receives some goods from head office stock value will be same or it will increase increase now when you're preparing this Ledger now you have to think whether the stock balance is increasing or stock balance is reducing that's all so when you receive goods from the branch when you receive goods from head office stock will increase let's say you had goods worth 1 lakh rupees Branch already had goods worth 1 lakh rupees they received three lakh more from head office they received goods worth three lakh more from head office that means how much Goods they have no 4 lakh that means what happened to Branch car stock same or increased increased so opening balance of stock where it will come on the debit side you'll write it as what sir don't write to opening stock because you're not preparing trading account you're preparing Branch stock account in stock account me opening stock means it is a opening balance of opening balance of stock opening balance of stock where it will come to balance broad this is your opening stock in these problems I told Will Branch purchase the goods or they will receive the goods receive the goods from whom head office purchases where it will come in the trading account visualize if you're confused visualize trading account purchases where it will come debit side so will the branch purchase it or receive from ho that means the goods received from purchas Goods received from head office is like purchases only so where you should show on the debit side or in another way around when you receive the goods from head office Brian stock will increase Brian stock is an asset asset have debit balance how do you increase that again debit it why will it increase because you receive goods from head office so you'll write it as two goods into Branch account because H only is preparing this no so instead of writing goods receive from head office you'll write it as goods and to Branch manageable that is one after receiving the goods what will branch do sir they will sell they may sell this goods for cash on a cash basis or credit basis so when you sell the Goods stock value will be same or it will reduce it'll reduce so what's the journal entry for where will you show sales visualize trading account where will you show sales Credit Credit side so instead of writing by sales you write it as by Branch datar account because what is the journal entry for credit sales datar to sales here instead of writing dats to sale you write it as dats to stock dats to stock because when you sell stock value will reduce so hence you'll write it as by datar or you'll post it as by Branch datar account and stock account yes sir what's the journal entry for cash sales cash account debit to sales that is your normal entry but are you maintaining sales here or stock Ledger stock ledger so when you sell stock Ledger will stock balance will reduce so what is the journal entry Branch cash account debit to Branch stock account so the posting will be what by Branch cash account yes sir so now you have to think only whether stock value is increasing or stock value is reducing like that okay but sir this is at selling price no sir yeah here sir every component of this brand stock account is recorded at invoice price okay that means even opening stock Goods sent to Branch account all these components are shown at what value invoice price that means ideally this account should have a balancing figure or it should get matched it should get matched because every component is shown at what value invoice price that means you should not have any profit or you should not have any loss by mistake or by by chance if you're getting any balancing figure by chance if you're getting any balancing figure transfer that to an account called Branch adjustment account what does that mean is let's say invoice price is 120 invoice price for Simplicity is 120 so all the component should be shown at what sir 120 that means Ledger should match but sir Branch got to know that they will be able to sell this goods for 150 there is some Market there is a market there is a heavy demand they thought instead of selling those goods at 120 let's sell it for 150 now you tell me this Ledger will match no opening stock good sent to branch and all is shown at what value 120 but sales is made at what value 150 that means this Ledger match or there will be a balancing figure balancing figure means what some extra profit made by the branch here all the profit Element no sir will be adjusted through which account Branch adjustment account all the loading element whatever we discussed previously what are the loading element on opening stock closing stock and goods into Branch account all that loading element removal also will happen through Branch adjustment account that's the reason any balancing figure you transfer it to Branch adjustment manageable okay give me a quick recap again first account what do we prepare sir Branch stock account for Simplicity you can think like this Branch stock account is like your trading account except that all the components are shown at invoice price so opening stock where it will come deit debit side will you write it as opening stock or two balance brought down two balance brought down then will you have purchases or Goods received from head office Goods received in fact we don't say Goods received from head office because this accounting is done by ho they will write it as what goods s to Branch so Branch will not have purchases rather they will have Goods into to Branch account so where will that Goods into Branch account appear on the debit side because when you receive the goods Branch stock balance will increase after that what will happen Branch will sell two kinds of sale cash sale and credit sale when both when you make cash sale and credit sales stock value will reduce so show both the components on the credit side okay and closing stock you show it on the credit credit side is balancing figure so ideally since every component is shown at invoice price The Ledger should match if at all there is a balancing figure that is some extra profit or some extra loss that you transfer it to where to which account Branch adjustment account that's the thing yes sir next you prepare something called Branch datar usually Branch datar account is prepared to get to know cash received from datar usually in these sort of problems cash received from datar will not be given to get to know how much cash is received from datar we prepare Branch datar account or credit sales will be missing one of the two components either credit sales or cash received from datar will be missing to get to know that we prepare Branch datar account Branch datar account is usual you know opening balance of dat debit side closing balance on the credit side bad debts and all if you have means the credit side like that you go on posting is that fine don't write sales as dats to sales here instead of datar to sales the entry will be dats to stock account datar to Branch stock account that's the only thing yes people okay now usually next account that you used to prepare I'm not written a format over here usually another account that you'll prepare here is the branch cash account I'll tell you with the problem here one problem immediately will take up another account we usually prepare is what sir Branch cash account why do we prepare Branch cash account is usually cash sales cash sales will be missing cash salea information is missing to get that information we usually prepare Branch cash account either this or cash from datas cash from datas one of these two components will be missing to get to know that we prepare Branch cash account okay sir this is one next Goods sent to Branch account now goods are sent to Branch account at what price invoice price sir who's doing all this accounting head office head office now head office purchase the goods head office purchase the goods can they sell this Goods now can they sell this Goods or they give it off to Branch they give it off to branch that means who will record all the sales Branch right so hence Goods sent to Branch account you have credited here no will be adjusted from purchases it'll be adjusted from purchase because head office purchased it then they sent the goods to Branch account so that means this Goods s to branch is nothing but like for head office it's like a sale no so this Goods sent to Branch account will be adjusted with what sir purchases but the main problem is the goods sent to Branch account is shown at what value invoice price but purchase purchase is always shown at cost price let's say invoice price is 120 cost price is only 100 will The Ledger match or there will be a balancing figure what is that balancing figure 20 that is nothing but profit element here all the profit element will be adjusted through which account Branch adjustment account is that okay so record this entry once again I'll tell you with problem if you have forgotten no issues I'll take you with with problem but just keep an open mind those of you have done it it should be a quick revision for you okay next we prepare something called Branch adjustment account why do we prepare Branch adjustment account to remove the loading element on everything everything means opening stock closing stock Goods into Branch account after removing the after removing the loading element if still any balancing figure is there okay this is like your trading account what does trading account give you trading account what does it give you gross profit where do you transfer that gross profit to Branch Pendle because we talking not about head office we're talking about Branch so any after removing all loading element if Branch adjustment account has any profit that is nothing but the gross profit made by the branch which will be transferred to Branch p is that okay finally we prepare Branch pandle account to get to know how much profit or loss is made by the branch don't ask me whether it is followed or not I don't know whether in exam has it come yes few times is is it important for exam yes many people will do this as a selfstudy they look through the Ledger and they'll be like yaa what is this skip actually this is very very easy problems all you need to do is solve one or two question entire method will come to your head just a case of one or two question practice because everything is a rule based activity okay that's all it is simple once you know the rule go on plugging the numbers F FF you'll go on pitching now we'll quickly remember the revise the rules and then we'll apply it in one of the questions now which which is another shortcut method stock and datar Method and the stock and datar Method what does the head office do they prepare one Ledger or many ledgers many ledgers what is the first Ledger Branch stock account the kick the point here is all Branch stock account resembles your trading account don't tell I tell all this in outside of I'm telling all this data only for you to remember it don't tell he told it was like trading account no no it is not trading account I'm saying for your easy remebrance you can think of it as what trading account so visualize trading account what it all will come in trading account opening stock instead of purchases what will come Goods sent to Branch account on the other side it will be sales okay so you have to plug in the finger when you write Branch stock account instead of opening stock you'll write two balance broad then you'll write Goods sent to Branch account on the other side sales sales could be credit sales or cash sale so when you sell the goods don't write sales when you sell the good stock value will reduce so if you does a cash sale the entry is Cash Branch cash account debit to Branch stock account so in your branch stock account the posting will be by Branch cash if it's a credit sale the journal entry will be it's not datar to sale it will be dats to Branch stock account so in your branch stock account the posting will be by Branch datas and then closing stock will come as by balance carry down since everything is shown at invoice price Ledger should automatically match if it doesn't match balancing figure to Branch adjustment account because it's some you sold it at extra profit and here all the profits are adjusted initially through which account Branch adjustment account then Branch datar account we prepare usually why do we prepare Branch datas account because credit sales or cash received from datar information will be missing to get to know that we prepare Branch datar account then we prepare Branch cash account why do we prepare Branch cash account cash received from datar or cash sale information will be missing to get to know that we prepare Branch cash account then Goods into Branch account be adjusted with what head office purchased the goods and they send it to branch that means it is a is related to what purchases so Goods into to Branch account you adjust it with purchases but Goods will be sent at invoice price purchases shown at cost price Ledger will not will perfectly match out there will be a balance that is nothing but loading element on Goods sent to Branch all loading element here are adjusted through which which account Branch adjustment account then finally we prepare Branch adjustment account to remove loading elements on three things opening stock closing stock goods and to Branch account any balancing figure in Branch adjustment account represents the gross profit made by the branch which will be transferred to Branch Pendle finally prepare Branch Pendle account to get no final profit or loss made by the branch that's all is the rule yes you see how I remember practice that's all one or two questions if you practice it'll come the same thing so don't skip all this question okay so initially it look like maybe tough if you forgotten I'm seeing okay in a class we have done at least I think I remember doing at least two questions on this okay that time you would have understood but the problem is after class you would have not revised later on next you will open the book only on the examination day that is a problem in that case all the things you would have forgotten that's the reason I've given you all notes also entire Point I've dictated in your notes if you forget it if you open flip through the notes you'll get all this okay but I don't have time to go through all that because this is not regular class this is a last time I checked it was a revision class but it is going like more like a regular class according to me yeah all the time extra I'm taking yeah no problem it's fine you are giving me weird look that's the reason especially you you two probably when last you attended class one and a half years back that is a problem okay no issues H some of the recorded guys who are watching this class they're saying I I to watch this because they would have watched the class only one month or 15 days back they feel all this is anyway we know of if you know it you were able to recollect it awesome okay fine so let's go for the next question mahavir the Kolkata started a branch in hosur so the key word there is started you started a branch in the current year means will you have any opening stock that means no opening stock no opening balance of debt are in fact no opening balance at all correct because you started the branch only in the current year goods were sent to the branch at 20% above cost branch makes both cash sale and credit sale great Branch expense are met from Branch cash and balance money is remitted to head office so how much of money branch has no first entire money they will not give it to head office some expense deduction they will do and then balance only they'll remit to head office branch does not maintain Double Entry books that means automatically it is what kind of a band Branch dependent branch and necessary accounts relating to Branch are maintained in head office so head office only maintains brancha account further details are given at the end of they're saying what check show the necessary Ledger account according to stock and datar system so clearly mention the method okay in stock and datar Method how many ledgers you need to have Branch stock Branch datar then you have Branch cash Goods into Branch account Branch adjustment Branch PN have all the ledgers first the best way to do this particular Ledger is Don't Close The Ledger one by one because all the ledgers will be interconnected here so what you do is you need six ledgers now all the Ledger format first you draw and read the component one by one that component you have to go on posting into the ledgers that's all is this have six ledgers go on posting one by one can we do that so all the six ledgers I have it here first Goods sent to Branch account 50,000 in fact one minute they told what sir cost of the goods s to Branch account how much 50,000 okay so Goods s to Branch account where it will come are we preparing trading account here or Branch stock account when in Branch stock account when Goods is sent means Branch stock will be same or it will increase it'll increase yes so where will you post this for branch it is like purchases so where this entry will come on the debit side yes so debit side of which account Branch stock account in Branch stock account you write to Goods send to Branch account but the catch here is Branch stock account no all the component should be shown at invoice price but this 50,000 what they give is the cost price so can we take cost price no what value were the goods sent at 20% above cost so 50,000 plus 20% du how much is that 60,000 that means the value will not be recorded at 50 it will be recorded at 60,000 opening balance is zero because Branch was only started in the current Ser done now okay so what is the entry for this Branch stock account debit to Goods s to Branch account are you opening Goods into to Branch account yes in that ledger May what is the posting in Goods into Branch account you'll post it as by Branch stock 60,000 like that post it off simultaneously otherwise you will forget it each Ledger posting simultaneously you need to go on pushing here do not forget that yes next component we'll go for goods received by Branch till 31st March at invoice price 50 four sir how much Goods we sent 60,000 how much Branch received 54 that means that 6,000 is a Goods in transit G that Goods is still in Highway okay but anyways these are branch and datar no sir Whenever there is a branch and datara system no if head office says I've sent the goods and if the goods is in Highway we can record Transit items we can record Transit items like I asked you what's the name I forgot darh so suppose DH is suppose DH is our student okay she has to pay fees okay you already paid paid okay she has to pay fees let's assume okay let's say she has to pay a fees of 40,000 rupees for inter coaching now sir we asked her there any darini when will you pay the money he said I'll pay tomorrow sir P today only we'll go and pass the journal entry bank account debit to g account will we do that will we do that or we not do it we not do it why because as far as a company is concerned don't take to your heartware okay as far as the company is concerned student is separate company is separate correct only when the student pays the money then only we will record yes correct but in case of branch and and head office there is a they belong to different companies or same company same company so if head office says I've sent to the goods and it is in Highway can Branch trust that and do the accounting yes I'm not saying I don't trust you okay just saying that's the way we do it in case of an outsider we will not record Transit item but in case of Branch or department and all know Transit items are recorded the transit items could be goods and transit or check in transit both okay so here how much is the goods received by head office only or how much is the goods received by Branch only 54 but how much Goods was sent 60,000 that means how much goods are still in Highway 6,000 so should be recorded yes should be already recorded it yeah here we did not take 54 we took 60,000 this includes what sir Transit it manageable because in case of branch and head office Transit items are recorded like that yes next credit sale 58,000 what's the journal entry for credit sale normal entry dats to sale but here will we say datar to sale or datar to stock datar to stock so in Branch stock account what will be the posting by Branch datar how much 58,000 yes sir so in Branch datar account what will be the posting in Branch datar account you'll write to Branch stock account 58,000 okay saru next s s invoice prices sir yes sales are any which we made at invoice price datar as on 31st March datar as on 31st March means it is datara closing balance datar will not have opening balance because branches just started but datara closing balance is given to to be 20,800 which we ticked off okay next bad debts and discount written off what is the journal entry for bad debts bad debts to dears so in your dears Ledger the posting will be by bad debts 200 yes sir sir this bad debts is an expense now are we preparing pendl account yeah that means this bad debts will also be transferred where to pendl account in Branch pel account are you able to see bad Debs yes that is a transfer entry so immediately transfer in every account don't keep it any pending there because otherwise you lose the connection okay next what is the next they have given cash remitted to the head office are we preparing Branch cash here yes when the head office remits or when Branch remits their bank balance will reduce what's the journal entry sir there what's the journal entry sir you can pass the entry like this the for in ideally in the books of Branch the entry should be what hoo account debit to bank account okay in the books of head office the journal entry will be bank account debit to Branch Branch account correct no but here who is doing all this accounting H H only that means what will H say bank account debit but whose money back who bank balance reduced Branch car so in your branch cash in your branch cash balance the posting will be what sir by bank account is that okay or if it's confusing for you you pass the entry from ho perspective only because all these are in working notes it's okay okay what's the journal entry for cash remitted to the head office what's the journal entry for cash remitted to head office head office account debit to Branch cash account yes so head office account debit to Branch cash account so in Branch cash account what will be the posting by head office account is that okay so if you if you can clearly remember it you write you can write it as byy bank if buy bank is confusing for you because there is also branch bank there's also bank if it is confusing for you instead of Bank write it as by ho it is fine okay saru all right how much is that sir how much is the value of remittance 43,000 so 43,000 can we take off yeah next one what is the next one they've told cash in hand at the branch as on 31st March as on 31st March what is this closing balance of cash opening balance of cash is zero because branch is just started closing balance is given to be 2,000 great next is what cash remitted by the head office to the branch that means Branch cash balance will increase so pass the entry from Branch perspective only for easy perspective if branch has received money from head office what's a journal entry bank account debit to or bank account debit to head office account so what will be the posting you'll write to head office account actually the entry should have been to bank instead of that you can also write it as to Ho to avoid the confusion for you yesu so how much money has been received from head officer 3,000 rupees yes or if you wanted an even more simple terms sir debit side of bank account is for receips credit side is for all the payments so if you're receiving means if branch is receiving means put it on the receip side if Branch isay branch is paying means put it on the credit side is that okay all these are working notes and the name will not make much difference there comfortable okay next is what sir can this we have already targeted next closing stock of the branch at invoice price where will closing stock come in Branch stock as what it will come on the credit side you already as buy balance carry down but hang on this is closing stock at no no no closing stock at Branch but but but but but but this is the value of the goods at Branch every Goods Branch received or some are in Highway some are in Highway that means this 6,000 includes that Highway item or it does not it does not but should we include it yes we already included it in Goods into Branch account that means it should also be included in closing stock also the value of closing stock they have given is how much 6,000 but 6,000 are in Highway that means the closing stock value is not 6,000 it is 6,000 plus 6,000 which is 12,000 understood okay because branch has not received this Goods so it is not there in Branch go down as per Branch go down the value of the goods that with them is how much only 6,000 but in case of dears and head office in case of ho and Branch will we record Transit item yes hence the closing stock will not be shown at six it will be 6 plus 6 which is 12,000 easy saru okay next is what sir expense incurred by the branch Branch Branch incur some expense means it Branch cash balance will reduce it's a payment payment where it will come credit side or what is the journal entry for expense paid expense account debit to Branch cash so in Branch cash account or Branch bank account what is the journal entry or what will be the posting by expense account there expense where it will go are you preparing any pnl yes expense will come come in P yes in P account you write it as two expense how much 12,000 rup corresponding post okay all right anything done or everything accounted everything accounted now now sir here before you close in hararo always check each Ledger will be connected here first let's look at datara Ledger do you know datara opening balance zero not there closing balance Yes Credit sales do you have this brand stock is nothing but what sir this is your credit sales so what information is missing from Branch datas account you made some sales also you have closing balance also you have bad debts also what is the information is missing cash received from datar that's what I told usually we prepare Branch datar account to get what either to get cash received from datar or credit s here credit sale information is given so what is missing cash received from cash received from datar information is missing what's the journal entry for cash receive from datas who will receive head office Branch will receive Branch so posting will be Branch cash account debit to Branch datar account so you'll write it as what buy Branch cash account arrived as a balancing figure understood so this Ledger is completely closed any problem so same entry you have to post it in Branch cash also what will be the posting in your branch cash account what is the posting for this what is the entry is Branch cash to Branch datar so in your branch cash account what will be the posting you'll write it as two Branch data 37,000 corresponding posting yes sir okay so usually I told why do we prepare branch bank account or Branch cash account either to get cash received from datar that already we know or credit sale as a balancing figure to get one of these components we prepare Branch cash from okay another cash sale either to get cash sale or cash received from datar we prepare this account cash receip from datas we already know now add up Sir this side total if you do it it is how much 45 55 57 that side also should be 57 is it matching or balancing figure we're getting 177,000 as balancing figure so what is that balancing figure it is nothing but cash sale what is the journal entry for cash sale cash to sale or cash to stock here cash account debit to or Branch cash account debit to Branch stock account yes or sir so this Ledger is fully closed St this this uh entry will only affect a branch bank account or also it will affect Branch stock account Branch stock account in Branch stock account what will be the corresponding posting by Branch bank account or Branch cash account 177,000 is a corresponding post yes sir all right so all the components has come in branch stock account ideally bran stock account should get matched is it matching or balancing figure here we're getting 27,000 balancing figure that means did we sell the goods at invoice price or much higher much higher that means is your profit Element no here all the profit element are initially transferred to which account Branch adjustment account so you're transfer it off to Branch adjustment account derived or balancing figure balancing figure yes sir so this what is the posting you'll pass in Branch adjustment account now the entry here is Branch stock to Branch adjustment in Branch adjustment account what will be the posting by by Branch stock account 207,000 yes saru okay next we have one more account called Goods into to Branch account I told Goods into to Branch account should be adjusted from what purchases sir what is the cost of the goods you sent to Branch 50,000 so you purchase the goods at 50 but invoice price is 60 what is the cost price 50,000 that means you'll write here two purchases how much cost price of 50,000 yes sir because Goods into Branch you have to adjust it from purchases purchases what balance or if you're confused with the entry purchase is what balance debit balance Goods sent to Branch you are adjusting with purchase so purchase will get nullified purchase has debit balance how do you nullify it credited what are you adjusting with goods and to Branch account goods and to Branch account so what is the entry Goods s to Branch account debit to purchases account as a entry but this entry has to be passed at invoice price or cost price cost price so you pass that entry is a this Ledger matching or there is a balancing figure balancing figure what is that balancing figure in loading element of on loading element on goods and to Branch here all the loading element or profit element will be adjusted through which account Branch adjustment account so this 10,000 loading element will be adjusted to Branch adjustment account like that okay sir so what will be the posting and Branch adjustment account here you have written Goods sent to Branch to Branch adjustment so there you'll post it as what sir by Goods sent to Branch yes or sir okay now go back to your theory it's a dependent Branch means on three things you need to remove loading element opening stock closing stock Goods into to branch what is this 10,000 loading element on goods and to Branch already removed only two things we need to remove that is opening stock or stock Reserve opening stock comes on which side debit side so stock Reserve adjustment will come on which side credit side so you write it as by stock Reserve here I'm writing as zero why opening stock is zero so the profit element on opening stock is also zero closing stock comes on which side credit side loading element removal will coming on the debit side you'll write it as what two stock Reserve what is the invoice price of closing stock sir invoice price of closing stock is how much 12,000 so you already know the equation what is the invoice price 120 that means this 12,000 represents 120 we want profit element which represents 20 so 12,000 into 20 divided by 120 you how much you getting 2,000 Rupees that is a stock reserve on closing stock any balancing figure in Branch adjustment account represents your gross profit which will be transferred off to Branch P so the entry is Branch adjustment to Branch p in Branch P what will be the posting what we write in Branch P usually write by GP broad down here we'll write by Branch adjustment okay by Branch adjustment 305,000 these two expense you deduct any balancing figure in Branch P account represents what the final net profit made by the branch which is this that's tell me any D hardly any calculation all data they'll only give you have to have six ledgers and go on doing the posting most probably even Transit item they may not give I brought in transit item because I thought maybe this is a good adjustment to have Transit item also they will cut most probably all the data as it is they will give you just have to take it and dump it into the ledger so when you look at it initially it look like what is this crazy but once if you practice it is what easiest all this will help you to clear the examination soon because all these are simply rule based no deviations just take the data dump it into the format Marks full marks into your pocket if you do all this properly no way that they can deduct the marks everything they have to give you what compulsorily if it comes for eight marks evaluator has to give you how much eight marks only so the chances of losing is what very less but the K the whole Crux is to remember and put it across that's the reason I've given you all those pointers so refer all those pointers in your notebook regular class May I've given all that in case if you forget that now any which we have revised it so you should be able to remember it just in case again if you remember you can go back to your notes or you can refer to this video again whatever is your call so this is another one okay saru last aspect is there can we go for that yeah sir because if you remember the chapter name it was Branch accounting including foreign Branch so if it is a foreign Branch what to do okay so this is not new things to us we already know this tell me where we discuss foreign Branch uh accounting standard 11 Whenever there is a foreign Branch first you need to figure out whether it's an integral foreign operation or a non- integral foreign operation whether it is an integral foreign Branch or a non- integral I gave you the indicator already for that yes no I'll not go into that but tell me the exchange rate sir if it's integral fore an operation all monetary item converted at closing rate all non-monetary items depends on how it is valued if it is already valued at cost you use tdsr transaction date spot because you already converted con use the same thing however if it is valued at fair value or NRV means find out the exchange rate on the day you found out fair value and that data exchange rate you have to use and you have to Recon and for all income and expenses you have to use average rate for integral foreign operation normally they'll give you in this sort of problem they will give you trial balance of foreign Branch they will give you trial balance of foreign Branch you need to convert that into Indian rupees okay or it could be other way around also sometimes they ask it in Ulta way also we'll see that okay when you have to convert this trial balance are you using same exchange rate here or different different different different that means will the trial balance match or there will be a balancing figure balancing figure if it's integral foreign operation the balancing figure is nothing but your exchange gain or loss transfer to P however if it is a non integral foreign operation again they started out drilling oh H okay if it's a non-integral foreign operation is non-integral foreign operation much important to us or not so important not so important that means all monetary item or non-monetary item will convert it at closing rate for income and expenses we need transaction data rate which will be mostly not available to us in the question so we will use average rate itself however when you convert this trial balance no you will get some balancing figure and balancing figure is nothing but exchange gain or loss you'll not transfer that to Pendle you'll park it in fct foreign currency translation so that's so funny no I think difficult no no they started okay probably they finished all that I also can't say anything now okay are we comfortable with this now sir okay so this is the rules we have to apply this in one of the question can we quickly apply this in one of the rules okay so let's take up one of the study material question itself on 31st December 20 X2 following balances appeared in the books of Chennai branch of an English firm having a head office in New York so it is Dollar to Rupee conversion or rupe to dollar conversion it is rupe to Dollar conv Ulta scenario because head office is there not in India head office is there in New York uh for online also is it audible drilling sound is it Audible okay for us so it is a little difficult okay no problem so here you have to convert all the rupee value into dollars because the head office is there where in New York okay that's the thing so this you need to be a little careful of so they have given you all the data they'll also tell you in the problem there stock as on 31st December is 6 lak 37500 so there's nothing but your closing stock work it Branch account in New York book showed a debit balance of 13,000 400 on 31st December 20 X2 little difficult to conduct class like this no okay Furniture appeared in the head office books at how much value 17 5 okay so we'll see this the exchange rate on first 31st December 20 X1 stop they've given the data the the year is ending on which date 31st December 20 X2 they have given here 3st December 20 x one so that means last year last year closing rate will become current year opening rate so how much is 31st December 20 X1 rate 52 that is nothing but your opening rate okay on 31st March 31st December 20 X2 exchange rate is 51 that is nothing but your closing rate average rate they have given it to be 50 so basically opening rate is 52 closing rate is 51 average rate is 50 that's what they have given because we need for a few components we need these rates that's the reason we have written so all you have to do simply do is convert this and they're asking you to assume what sort of an operation integral fore an operation sometimes they may give you indicator or sometimes they'll only tell whether it is integral or non- integral here what is it sir integral so if it is integral what is the rule monetary item closing date non-monetary item tdsr tdsr means transaction date spot rate you might have furnished you might have bought an asset 15 years ago 5 years ago that means what 15 years ago exchange rate they can give off no that's the reason if you just check for furniture no sir they already told the dollar value how much is that 175 normally in these cases for fixed assets they will only give us separate exchange rate or they will only give that converted value here all the rupees we need to convert it into dollars so that is already converted at what value 1750 because for furniture we need tdsr transaction date spot rate trans transaction would have happened many many years ago we don't know that's the reason they would have converted is it fine so that means for this we need to convert or just take this value just take this value that is one okay that is got it monetary non-monetary item over all income and expenses average rate any difference any exchange gain or loss you'll transfer it to end account so the first step is to prepare the trial balance convert the trial balance from rupee to dollars so let's write that we'll bring this a little closer and we'll do this okay first sir or you tell me sir this is opening stock for opening stock what rate will you use for opening stock what will you use opening stock is a last year closing stock so for opening stock we will use opening rate for opening stock we will use opening rate sir we should be multiply exchange rate or divide sir if you're confused always put for one here dollar or first I'll put rupees and then we will have dollar okay so do you know the opening rate how much is the opening rate 52 so $1 is equal to 52 rupees $1 is equal to 52 rupees how much is the rupee value of opening stock rupee value of opening stock is 234,000 so that means what is the dollar value that means you have to multiply or divide divide so one if you get it you got to know no so all the exchange rate now we need to multiply or divide divide so do that 252,000 234 divided by 52 45 like this can we directly check Division and all it's okay can we trust okay next they have given here only we'll take purchase and sales purchase and S is pnl item for PN item you have to use what rate average rate what is the average rate 5050 they've converted this rupee into Dollars by multiplying or dividing divide okay that and credit are Bill receivable bills payable both are what items sir dear credit are Bill receivable bills payable they are monetary item all monetary item should be converted using closing rate what is the closing rate 51 that's what they've taken CR as in closing rate yes sir okay next salary wages Rent All These are what items income and expense for income and expense average rate what is average rate 50 they have converted yes sir all right furniture furniture we have to convert or they only given they only given how much is the furniture value 1750 take it as it is okay because we need tdsr so instead of tdsr they only converted and given to us next bank account or bank is what item if you have money in your bank cash bank and all is a monetary item monetary item again should be converted using closing rate which they've taken yes or sir sir Branch will maintain ho account ho will maintain Branch account these are just for the sake of reconciliation ho will show probably Branch as a like ho will maintain Branch account since ho has sent the goods to the branch ho has to collect the money from Branch so that means Branch will have a debit balance okay when you prepare Branch account they will maintain heto account since branch has a liability to pay the head office heto account will have a credit balance do you think these two balance will be different or same same if you have any Transit items Goods in transit or check in transit I've done two problems on this in regular class then these two balance may not agree you have to prepare a Reconciliation statement otherwise mostly this balance will match check the data in the question this is a data relating to the branch no branch is maintaining head office account what is the head office name New York they are maintaining this in what value rupee value but head office will maintain it in rupee value or dollar value they have already given check Branch account in New York books New York books means head office C books has shows a debit balance of how much 13,400 so head office will show this as a debit balance Branch will show it as a credit balance will the value change or or same value that means should we have to convert this or already done already done ho is showing it at what dollar value 13,400 so conversion or take the actual actual so for this New York May don't have to convert take the value they only converted and shown it as 13,000 for understood sir for branch for branch remember if you're confused about debit and credit check the data here New York account is shown under debit side or credit side this is your debit and this is your credit this should shown under which side credit side I means after conversion also it should be shown under credit side that's what they've done here because for branch this hoo account is a creditor creditor will have what balance credit balance like this so when you convert this stal balance are you converting it at same rate or different different rates different different rates so will the trial balance match or there will be a balancing figure balancing figure that balancing figure is exchange gain or loss but this is what kind of a branch integral foreign operation and what does accounting standard 11 say any integral foreign operation if you get any exchange gain or loss that should be transferred to P so this exchange gain or loss whatever if it comes on the credit side it is an exchange gain if it comes on the credit side it's an exchange gain because what is the nominal account C rule debit all expense and loss credit all income and gain so if you get it on the credit side that means it is an exchange gain if you get it on debit side it is an exchange loss show that exchange loss as a balancing figure and trial match the trial balance like this okay sir this is one question generally comes for eight marks this will carry around three to four marks easy easy manageable after this you need to Simply prepare a trading Pendle account sir that's what theyve asked trading pnl can you manage this is simply after this you have to Simply prepare trading pnl account okay so for or you you just check over quickly what is what what is the first component in trading account opening stock now you have to prepare all this trading pel not in rupees in dollars what is the opening stock in dollarars 4,500 take now yes then what will come purchases do you have purchases yeah purchases how much 31 250 okay sir sir Branch will head office will send the goods to the branch no sir sir it's a foreign Branch maybe possible that head office is sing you only purchase it if I have to send the goods I have to incur heavy Transportation cost so it's better you only purchase it that's the reason here we don't have or we don't have that much of goods sent to Branch account is it sir okay that means why head office why branch has to pay money sir to start the branch who will pay the the money who will give Capital to start the branch who will give Capital head office that means who gave that money head office only so that means head office will recover that yes or no that means head office account will be a creditor for the branch only yes or saru so purchase accounted next what is there sir sales sales will come yes sales will come on which side credit side so 46 875 they've shown yeah then what will come sir datas and credit datas and credit or line by line item we'll take it off from here only better because theyve asked you trading pnl as well as balance sheet so this datar and credits where it will come balance sheet datar will come in balance sheet check have they shown dears in balance sheet this is your branch balance sheet dats at $115,000 what about credit sir what is Credit Value 10,000 credit where it will come liability side check on the liability side have they shown credit 10,000 yes okay next come to the next item what is the next item Bill receivable bills payable Bill receivable on the asset side bills Li bills payable on the liability side so Bill receivable here bills payable here yes correct sir going fast or okay okay simple you have to just convert trial balance use a trial balance to prepare trading and pnl account and balance sheet but prepare all that value for the branch in dollars not in rupees but in dollars okay next next what is the component that they've given next theyve given salary wages it's not wages and salary it is salary and wages stupidity but that's still interpretation works if it is wages and salary direct expense comes in trading account if it is salary and wages indirect expense comes in P account I don't know God knows when they'll take it off but study material is still following that we will follow so how much is the salary and wages rent and taxes 2 and 2125 both will come where trading account or pel account pel account 2 and 21125 in your P account here 2, and 2125 yes okay next is what sir furniture furniture where it will come balance sheet sir Furniture depreciation no data given so what to do don't depreciate so show the furniture and balance sheet at 17 5 next what bank account bank account where will come balance sheet 11,150 on the asset side yes shown next what uh New York account sir head office will show Branch account Branch will show New York account at different different value same value head office will show it Branch as a datar balance Branch will show H account as a credit balance both will get nullified is it okay it will get nullified where when you prepare overall company balance sheet are you prepared overall company balance sheet or only Branch balance sheet Branch balance sheet when you prepare overall company for one for branch it's a datar for a branch it's a credit for hoo it's a dear both will get nullified but are you preparing overall company balance sheet here or only Branch balance sheet Branch balance sheet there's only balance sheet of Chennai Branch so will head office come yes at what value you already converted that value how much is that 13,400 debit balance or credit balance credit balance so show it on the liability side 13,000 400 understood okay anything else is there exchange loss exchange loss where it come sir pel account have they taken exchange loss Pendle two yes okay saru now with the trading account closing stock have they given check outside the trial balance they've given closing stock how much is the closing stock 6 lak 37400 so don't take this value this value is in rupees we want everything in dollars that means for closing stock you lose what rate sir closing rate how much is closing rate I think it was 51 now closing rate was how much 501 we have to multiply or divide here divide 6 37500 divided by 51 you do how much is it 12,500 that's what my calculator is showing that's what they've taken here done now so trading account all the components you have considered any balancing in tra figure in trading account is what gross profit which will be transferred off to pel account yes no then you'll write in pel account what sir by GP brought down then any balancing figure will be transfered where sir net profit account this is a net profit of whom this is a net profit of whom Branch who will prepare overall company pnl head office that means Branch pnl what you'll do transfer it to Branch P you transfer to h p is that okay now here this Branch profit belongs to whom head office branch profit belongs to whom head office that means head office already has an account how B how much balance it has 13,400 this like this like Capital sir for a branch H account is like Capital what do you do for profits in case of capital what do you do for profits capital will profit will be added to the capital account so how much is brancha profit 17,500 added to the H account because H this profit is of the branch which belongs to the head office simply add it up the balance sheet will simply match up this is your presentation can you manage this much presentation the conversion is a main aspect for that you need to remember the conversion rate okay once you remember the conversion rate all everything remaining thing is just trading be underline balance sheet small small adjustment here and there if you're doing mistakes don't worry about it it is okay all right so but as much as possible in these sort of questions don't try to make any error because all these are very very straightforward and simple questions once go through it don't be that don't have that overconfidence I know it don't go like that even if you know it revise once it's okay all right just revise you don't have to solve at least once you revise like the way we did over here this comes on debit side this comes in pnl this comes in balance sheet like that go on revising that is good enough at least that much you do yesu all right so with this Branch car revision also so we have completed closing stock is stock is always a non-monetary but for closing stock usually we take the closing rate is what we we generally take that as such but uh yes but in a way if you talk about it also uh or another way around if you want to talk closing stock is actually a non-monetary item stock as such is a non-monetary item when will you find out closing stock at the end of the year closing stock you'll only get at the end of the year so which rate you need to use closing rate so even if you think like that also you'll still end up using what rate closing rate only okay now that's a good question okay so with this branch is fully Damar so all right people the next topic we'll be revising is preparation of financial statements okay so now financial statements this particular topic deals with preparing your balance sheet and preparation of your pnl account again a pure format driven activity and one or two extra concepts are there which we will revise so first we will directly go into the balance B sheet C preparations then we will come back to this charts so you have prepared a lot of balance sheets so tell me the balance sheet C format heading wise balance sheet of so and so company as on so and so date not date no particulars note number current year column previous year Callum because we don't prepare only give current year data we also give previous year data but usually in these sort of problems last year data will be missing so you can only have three columns particulars note number and amount so under particulars column Roman letter one equity and liabilities under that point number one shareholders funds under shareholder funds Point number one share Capital then reserves and surplus okay next is non-current liabilities under non-current liability long-term borrowings under long-term borrowings you prepare a separate working note for long-term borrowings and you show bank loan uh debentures etc etc then point number three current liabilities under current liability credit ours and all the short-term provision short borrowings credit ass outstanding expense all that will arise then the total up then Roman related to assets under assets Point number one non-current assets under non-current assets property plan and Equipment then intangible assets if you have any intangible assets under development you should have any Capital work in progress most probably all the data will be missing then if you have any non-current assets non-current Investments that also comes under non-current assets itself then point number two current assets under current assets you'll show your inventory datar etc etc yes sir so all this is your usual format and then what is the p and Dela format what is PN delka format I don't know whether I have it have it do you know okay p and Del format is what revenue from operations then other income revenue from operations and other income if you total you'll get the total income then you'll put up all the expense give the heading as expense and call out all the expenses first expense is what sir cost of material consumed how do you get cost of material consumed cost of material consumed is nothing but opening stock Plus purchase of raw material minus closing stock of raw material okay then it will be purchase of finished goods purchase of stock in trade that is nothing but your purchase of finished goods then changes in inventory changes in inventory what do you what do you capture opening stock of wiip plus opening stock of finished goods minus closing stock of WIP minus closing stock of finish Goods so basically all these are trading account components all that trading account components is captured in these three components in your new schedule Raa format yes then you'll capture what sir employee benefit expense employee benefit expense means whatever you pay youve already done whole of I5 so all that will come under employee benefit expenditure then it'll be your Finance cost Finance cost means your interest charges that you pay on your loan debentures etc etc then depreciation and amortization depreciation on property planning equipments amortizations on intangible assets then last residual category called other expense so whatever you could not fit in the above column will come under other expense category then you'll get the total expense from income minus expense if you do profit before tax then you'll reduct what sir don't say tax say tax expense tax expense constituents are in this all that in in preparation of financial statements all that is not relevant just for our revision tax expense means current tax plus defer Tax Plus M credit if any okay then you'll get profit after tax then finally in your P you also need to report EPS so you you know this already all this data we need to give it for continuing operation from here to here what you give it for is for continuing operation discontinuing operation only you need to give three data profit before tax of do tax expense of do and profit after tax of discontinuing operation Co and do profit if you add you'll get the profit for the period profit for the period is nothing but your total operations after this here your pnl ends and you need to prepare after that you need to give a disclosure of eps two types of eps basic EPs and duts all this will not come in your uh discontinuing operations and all will not come in your preparation of financial statements so they'll only give you current continuing operations data fine enough okay so the Crux is to remember the format and apply it in the question can we directly take one question and see how well we remember all this format yeah okay now one question I think that's come in MTP only so we'll take that MTP question only the same question is there in our study material also it's a repeat question but this question they've added a few extra things that's all following is a trial balance of following is a trial balance of Delta limited as on 31st March 2023 all the numbers are in thousands so what we'll do is sir we will read the data and moment we read the data we have to you have to tell me whether that components comes in balance sheet or pnl because here you have to prepare balance sheet as well as pnl the requirement is both you need to prepare balance sheet as well as p as per the schedule 3 format okay ignore previous year's figures and as well as ignore tax they have told okay so all that is information is missing so all you have to tell me is balance sheet component or pnl component if at all say balance sheet where in balance sheet it will come like that so one by one we will see and one by one we'll tick off in the balance sheet like this unticked we will see it later some extra disclosures will be there as in when I see that I'll go on telling you that then we'll go back to our chart book that only I've discussed again we'll rediscussed that yes that's the approach we will follow can we okay first land sir land will come where balance sheet under where under non-current assets and non-current assets we have a category called PP it will come there 800 yes no so normally we prepare a note for it come to note number they prepared note number what sir for PP note number five come to note number five have we take off 800 yes this is your note number five land value is how much 800 don't worry about other adjustment as in when we see we'll take off later we'll worry about the other adjustments yes okay next is what sir calls in are so what do you do for calls in are calls and are is deducted from the capital from equity share Capital you will deduct it yes call in Aras is related to share Capital no so you'll reduce it from equity share capital normally we prepared note number one for equity share Capital so check have they deducted five from equity share capital in note number one this is your note number one they have reduced fine there's nothing but your calls in are other things we'll see it later okay next is what sir uh where is the next item cash in hand cash in hand where it will come under asset side in balance sheet under which side current assets how much two so check have they shown for this and all you don't I mean you in fact the in current assets you show cash and cash equivalent so for cash and cash equivalent they prepared note number seven now I'll tell you the disclosure for this when you prepare cash and cash equivalent no sir cash in hand you need to show it separately cash at bank you need to show separately cash in hand separately cash at bank separately and even cash at bank how much bank balance you maintained with scheduled Bank you need to show separately how much bank balance you maintained with other Banks you need to show it separately so how for now how much what have you got it you only have got cash in hand how much is Cash in in fact we have got cash in hand how much is cash in hand two so check have they shown that in cash in hand note working note this cash in cash equivalent cash in hand they've showed it to two comfortable okay come to the next one what is the next one sir plant and Machinery plant and Machinery will come where in PPA working note in PPA working note check have they taken 824 yeah this is your PPA working note planted missionary shown at 824 other things we'll see it later next trade receivables inventory inventory as on 31st March so 31st March inventory is what sir closing stock so trade receivable and inventory where it will come in your balance sheet current assets so 120 and 96 check in your balance sheet if they shown so 120 and 96 so for trade datar also you need to have a working note you know what you need to show anybody remembers the disclosure for datar what do you need to show the working note debts outstanding for more than 6 months and other debts if any datar has not paid you the money for more than 6 months you have to show that dat are separately and other Debs you need to give a disclosure that we will see it later they'll give that in the disclosure we'll see it later for now we have got the total amount no okay next is what sir okay what do the next component they've given cash at Bank cash at bank will come where in cash and cash equivalent what is the cash and cash equivalent total I mean cash at bank they told 28 28 we have found off no we'll do it later as I told what disclosure you need to give for cash at bank how much balance is with the scheduled bank and other Banks all that information they'll give notes to accounts for now let this be there okay next what sir uh adjusted purchases sir adjusted purchases means how do you get adjusted purchase we have solved the same question in regular class adjusted purchase is nothing but opening stock plus purchases minus closing stock so usually closing stock will not come inside the trial balance closing stock will come outside the trial balance what have they given over here trial balance usually closing stock will never come inside the trial balance it will come outside why because closing stock is already included in purchase closing stock stock is already included in purchase that's the reason again if you show closing stock in trial balance trial balance will not match but here have they given you normal purchase or adjusted purchase adjusted purchase and how do you calculate adjusted purchase opening stock plus purchases minus closing stock so the closing stock was included in purchase but through adjusted purchase what did we do we excluded so that means now is does purchases include closing stock or it is excluded since closing stock is excluded from purchase now can closing stock come inside trial balance yes that's the reason closing stock is coming inside the trial balance for you closing stock is coming inside the TB understood because it is eliminated from purchase whenever they give adjusted purchase opening stock will not come inside trial Valance why because how do you get how do you get adjusted purchase opening stock plus purchases so opening stock is already added with purchase hence opening stock will not come inside trial balance but closing stock will come otherwise usually what will come opening stock will come inside trial balance closing stock will come outside trial balance but when they give you adjusted purchase opening stock has been added to purchase hence opening stock will not come closing stock has been eliminated from purchase hence closing stock will come inside of trial balance easy Okay purchase is how much sir 400 where will purchase come in balance sheet or p p balance sheet of P Pendle in pel you have a category called purchase of stock in trade okay sure there only so how much is that purchase in pnl are you able to see purchases adjusted 400 yeah that's what we have shown okay next most of the things so here will not involve calculation just taking the data and dumping it into format the maximum marks you'll get is only for remembering the format and presenting in proper notes that's all the marks will be there calculation will be hardly anything one or two at best may come otherwise no okay next is what sir Factory expense admin expense selling expense all this we have a separate category or residual category residual category what is that residual category other expense add all this 80 45 25 add all this 125 + 125 150 check 150 have they shown other expense in pnl this is your pnl other expense total is how much sir 150 that's what they've added they prepared a note for it but that's okay we have identified no so let's not worry about the notes or if you want you can come to the notes and take off so these these three components we can take off okay sir all right next is what sir debenture interest denture interest where it will come in pnl under which category under Finance cost how much 30 check how they shown Finance cost 30 in pnl finance cost pnl 30 they prepared a note but for one one item and all don't prepare notes if you have more than one item prepare note otherwise not required if you have time prepare it otherwise not required it's okay yes all right next is what sir come to the debit credit side share Capital where will share Capital come in balance sheet usually we prepare note number one for share Capital what is the value of share Capital here they've told 500 but do we have any calls in AAS yeah we have a calls in areas of five come to note number one share capital is 500 you deducted calls in a year so what is the final value 495 495 will come in the balance sheet yeah check they've shown 495 in the main balance sheet yes after deducting calls in AR what is the next component 10% debentures where will 10% debentures come under non-current liability under non-current liability we have a category called long-term borrowings under long-term borrowings you will show 10% debentures yes so so in the main balance sheet long-term borrowings directly they put 300 usually they prepared a note but you have multiple components or only one only one so if you have one component under long-term borrowings only you write 10% debentures 00 it is fine if you don't have a time otherwise prepare a note take a call based on time in examination next what sir General Reserve pel Security Premium all these are what reserves and surplus all reserves and surplus we prepare note number two come to note number two how much is a general Reserve 150 75 and 40 but two keep in mind this is pnl account opening balance what is the importance of this sir current year pel you are still preparing so when you prepare current year C pel you will get current year profit so that current year profit you need to add here because this is PN Del opening balance to this you add current year profit and you'll get p and Del closing balance is that okay with you okay so for now we are able to identify this 150 75 and 40 check come to reserves and surplus working note 15 75 and 40 no 150 75 and 40 we have ticked off other things we'll see it later next is what sir uh sales sales where it will come in your pendl account check in pel account have they shown revenue from operations ,200 revenue from operations 1,200 okay next what sir trade payable trade payable where it will come under current liability 30 check have they shown under current liability 30 in balance sheet is your current liability trade payable 30 okay next one provision for depreciation provision has what balance credit balance provision for depreciation may have a credit balance will you shorten the liability side no this provision is related to what assets this this provision is related to assets this is a provision for depr you know know as we can we can account depreciation under two methods charge method and provision method we already discussed that so this is your they following what method accumulated depreciation method or provision for depreciation method they following so provision as debit balance what you or credit of balance what do you do instead of showing it on the liability side it will be reduced from asset value so asset may have PP we are preparing any working note yes we preparing working note number five check under working note number five have you have they shown 150 working note number five provision they have identified as what sir 150 other things we'll see it later yes okay next is what suspense account sir suspense will come suspense will come no but that means our accountant has done some mistake so let's see let will this come in your balance sheet of pendl no it has to be sorted out we'll see why this comes or how we can sort this out first one by one we are reading authorize share Capital so authorize share Capital will we account or will we disclose discl disclos in fact in note number one note number one is for what sir share capital in note number one you have to give a few disclosures what is the first disclosure one is the authorized share Capital disclosures you need to give second one if any Shares are issued you have to show issued subscribed and paid up capital from that if there is any callar is deducted out of the issued shares you need to tell if any Shares are issued for consideration other than cash like bonus shares or if you purchase the asset and give away cash or you give away Equity shares like that so if any Shares are issued for consideration other than cash that disclosure also should be given so here how much is authorized Capital 80,000 shares of 10 each so how much is that 8 lakh check in note number one have they shown authoriz share Capital as a disclosure authoriz share Capital 8 lakh all the numbers are here in thousands no that's the reason they've shown it as 800 okay next next what is the next point they have told the company revalued the land at 960,000 go back so this is where you need to be little careful all the table value is in thousands but this value they have given full so don't directly compare this value also you need to represent in thousands so 9 lakh 60,000 if you have to represent in, what it will become sir 960 correct so revalued amount is 960 but what is the book value of the land as per the trial balance Book value of the land is 800 that means you have a revaluation loss or revaluation gain you have a revaluation gain of how much sir 160 what is the journal entry for revaluation gain first time you did revaluation and got a gain what is a journal entry land account debit to revaluation Reserve 1ak 160,000 so because of this what will happen land value will increase another Reserve will come for called revaluation Reserve check in land have they added 160 land we prepared working note number five come to working note number five have they added 160 yes that means land value will become 960 that's all one more under reserves in Surplus one extra Reserve will come called revaluation Reserve check have they added revaluation Reserve revaluation res 160 okay great next what is the next one issued share Capital include shares of 50,000 issued for consideration other than cash if you are issuing any shares for consideration other than cash what do you have to do you have to disclose this where in note number one what is a share capit each share face value sir 10 how much shares total you have issued for consideration other than cash 50,000 that means how many number of shares you have issued for consideration other cash 50,000 divided by 10 which is how much sir 5,000 so you need to give this check come to note number one have they disclosed this out of the above 5,000 shares have been issued for consideration other than cash that disclosure is mandate H okay next what come to the next adjustment suspense account we saw that suspense no what is the value of suspense in balance sheet sir 10 10,000 basically it is that they've given a breakout so check suspense account of 10,000 so in the table they have expressed it in th000 that's the reason they've written 10 here have written 10,000 that means this is full value so suspense account of 10,000 represents cash received from sale of some of the missionary more importantly the missionary is sold on which date 1st April 2022 so the year is trial balance is on which as on which date 31st March 2023 and you need to prepare balance sheet and all as on which date 31st March 2023 year is ending on 31st March 2023 but you sold the asset on 1st April 2022 that means you sold the asset at when year get so how much did you sell the asset for we don't know check this you sold the asset for 10,000 okay so suspense account of 10,000 represents cash received from sale of asset du fellow what is the journal entry for assets sold sir something else but you know what they passed they passed the journal entry bank account debit to suspense they passed the journal entry cash account or bank account debit to suspense because that's what they're saying suspense account represents cash received from sale of asset that's the reason suspense account is coming with a credit balance these are all credit balance no because they pass the journal entry cash account debit to suspense but hang on can we pass like that no read the full data cost of the missionary is 24,000 sir when they use the word cost what does this C cost mean original cost why is it important sir you are maintaining provision for depreciation method whenever provision for depreciation method is used I I told asset Ledger will always be shown at original cost because all depreciation you are transferring to ppal Ledger or provision Ledger you're transferring all depreciation to provision for depreciation ledger so fixed asset Ledger or PP Ledger will always be maintained at original cost now is this asset there or not there not there if asset is not there means can you show this asset or you have to derecognize it derecognize what is the original cost of the asset 24,000 that means you have to reduce asset Ledger by how much 24,000 now one more corresponding component provision for depreciation account is required as long as you have the asset if asset is no more there provision also should be closed what is accumulated depreciation or provision on this asset 20,000 so original cost is 24 you have depreciated this asset to buy how much sir accumulated depreciation is 20,000 that means what is the book value of the asset 4,000 you sold it for what value 10,000 that means you ended up making some profit Prof or you ended up making some sale oh you ended up making some profit or loss profit 4,000 worth of asset you sold it for 10,000 means you ended up making how much profit 6,000 rupees this is the treatment correct now this we have to express in journal entry tell me the correct journal entry by looking at this let's see I discussed this with you and I did cash flow statement also I told three things you need to add it should be equal to original cost I give you with entry what is that tell me an entry tell me an entry entry only yeah tell me entry for this simple if you're getting confused you did you sell the asset so money will come in so bank account debit is the asset there or gone gone so provision is required or not required not required provision has what balance credit balance how do you close it debit it so provision account will be debited so first entry will be cash account debit provision for depreciation account debit yes sir now asset is there or asset is gone asset has what balance debit balance how do you cancel it credited asset is shown at what value since maintaining provision for depreciation method asset Ledger fixed asset Ledger will always be shown at original cost that means you have to cancel it to what extent original cost so you'll credit PP by how much 24,000 journal entry matching or there is a difference what is a difference 6,000 which is nothing but profit on sale which will be transferred to theend account so the correct entry is this sir cash account debit provision for have written accumulated depreciation instead of accumulated depreciation you can write also right provision for depreciation so the entry is cash account debit provision for depreciation account debit to planted missioner to profit on sale but our super duper accountant simply passed one entry cash to suspense that means now we need to rectify you have to pass a rectification entry so how how the trick how should rectification entry be passed rectification entry and wrong entry if you add you should get correct entry that's the trick so in correct entry suspense is there no suspense has credited so you need to close what will you do debit suspense account is there any mistake in cash account cash should be debited by 10 he also debited by 10 so no mistake in cash so leave the out what should have been debited accumulated depreciation did they debit no so debit now accumulated depreciation how much 20,000 what and all should have been credited PP and pel did they credit no that means now credit PP account debit to P so this is your rectification entry they not ask the entry okay you don't have to write the entry this is just for your reference now this impact you have to give it in your balance sheet and P okay one by one impact accumulated depreciation accumulated depreciation is nothing but provision for depreciation so this is a provision for depreciation relating to the asset sold if asset is sold means provision Pro depreciation balance will be same or it'll reduce reduce for provision you're maintaining a separate working note or PPA working note only in PPA working note due to this adjustment provision for depreciation balance should increase or reduce due to this asset is no more there if asset is not there means ision for depreciation required or not required not required so 20,000 provision for depreciation you need to reduce check have they reduced note number five this your this one depreciation 20,000 they have reduced all the numbers are in th so 20 they have reduced okay now sir did you sell the asset yes asset was shown at what value original cost what was the original cost 24,000 if asset is no more there means asset ledger balance will be same or it should reduce it should Reduce by what original cost so 24,000 have the reduced yeah is that okay that's another tick mark this 824 minus 24 they've got it as 800 it's fine done sir all right next impact so these two impact we have pushed this is over this is over what about pnl 6000 this is a profit on sale profit on sale you will show it as revenue from operation or other income check in pnl have they shown this as other income 6,000 yes 6,000 they have shown it as other income there is nothing but profit on sale of planted missionary these are the three impacts given that's all this way suspense account also got nullified suspense will no more come in your balance sheet or pnl because it is fully closed off by passing rectification entry you don't have to pass entry in exam only for your reference okay come to the next adjustment then depreciation is to be provided sir depreciation is to be provided so already accounted or to be accounted to be accounted at what value depreciation to be accounted on planted missionary at 10% on cost so what is the cost of planted missionary 82 824 into 10% don't do 824 into 10% don't do why sir in this 824 one asset got sold on the first day how much was the asset cost 24,000 so in 824 24 cost of the asset is gone that to on the very first day that means will you calculate any depreciation on that no that means you'll calculate depreciation only on the balance balance is how much 800 what perc depreciation 10% so 800 80% is how much I mean 800 10% rather is 80 yes sir so what is the journal entry for depreciation here sir what is the journal entry for depreciation under this method and we are following provision for depreciation method so the journal entry will be the entry will be depreciation account debit to provision for depreciation how much sir 8080 and depreciation is an expense expense where will you transfer to P so P account debit to depreciation 8080 now this impact we need to push it in balance sheet and P so depreciation is an expense it'll come in your pend we have a separate category called depreciation and amortization check P have they shown 80 yeah depreciation is 80 sure yes now this depreciation where did you what did you credit provision for depreciation provision for depreciation already has credit balance again you credited means its balance will reduce or increase increase check for provision for iation you are maintaining a separate note or PP a working note come to PP a working note and have they added yes they've added okay why have they reduced 20 because this reduction is to planted machinary sold why have they added 80 this is current year depreciation that's Ser okay that means what will become the provision balance 150 - 20 + 80 is what 230 210 okay so from 800 value of the asset reduce 210 provision for depreciation so final balance of pp will become how much 590 rupes that you will show in your balance sheet easy s next s what is the next one sir bank balance includes 5,000 with ABC Bank which is not a scheduled bank so what is the total bank balance that they've given in main trial balance check total main bank balance is how much 28 in this 28 they are saying here in this 28 they are saying 5,000 is with with ABC Bank which is not a scheduled bank so in 28,000 here the total cash bank balance is 28,000 if 5,000 is not with scheduled Bank means balance 23,000 will be with scheduled Bank this is calculation or this is disclosure disclosure where do you show cash at bank and cash and cash equivalent yes for cash and cash equivalent are we making any note yeah cash and cash equivalents we made which working note there is that working note number seven check have they break given the breakup yeah cash with scheduled Bank 23 cash with unscheduled bank or other bank 5,000 so total bank balance is 28 which we identified and already ticked also yes sir so means total bank balance is how much or total cash and cash equivalent is how much considering all the things 30 30,000 okay next working note what is the next working note make provision for tax at 30% this will affect what sir in pnl account you have to make provision for tax at 30% finally what is the profit you got in fact I think pnl everything we have ticked off no so all income ticks all expense income minus expense only is profit so calculate tax at 30% 546 30% is is how much 16380 correct so what will be profit for the period or profit after tax 382.33 yes sir sir provision for depreciation what did you do you reduced it from the pp why because that provision was related to PP provision for tax is it related to any asset no that means provision for tax should be shown separately on the liability side which liability current liability because taxation liability you settled after one year or within one year within one year so under current liability you have short-term provision category there this provision for tax should come for 163.5 that is one checkpoint you should not forget it yes sir that is one already done so what is the current year profit after paying tax how much profit remains 300 82.2 where will you show this will you add it to Capital in case of company profit will be added to Capital or show it separately show it separately you already already they give pnl account opening balance what is current year profit 382.33 2.2 they have added so that means what will become the total pnl balance 457 all the reserves and surplus has been ticked off so total reserves and surplus is how much 807 .2 that will be pushed to your main balance sheet anything else is there H trade receivable of 50,000 are due for more than 6 months so what is the total datar that they have given in the balance sheet check where is that tradeable is how much 1 lakh or 120 that is in thousands so total trade receivable is 120 in that they are saying 50 we we want 10,000 no in this 50 are they are they saying more than 6 months in 120 if 50 is outstanding for more than 6 months means balance will be other debts so for dears also you need to give the same disclosure how much debt is outstanding for more than 6 months and other de check have they prepared any note for datas yeah they prepared note number six in note number six have they given this six months outstanding W check in trade receivables they said debts outstanding for more than 6 months 50 other debts is 70 total dat are is still 120 this is just a disclosure no calculation okay anything else that's all anything else we kept it pending ah check your B your notes first anything we unchecked long-term borrowings I think we did not make a note provision for tax we directly wrote it yes so rest everything is a total yesu that's all sir everything else is just a taking off approach so everything else will come in over manageable so like this so first what you do ideally is normally we prepare note number one for share Capital note number two for reserves and surplus but you'll not be able to prepare balance sheet unless you know current year car profit okay for pnl also you need to prepare notes but you don't know how many notes numbers are required for balance sheet hence what do you do with yes first you always present balance sheet in page number one present pnl in page number two first page when you are solving you present balance sheet format you have then you have pnl format then start your notes to accounts okay leave around two pages those two pages are for your notes to the balance sheet then start notes to pnl don't give any numbering to notes to pendl only prepare notes just write note note number you write numbering you do it at the end start your pendl notes and prepare your P once current year profit you know can you close balance sheet yeah then balance sheet you know note number one is for share Capital note number two is for reserves and surplus note number three is for long-term borrowings then balance sheet ends at note number five P andela note will start from note number six then you start P andela note number is that okay prepare in this format because usually if you just check companies act no part one of company's Act deals with balance sheet part two of schedule three of companies that deals with P hence first you'll always have to present balance sheet then you have to present PN but for preparing balance sheet pnl is necessary hence you don't know how many notes are required so do this approach understood what I said work so is this question any dumb or not no dumb just the formatting error a little practice so these are very very simple questions but the only Crux is the time time and your memory these are the only two things that will play out over here okay so now we'll quickly run through the disclosure aspect that's what I've given over [Music] here ah okay sir first sir I think we already know few of them in note number one note number one is for what sir share Capital what and all you'll give disclosure you'll give one you'll give a disclosure of authorized share Capital then issued subscribed and paid up Capital if there is any call scenarios reduce it also one more disclosure if any Shares are issued for consideration other than cash like bonus shares or asset purchased and shares issued like that disclosures you need to give that is one next next disclosure is what do you do for call andaras reduce it if you have taken a loan if you have taken a loan where will that loan come under usually long-term borrowings because usually the loans are not short-term loans loans loans will be usually long-term loans so loan taken no sir loan you need to give a breakup what is a loan breakup you need to give is how much loan have you taken from Bank how much loan you have taken from related party how much loan you have taken from others in some problems May they'll give you this data not a popular adjustment but can come okay all this will be given to you in adjustment they will say you loan value is 10 lakh out of this loan from related party we took two from bank we took uh seven uh 8 lakh that means from other party we took zero like this so basically out of the loan you need to tell how much from the bank how much from related party how much from others and out of this loan you need to tell how much is a secured loan and how much is unsecured loan because whenever you take a loan no sir you will give something as guarantee so you need to tell both the secured as well as the unsecured portion all this question we have done it in regular class now I can't go through every question so discussing the main main adjustments yes okay next another part you need to know is bank balance bank balance you already know the disclosure what do you need to disclose basically banks will be shown under the main category cash and cash equivalent okay so under this cash and cash equivalent cash in hand you need to show separately cash at bank separately in cash at bank there are further disclosures what is that how much balance you have it with scheduled Bank how much balance you have it with other Banks you need to show it separately then when it comes to trade receivables you need to show how much debt is outstanding for more than 6 months and how much is the other debts all right and one more pointer you need to keep in mind is the dividend sir if any dividend simple thumb rule of dividend is dividend you will account on the Declaration date dividend will be accounted only in the Declaration date let's say current year is first 1 April 2024 to 31st March 2025 this is our current year all right so uh dividend will be declared in AGM so let's say annual general meeting was held on 1st July 2025 where they declared a dividend of 10% for which year for this year for current year they declared the dividend in AGM but dividend declaration date is what sir 1st July 2025 so should we when if you're preparing current year financial statement due to Dividend your pnl balance will reduce so should we reduce the dividend from pnl balance in the current year or next year next year dividend is always accounted in the year of Declaration what is the Declaration date first July 1st July 2025 Falls within the current year or next year next year so that means this dividend will only be accounted in the next year you don't have to account it in the current year is that okay in the current year we only give a disclosure saying dividend has declared that's good that's what I've written over here dividend declared after the balance sheet will not be accounted but only disclosed in not STS because dividend you have to account on the date of Declaration that's the thing okay all right another portion is suppose or maybe I'll put this on hold one more I I'll discuss another related concept then I'll come back to this so there is a small discussion around current assets and current liability we'll do that and then we'll come back to one last pointer then okay so what according to you is a current assets current assets means what intention to sell huh correct only little refinement hey that is monit non- Monitor item I'm talking you about current assets we have discussed this no current assets means cash is an example of current assets specifically included in definition current assets are those which are held for trading purpose usually in your golden days they used to to say anything less than 12 current anything more than 12 non-current yes that is not the thing for current assets we have a specific definition which is called out in your schedule three of companies act one is if you want to call a component as current assets cash is specifically included in the definition of current assets that's one and current assets are those which are held for trading purpose why do you hold inventory for the purpose of trading buying and selling so that means inventry is an example of what current assets third one is current assets are those assets which are expected to be realized within operating cycle current assets are those assets which are expected to be realized within operating cycle so operating cycle means operating cycle means it's a Time Gap it's a Time gap between the day you purchase the goods and sell the goods and recover the money from dears so suppose you purchase the goods on 1st April 2023 and you paid 10 lakh Rupees to creditor because it's a cash purchase to purchase the goods on first April suppose you sold the goods on on 1st July 2024 to your datar on your datar will you make a cash sale or a credit sale usually you'll make a credit sales let's say credit term is two months that means when will you collect the money from datar you sold it on 1st July so you'll collect the money on 31st August 2024 31st August you will collect the money from datas is my statement right so which day did you invest the money to purchase the goods you need to invest the money so when did you spend the money 1st April when did you recover this money 31st August what is the time gap between these two 1 April to 31st August you count how much is that April May June July August how many months five months that five months only we call it as what sir operating cycle operating cycle simply means the time gap between the day you purchase the goods and pay for it till the time you sell the goods and recover money from your netas okay so current assets are those assets which are expected to be realized within operating cycle so operating cycle me five means we will prepare balance sheet five five months sir no so anything with is within operating cycle means it is current assets anything which is going Beyond operating cycle means non-current assets that's the indication okay so that means every problem you have to find operating cycle sir no if they give you the data find it out otherwise we normally assume operating cycle to be 12 months that's the reason that saying is popular anything less than 12 current anything more than 12 non-current so in fact what are they indirectly telling you is the operating cycle okay sir so you don't have to calculate operating cycle if the information is given calculate in these problems and all they will not ask here they will not ask in FM they will ask operating cycle there we have done such problems here such problems will not be asked okay uh excuse me so operating cycle we generally if it is not given in the problem we assume it to be 12 months what does operating cycle mean again it's the time gap between the day you purchase the goods and pay the money till the time you sell the goods and recover the money so any anything which is within operating cycle is an example of or is a component of a current assets and last one is current assets are those assets which are expected to be realized within 12 months from the balance sheet date current assets are those assets which are expected to be realized within 12 months from the balance sheet date sir let's say current year balance sheet you preparing on 31st March 2024 okay so count 12 months from the current balance sheet date what is that date 31st March 2025 so in balance sheet means you will show all assets no suppose I have a datar worth 10 lakh Rupees I have a datar in my balance sheet who how much I have to collect from this datar 10 lakh now you have to check if the datar datar means you will collect the money from him if you are expecting to collect the money from him within 31st March 2025 then in this balance sheet datar will be shown as a current assess so don't count 12 months from the date of transaction you have to count 12 months from what sir end of balance sheet date current assets are those assets which are expected to be realized within 12 months from the end of The Current financial year or from the end of balance sheet date so from balance sheet date count 12 months so if you are expecting to receive money from datas like I'll give you an example here you tell me sir case one datar of 10 lakh Rupees is expected to make the payment or receip date I will write we are expecting to receive money from him on first January 2025 1 January 2025 we have a datar okay datar is outstanding on 31st March 2024 has sold the goods we feel that datar will pay us the money on 1st January 2025 so in this balance sheet will you show this datar as a current asset non-current asset what in this balance sheet will you show this datar as a current or non-current assets you will show it as current asset why you have to count how do you define whether it's a current or not count 12 months from balance sheet date if you count 12 months from balance sheet date what is the cut off date 31st March 2025 if the datar if you are expecting that you will receive the payment within 31st March 2025 then that datar will become a current assets here what is the expected date of payment 1st January 2025 is 1st January within 31st March or going Beyond it is within that means this datar will be shown as what in our books it will be shown as a current assets when you prepare balance sheet as on 31st March 2024 this datar will be shown as a current suppose if I modify this example and if I make the payment as 1st May 2025 okay I have a datar outstanding on 31st March 2024 but I feel that datar will only pay me on 1st May 2025 usually that will not be the case because you will give so much credit to your datar usually no hypothetically discussing so if datar is expected to make the payment on 1st May 2025 that means in this balance sheet you will show this datar as a current or non-current assets non-current assets why what is a cutoff date date 12 months from the balance sheet date 12 months from the balance sheet date ends on 31st March 2025 you're expecting to receive the payment from datar within 31st March or going Beyond going Beyond so that means in this balance sheet you will show this datar as a noncurrent assets like that okay sir okay tell me what is it once it again once again what current assets what are the four features it's not necessary all the features should be satisfied one of the things are good enough so current assets means it's either a cash cash or cash equivalent second it's held for trading purpose or it is expected to be realized or consumed within operating cycle or it is expected to be realized within 12 months from the balance sheet date okay I'm using the word consumed here because raw material also you will have inventory also is there inventory is a current assets inventory is a current assets raw material inventory will you sell or will you consume H hence consume also is what is used in the definition okay anything which is realized or consumed with an operating cycle is a current asset if it is going beyond me non-current asset like that so if you know current assets definition you can construct your own current liability definition what is first definition of current assets cash and cash equivalent cut off that what is the second one held for trading purpose here also same thing current liabilities are those which are held for trading purpose what is the third component of current assets they are those which are expected to be realized or consumed within operating cycle from current assets you will realize from current liability will you realize or will you settle settle so redefine the definition current liabilities are those liabilities which are expected to be settled within operating cycle okay then the last feature of current asset was what current assets are those which are expected to be realized within 12 months from the balance sheet date so that means current liability definition will be current liabilities are those which are expected to be paid within 12 months from the balance sheet date there is one more which I discussed you with example but all this problems this last one you'll get problems in CA final for now it's not important leave that okay fine I discussed you in regular class now I'll not bother too much about it another 5 10 minutes I have to waste not required okay now so if balance sheet does not tally means how much marks will be reduced sir it depends on the creativity you have done sir can't say like that okay step wise marking they will give so each step May if you have done correctly the marks will be so I can't say with certainity how much will be deducted because it's all step-wise marking it's not that balance sheet Tes means we'll get full marks and all that because even disclosures will have marks like shares issued for nil consideration you need to disclose if you don't disclose one Mark gone authorized Capital should be disclosed you did not disclose one Mark gone debts outstanding for more than six months needs to be disclosed you did not disclose another one Mark gone like that it's all stepwise marking ah like that everything gone okay now why did I discuss all this now why did I discuss all this is one in fact here check loan I'll give you a small example sir we have a we have taken a loan from bank loan value is 10 lakh Rupees loan value is 10 lakh Rupees okay one I'll discuss of this first on that loan sir some outstanding interest is there on some on this loan there is an outstanding interest of 50,000 one month interest have not yet paid so it is outstanding interest so loan cut term is 5 years loan cut term is 5 years now you need to tell me this outstanding interest which you have to pay outstanding interest means a liability you'll show it as current liability or non-current liability what in your balance sheet there's out outstanding interest current liability non-current liability what this outstanding interest will be shown as a current liability because this out how many months interest is outstanding one month will you pay this interest Beyond 12 months from the balance sheet or you'll settle off soon settle off soon that means this outstanding interest you will show in the balance sheet at as a current liability how about this loan value loan cut term is how much when will you settle this loan in 5 years is that okay loan cut term is is 5 years every year you'll repay principal hang on I'll build the example is that okay with you so loan if if I say term is 5 years means the settlement is happening within 12 months or Beyond 12 months Beyond 12 months let's say current year is 1st April 2023 to 31st March 2024 on 31st March 2024 loan outstanding is 10 lakh sir loan no sir principle you have to repay every year annually principal has to be repaid in let's say 2 lakh of principal has to be repayed with the next year okay everyone understanding so every year you have to repay how much sir two lakh of principal at the end of each year you need to repay the principal let's say 12 lakh rupees was a loan amount 2 lak rupes principal is already repaid so how much is the loan outstanding now 10 lakh now this 10 lakh entire amount will you show it as a non-current liability or there is a split entire 10 lakh will you show it as non-current liability or is there any split there is a split why so current liability means what sir current liability means what those liability look at the operating cycle around you leave look at the last criteria what is the last criteria current liability means there are those liability which are expected to be settled within 12 months from the balance sheet date within 12 months of the current year how much money are you expecting to repay 2 lakh principle of 2 lakh you need to repay so that means out of this 10 lakh 2 lakh you have to show it as current liability balance 8 lakh only you have to show it as non-current liability understood everybody good why because this 2 lakh payment is expected to be made within 12 months from the balance sheet date that's the reason this two lak no sir we call it as current maturities of long-term debt they will give this adjustment in the question current maturities of longterm debt is 2 lakh they tell like this only loan value is 10 lakh it includes current maturities of 2 lakh rupees hence what do you have to do so what they're trying to say is total loan value is 10 lakh in that 10 lakh 2 lakh you have to settled within 12 months that means this 2 L you have to show it as what in balance sheet current liability balance eight only you have to show it as non-current liability this also is popular has been asked quite a few times in examination overall did you understand basically current majorities of long-term debt you have to show it as what sir current liability that's another point that I've written over okay this is all with respect to the disclosures and pendl and balance sheet the main aspect here is the disclosures that's all you need to remember this much you remember these are the common disclosures that usually comes in the examination okay people okay great now current assets current liability also we have discussed all this also we have discussed it's fine and this is also okay next maybe one point I would like to discuss is another type of question that can come for four to five marks from this topic is Declaration of dividend from reserves Declaration of dividend from reserves so usually you pay dividend out of what you will pay dividend out of P correct out of profits only you will pay dividend I'll give you a small scenario and immediately we'll apply it in one question sir company wants to pay Equity Dividend of 5 lakh on Equity shares company wants to pay a dividend of 5 lakh but profit p and Dela balance is only three lakh p and Dela balance is only three lakh so we have enough pendl balance or we have shortage shortage how much shortage we have here we have a 2 lak rupes shortage you know what the company is saying that shortage amount we'll pick from General Reserve company has General Reserve they're saying the shortage we will pick it from General Reserve can they do it is the question that's a that's a provision you understood the concept this is backed by dividend declaration rules again all the rules is not accounting rules or accounting standard rules all these rules are given in companies Act of 2013 what companies act 2013 says is if you have shortage in Pendle you can utilize General Reserve to pay what dividend you can utilize General Reserve to pay dividend provided three rules are satisfied three conditions are satisfied that condition only I've listed it out here first condition is the dividend rate that you're planning to declare no should not exceed the dividend for the last three years whatever dividend you're planning to give whatever dividend percentage you're planning to give no that percentage should not exceed the average rate of dividend for the last three years like let's say last three years you've been paying 15% dividend an average current year no you should not declare a dividend greater than 50% let's say current year I want to give only 12% dividend so condition failed or passed condition passed so condition is what the rate that of rate of dividend that you're planning to give it in the current year should not cross it should not exceed the average rate of dividend for the last three years that's a condition number one second condition is the amount to be withdrawn from the general Reserve should not exceed 10% of paid capital and free Reserve as per the latest audited financial statement the amount that you apply it in the problem first I'll tell you the rule listen because you you have to quote all this because you can't directly write it if you because if you directly write it one or two marks you'll get you have to write with condition so condition you all have to remember the amount to be withdrawn from Reserve should not exceed 10% of paid up capital and free Reserve but do keep in mind this paid up capital and free Reserve should be as per the latest audited financial statements not unaudited it should be audited financial statement then the third condition is the balance in general Reserve after withdrawal should not fall below 15% of paid up Capital after withdrawing General Reserve balance should not fall below there is a lower limit okay so we'll see this if all the three conditions are satisfied then you can go ahead and utilize General reserve and for what purpose for dividend declaration purpose so let's can we look at one question H come to this particular question due to inadequacy of profit in the current year ended 31st March 20 X2 XY Z limited proposes 10% dividend out of General Reserve so they want to give dividend out of General Reserve straight away they can give or condition is there condition is there from the following particulars assertain the amount that can be utilized from General Reserve according to company's dividend declaration rules so we have 17,500 preference shares of 100 each they are fully paid up so what is a preference share capital 17 lakh 50,000 we have 8 lakh Equity shares of 10 each equity share capital is 80 lakh okay we have General reserve on look at the date importantly on 1st April 20 X1 that means this is General Reserve car opening balance sir current year has just ended so would it be audited or not audited during the inadequacy of profit for the current year ended current year has just ended the moment year ends audit will be over that means what is this current year data is audited or un audited current year data is unaudited for our condition sake we should take un audited data or audited data audited data so General Reserve check here what are they told General Reserve balance as on 1st April 20 X1 so 1st April 20 X1 balance means it is opening balance last year closing balance will become current year opening balance last year is auditing done or pending current year auditing is pending what last year audited yes auditing is over that means this general iser of balance is as for what sir it is as per audited financial statements understood because for condition we need to take audited number that's the reason so is the general Reserve an audited number yes first of all is it a free Reserve because condition talks about free Reserve is it a free Reserve as per audited financial statement yes maybe we'll write like this is it free Reserve as per audited financial statement is it yes so how much is that 25 lakhs capital reserve is capital reserve and revaluation Reserve free Reserve or not not a free Reserve they are not a free Reserve so condition we are testing only for free Reserve so that means will we use these two Reserve or not required they may be audited because it relates to last year will we take that or not we don't want it we don't want it because we want only paid up capital and free Reserve capital reserve and revaluation Reserve is not a free Reserve so ignore net profit for the current year current year data is audited or unaudited unaudited that means can we consider this for our calculation or should not be considered should not be considered because auditing for the current year is not yet over that's the thing all right average rate of dividend for The Last 5 Years actually it should have been three years but that's okay no problem for the last five years the rate is how much sir 12% so now company wants to utilize generalism because they feel there is a shortage first let's confirm there is a shortage how much profit is available sir three lakh so they gave what net profit I told what whenever they give you net profit it means profit after tax sir from profit after tax immediately can you give Equity Dividend or first preference dividend first preference dividend what percentage preference shes 9% how much is preference share Capital 17 and a half lakh so 17 and a half lakh 9% you do how much is that 1 lakh 57500 so you have 3 lakh profit in that three lakh profit first you have to pay preference dividend to 157500 because if you want to give Equity Dividend first you have to compulsorily give a preference dividend so in this three lak profit 157500 will be utilized for preference dividend so how much money remains in pnl 140 to 500 now check how much dividend Equity Dividend company wants to propose at 10% 10% will be applied on what paid up equity share Capital what is paid up equity share Capital 80 lakh 80 lakh 10% you do how much is that 8 lakh so company wants to give 8 lakh dividend but profit available is only 140 to 500 profit is available or we have shortage shortage how much is the shortage sir 6 lak 57 500 is a shortage that shortage company is saying we will pick from General Reserve straight away can you pick or condition condition now can we test the condition one by one what is first condition the dividend rate that you're planning to give in the current year should not exceed average dividend for the last 3 years what is the average rate of dividend for last three years they've given five years that's fine how much is the average rate 12% but we are planning to give only 10% so condition failed or passed condition number one passed okay now Theory condition condition number two what does condition number two say the amount to be withdrawn from the reserves should not exceed 10% of paid up capital and free Reserve as per latest audited financial statement they use the word 10% of paid up capital and free Reserve what is a paid up do they say paid up equity share capital or only paid up Capital PA paid up Capital paid up Capital here constitutes both equity and preference share so add all this paid up equity share Capital you add preference share Capital you add General Reserve you add okay sir these two are audited sir yeah share Capital data and all will keep changing every year sir or it will be same share Capital data every year it will change or it'll be same same that means these two data will be audited only is that okay that means add all this paid up cap if you add all this you'll get paid how much huh2 1 CR 22 lakh 22 lakh 50,000 so what does the condition say the amount to be withdrawn from General Reserve should not exceed 10% of paid up capital and free Reserve as per audited financial statement so calculate this how much is it 12 lakh 12 lakh 25,000 so standard is saying maximum you can withdraw from Reserve is 12 lakh 25,000 am I withdrawing 1225 or just 657 I'm planning to withdraw only 657 so condition is passed or failed condition condition number two is also pass okay now condition number three what does condition number three say after withdrawal balance in general Reserve should not fall below 15% of paid up Capital now how much is general Reserve you have 25 LH how much you planning to withdraw 657 500 after you withdraw General Reserve balance will reduce so what is a reduce balance from 25 lakh if you withd draw 657 General Reserve balance will become 18 lh4 to 500 that is the actual balance of General Reserve what does the condition say after withdrawal General reserve of balance should not fall below 15% of paid up capital only paid up Capital so what is a paid up Capital here 150,000 and 18 so adding these to how much you're going to get 97 lakh 50,000 97 lakh 50,000 15% you calculate how much is that 14 lakh 62 meaning General Reserve balance should not come below 14 lakh it should not come below 14 lakh 62 500 after my withdrawal how much balance I am remaining 18 is it coming below 1460 to 500 or much higher than that much higher so that means is condition failed or pass condition number three is also pass if all the three conditions are satisfied Can Company utilize General yes final conclusion is yes company can utilize General Reserve to declare their dividend this is another kind of problem that usually gets asked from this particular topic okay okay as24 talks about discontinuing operation just now we discussed okay as24 talks about disc continuing operation fun out of the standard is very simple sir suppose you bought tataka share you bought Tata share why because you feel Tata limited is into steel business you you wanted to invest in that company which were into steel business is tataa into steel business yeah that's the reason you bought their shares okay now was to problem or whatever problem tataa plans to discontinue the steam they don't want to do the steel business anymore they feel it is too much regulation too much of government headache so we will not do the steel business anymore now you tell me if this information is given to you what will you do you already purchased ataka share will you keep it or will you sell it off we'll sell it off correct that means is this information helpful to the users of financial statements yes so hence as24 said some extra information has to be given provided company's planning to discontinue any operation that's the background behind the standard comfortable now next is Sir what is discontinuing operation or where what operations can you call it as discontinuing operation so if you want to call an operation or a division or whatever as a discontinuing operation if you want to call something as a discontinuing operation one there must be a plan and it should be a single coordinated plan a plan must be a must plan is a must there must be a plan so plan to do what to sell that whole division entirety to sell off that whole division in one go okay let's say you want to call a division as a discontinuing operation means that entire division you should have a plan to sell that is one or sell that division assets separately division means it'll have only assets or also some liabilities liabilities also so that division C assets you should be able to sell it separately and liabilities also you should be able to settle it separately either you can sell the whole division to one party or division cets individually you can sell and liabilities individually you can settle that is also acceptable okay but it should be as part of what single plan you should have made one plan to do this activity or terminate by abandonment or terminate by abandonment or simply you say I don't want to sell also I don't want to do anything simply I abandon it I will stop doing anything without division you are producing some good suddenly one day you decided that I will stop production I will not sell machinery and all I will simply stop the production that abandonment is also called as discontin in operation so what is discontinuing operation again if you want to call an operation is discontinuing operation it should come as a single plan what should be that plan to sell off the whole division or sell division assets individually settle division liability individually or simply abandon that's okay all right so every operation is discontinuing operation h no if you want to call it as discontinuing operation it should represent a major line of business or geographical area of operation it should represent a major line of business or geographical area of operation meaning let's say a limited has three locations they're operating in three locations Bengaluru Chennai and Hyderabad so bangaluru is giving 50% of Revenue Chennai is giving 20% of Revenue Hyderabad is giving you 30% of Revenue okay now 30% of Revenue looks like a small amount to you or big amount big amount now Hyderabad division they decided to discontin for whatever reason this looks like a small one or a major one major one that's what they seeing if you want to call an operation as discontinuing operation it should represent a major line of business or major location you should have planned to discontinue so how do you call it as a major they've not defined any percentage you have to assess it it's like an audit materiality you have to assess it on a case to case basis that is one okay so it is it should be either a major line of business or geographical area of operation this is what line of business or geography geography or another example May let's say one Company B limited they are dealing with three products product a product B and product C product a gives 70% Revenue product B gives 25% Revenue product C gives 5% Revenue Now product B they decided to discontinue this product B is giving you how much revenue to the company 25% it's a small amount of Revenue or looks like big one big one this if they are planning to shut down it represents a major line of business so that will be considered as a discontinuing operation is that okay with you that is what is the next Point all done huh disc if the discontinued C someone is saying if the discontinued c will it be considered as a do yeah 5% Also may be a substantial amount because what is substantial is it any percentage defined or you have to analyze it on case to case analyze it on a case to case so you have to think is 5% from the company's perspective big or small okay like that you have to analyze and take a call according to me 5% is still a big amount because generally when you have big big companies no they'll have multiple products which will give you Revenue to the extent of 1% 2% 3% like this no product will give you 30 40% Revenue which is very less small small products will give you small small chunk of Revenue so in my case even this 5% also could be substantial but there is no Benchmark defined or percentage defined you have to analyze it on case toase basis done now that is one next if you want to call it as discontinuing operation it should be operationally and financially distinguishable it should be operationally and financially distinguishable meaning whatever division you're planning to discontinue or whatever operation you're planning to discontinue that division asset information liability information Revenue information expense information you should be able to identify whatever division ask whatever division you're planning to discontinue that division asset liability income and expenditure data you should be able to identify if you are able to identify that data we say it is operationally and financially distinguishable sir in this chapter no this and this very important rest everything waste definition is important one here because they'll simply give you a case study and ask you to fight find out whether it is a do or not do means discontinu operation so in every case you'll have to call out a definition so remembering here the definition is a must you have to remember this in my view and also this these two points of you remember the standard is over rest everything is CH okay yeah that one so let's go back now and revisit this what does discontinued operation means discontinued if you want to call an operation as a discontinuing operation it should be as a single coordinated plan you should have made a single plan plan to do what to sell off the whole division in its entirety or to sell the division car asset separately settle division car liabilities separately or simply terminate by abandonment okay that is one and then if you want to call an operation is discontin Operation it should represent a major line of business or major line of major geographical area of operation it should be a major product which you're discontinuing or it should be a major location which you are discontinuing that is what is then third one is it should be operationally and financially distinguishable meaning that particular operation Revenue ex Revenue expense asset liability data you should be able to find it out if you are able to do that we say it's operationally and financially distinguishable this is what is do this is the meaning of discontinuing operation next they Define what is not a do what may not be are discontinuing operation this also is very important gradually facing out of a particular product is not a discontinuing operation gradually facing out of a product is not a do like here sir earlier we used to manufacture normal phones now anybody uses normal phones or everybody wants smartphone you're using normal phone he's showing one oh my God great appla to you okay good all right but excuse me normally now majority of the population prefers what phone smartphone let's say Nokia company earlier there were a big players in normal phone now what sir do they manufacture the major of their manufacturing is towards normal phone or smart phones that means they're shifting there gradually they're facing out theyve stopped normal phone production and they shifted to which phone smartphone so that shifting that gradually facing out of a product gradually stopping the production of a product is not discontinuing operation because every product will have a life cycle sir okay like earlier earlier we had a vcd or VCR DVD you remember we had DVD players okay right that we had now anybody uses that earlier in fact going back to that we had tape recorders we had radio tape recorders we had now once the TV came that value come down now after TV then comes the laptop right now people are moving towards what OT and other things smart virtual camera this that we are whatever 1001 blah blah yes or no so as technology progresses the product will get diminished okay now nobody reads newspaper now correct no physical newspaper hardly people buy it's all St most of them are wanting in the news in the the mobile yes or no so if you're gradually facing out or stopping the production of one product it is not considered as a discontinuing operation because every product will have a life cycle that's a reason okay that's one second shifting of a production facility from one location to another is not a discontinuing operation let's say I have a factory in let's say I have a factory in bangaluru and I have a factory in uh Chennai I have a factory in Bangalore as well as I have a factory in Chennai I feel excuse me Chennai Factory is more economical meaning I can produce the goods at a cheaper cost in Chennai because Chennai I feel I get a lot of Labor resource I get a lot of labors but in Bangalore May Since the cost of living is lot higher we have to pay a lot of high cost to the we have to pay higher cost to the labor salary that's the reason we decided from Bangalore we will shift production facility to Chennai let's say in Bangalore May earlier I used to produce 1 lakh units in Chennai I used to produce 1 lakh units in Bangalore may I brought it down to 10,000 units I shifted this 90,000 units to Chennai that means I'm increasing the production in Chennai I'm reducing my production in Bangalore that is not a discontinuing operation because I'm shifting my production facility from one location to the other so if you shift your production facility it is not a discontinuing operation that is one yes sir and third one closing down a facility to achieve productivity or cost saving closing down a facility to achieve productivity or cost improvements again you're shutting down a factory because you feel it's it's very costly if you're doing that that is also not considered as a discontinuing operation remember these two you'll have to quote all this in your case studies okay this exactly they'll give you a case study this and this you may have to quote if it comes for two marks maybe you have to quote only this that's all is that okay with you people everybody okay let's take up one case study rzo limited is in the business of manufacturing passenger cars and commercial vehicles compan is working on a strategic plan to shift the passenger car segment to from car segment they have to move to commercial segment instead of producing normal passenger car they want to produce lry tractors and all that commercial vehicles they want to produce over a period of 5 years that means it looks like a gradual facing out yes here what did they say however no specific plan has been drawn up there itself I can have to stop for you to call it as discontinuing operation there has to be a specific plan and the plan has to tell in how many years what you will do when the discontinuing operation will get over that is one okay then as part of its plan it has planned that it will reduce passenger car by 20% annually okay and then check this it also has plans to Comm commence another new Factory to manufacture commercial vehicles and transfer the employee in a phased manner so all this data is giving you what in fact I can stop at no plan only since there is no plan is it a do or not a do it is not a discontinuing operation final answer is it is not a discontinuing operation but you can't write in one line they will give you at least three to four marks so what first what you have to write DOA definition then you have to write what is not a do then finally conclude that there is no plan there is no time bound activity so this is not discontinuing operation like that you need to conclude is that fine with you got the answer okay coming back to the question now sir if it is do what you will do sir if it is do what you'll do sir sir check this p and Dela format are you able to see this P andelka format what is PN Dela schedule 3 format revenue from operation then other income then if you add these two you're going to get total income then you'll show all the expense then you'll get profit before tax then don't say tax you say now tax expense we not race we we become sophisticated now we'll not say tax we'll say tax expense because tax expense constituents are two parts current tax and defer tax and one more is there which is mat credit is that okay all right if you do that what are you going to get profit after tax The Profit after tax that you get is for continuing operation meaning all this data no sir you need to give it for continuing operation all this breakup what you give is only for continuing operation that means discontinuing oper sir expense income of discontinuing operation data need not be disclosed expense income data of discontinuing operation need not be disclosed what do you need to disclose sir only three things are related to discontinuing operation you need to show it separately first have you shown continuing operation data already yeah three things more you short of discontinu operation that is profit before tax of discontinuing operation tax expense of discontinuing operation profit after tax of discontinuing operation so first show C data then show dooka data but DOA expense income data you don't have to give only three data PBT tax and P this way what happens the moment you show discontinuing operation data separately in pnl user will automatically come to know that an entity has planning to or has planned to discontinue that means information will be given this is okay sir so you have to give it not in the notes to accounts directly on the face of P that is the significance of this understood ah that is what they're talking about it here all right sir when will you give that disclosure sir you got to know that you have to give some disclosure so when will you give the disclosure because if you're planning to shut down a division let's say in my example Tata limited decided to discontinue steel sir can they discontinue in one day sir sir they are planning to discontinue steel of factory means Factory will have thousands of assets it'll have hundreds of liability thousands of workers hundreds of credit ours right you have to pay everybody correct and sell all the assets all the samama will it happen in one day two days or it may take some time this only may take 78 months one year two years also yes or no that means you will give a disclosure only after 78 months or one year or sir no what the standard says is when IDE comes into picture disclosure starts when ID ad as an initial disclosure event when that initial disclosure event happens immediately you need to disclose is that okay so what is this IDE sir IDE means you say IDE has occurred when one of the following events is one a binding sale agreement of discontinuing operation is entered you want to sell one division now no that sale you want to sell to somebody you have to sell means you'll sell it to somebody that sale agreement if you already executed that sale agreement if you already executed we say initial disclosure event has got triggered then you'll have to give some information in note stocks is that fine or if this is not occurred means a formal detailed plan of discontinuation is made and it is announced company wrote a mail or they published a newspaper saying they want to discontinu steal C division like that they published they made a plan as well as they announced that plan so if the plan is made or announced then we say ID has occurred the moment ID has occurred you need to give a disclosure in notes to accounts because actual discontinuing will happen in this year or maybe two three years later on maybe 2 three years later on you don't have to wait 2 three years for the disclosure now only you should start giving the information what information basic Common Sense what information you expect as a user of financial statement you want to know which division is getting closed okay what will you do with that division will you sell that whole division to somebody or will you sell the assets and liabilities individually okay so when will the discontinuation come to an end how much is the expense expected all this data Common Sense may you give it in notes stock done now that means what we give it in PN sir the year you discontinue the year you discontinue and that year you'll incur some income and expenses that income and expense data of discontinuing operation you need not give it separately you only give three data of discontinuing operation which is what PBT tax expense and P in the year you discontinue actually when you discontinue you give only PBT tax expense and P before that you go on disclosing in your notes to accounts like this comfortable so when does a disclosure starts when IDE occurs ID means initial disclosure event and when does that ID get triggered when one of the following factors get appear that is a binding sale agreement to sell the division itself is entered or a detailed formal plan to discontinue is is made and as well as announced announcement need not be a public announcement if you just send out a mail to your employees saying we are planning to discontinue that that's also a good enough access only yes sir all right disclosure part I've already told you sir common sense and three disclosures if they ask you you need to remember what are those three disclosure we already know this now in p and what are the three disclosures you give separately PBT tax expense and P of discontinuing operation separately that's all is a whole fun about discontinuing operation a theory if at all question comes a theory question will come and they'll test you whether it is a do or not a do so only definition of do and what is not the do you need to concentrate on rest everything is not required not much important F so with 24 also Dum Dumar okay all right so let's take up accounting standard 13 and investment accounting both these topics we'll revise it together okay these are separate topics in your study material I think I'll com I've combined them and made the chart we'll revise them together okay all right sir uh accounting standard 13 which talks about investment accounting first of all what is an investment Investments are basically some assets why are you holding that asset to get some return in the form of Interest or in the form of dividend or capital appreciation I purchase this year Ka vioa I purchase vioa shares at 100 rupees with an intention that its price will become 150 from 100 when it becomes 150 I will sell that is my intention so what is my intention here to get dividend or interest or capital appreciation capital appreciation means I want the share price to increase I feel share price will increase when it increases I will sell and I will make money so Investments are basically those assets held to get some return interest dividend or capital appreciation that is one okay and normally when you have to buy the investment means you take the help of broker and broker will not help you to buy the investment at free of cost there will be some charges like brokerage stamp Duty and all you pay like that if you have any acquisition charges brokerage stamp Duty those acquisition charges is a loss for you don't transfer that loss to p endle add these to the cost of the asset these are necessary to buy the investment no these are necessary to buy the investment hence these acquisition charges don't transfer it to pnl but add it to the cost of investment because they're directly related to Investments that's the reason okay that is one all right then if you have purchased the investment through exchange so I purchased some company Equity shares infosis Equity shares I purchased but not by be giving cash by giving land and building I purchased infosis car shares and I have to pay cash no instead of paying cash I paid land and building so that scenario we call it as exchange this provision is same as accounting standard 10 as well as as26 there I will tell you there we will take it with example okay this is dto dto whatever comes here it's the same there also okay I think you know this already also we have covered we are revising now all right so exchange transaction as a thumb rule we have to valuate at what fair value which fair value fair value of the asset given up or acquired whichever is more clearly evident okay more about this with example we'll take it in as10 for now this is good yes exchange transactions are not important here they are more important for as10 so there I will take it okay so broadly there are two types of Investments sir one is uh sir your chart is very nice would like to great if you Pinn that in description thanks Kik but unfortunately we can't give soft copy MAA yeah you can buy the chart book from the website that I've showed you yesterday from our website it's available yeah butter is not working though yeah but still I'll take your compliment yeah thank you okay sir investment are broadly classified into two things short-term investment long-term investment okay short-term investment is also known as current investment or also known as trading investment long-term investment is also known as non-current investment or non-trading investment these are different names okay so short-term investment means what according to you short-term Investments are those Investments which are which are held for Less Than 3 months L than 3 months L than 1 year 12 months everything wrong correct one mistake you also did he told did a lot of mistake I told three Cash equivalent correct H you're giving me cash equivalent definition I'm talking about this one fine tune you need to one word you miss what is that it is not the actual holding period yes shortterm Investments are those Investments which are which are held for less than 12 months when you're talking about 12 months no it is not the actual holding period it is the intention so if you have an intention to hold an investment for more than 12 months it becomes longterm if you have an intention to hold the investment for 12 months or lesser it will be considered as a shortterm like that so it is not the actual period of holding it is the intention of the holding because today if you buy the investment means today you have to show it in balance sheet correct that means today if you purchase means only one day is over so will you classify it as current investment no the classification is based on the intent ition if you're planning to hold it for more than one year long term otherwise short term like that so it is not actual period remember it is the intention to hold strives the classification okay so what if your intention changes your two steps ahead of me wait okay I'll come to you come back to you in about 5 minutes classification as an next provision which I'll take you through first we'll run through this so short-term Investments are those Investments which are expected to be held or which where the intention is to hold it for less than 12 months okay shortterm investment should be valued at cost or market price whichever is lesser lower of cost or fair value or market value we see then short-term Investments all these are not that important it may come as a this may be important other things and all may at best come as an McQ question no need to mug it up just have a quick glance through of them that is good enough okay so short-term Investments can be valued on an individual basis or category basis but overall Global basis valuation is not allowed like let's say sir I invested in two private company shares I've invested in two private company shares both are in software business business only okay so I want to Value both of them together I want to Value both of them together that's we call it as category basis if you want you can find sir investment should be Val at cost or market value whichever is lower now I have one investment or two investment two investment if I want I can find the cost of both of them together market value of both of them together and value because they are one category because both are in software company both are competitors that means is there any difference between them or more or less same more so what as3 says invest short-term Investments can be valued on individual basis or category basis both are allowed if they belong to the same category you can value them together you can put them in one basket and value it's fine but overall Global basis valuation is not acceptable let's say I have some investment in Gold I have an investment in equity shares gold and Equity shares both I will value together acceptable both are same or completely different completely different that's what we mean by overall Global valuation every short-term investment you can't put it under one basket and say I will value them together that is not acceptable okay category wise valuation fine but overall Global valuation acceptable or not acceptable not acceptable that is one this is for your short-term investment another one is your long-term Investments long-term investment is that those Investments where the intention to hold it is for more than 12 months long-term Investments are valued at Cost long-term Investments are basically valued at cost if there is any temporary decline in the value of the investment it is ignored permanent decline is accounted like let let's say you purchased infosis Cas shares and you want to hold it for 3 years you feel after 3 years you'll get a bumper return so you want to hold it for how many years 3 years if your intention is to hold it for more than three years means it is a shortterm or a longterm longterm longterm investment has to be valued at Cost I purchased it let's say for 10 lakh Rupees I purchased it for 10 lakh Rupees so cost is how much 10 lakh so I will show it in my balance sheet this investment I will show in my balance sheet under asset side at what value 10 lakh so if there is any temporary fluctuation in value of investment it is ignored sir if I'm buying a share price means I bought it today for 10 lakh tomorrow also it will be 10 lakh only or it will vary it may become 10 L 5,000 10 lakh 2,000 11 lakh like this it will go up and down so if there is a temporary decline ignore it it's fine appreciation we never record even if there is a temporary fall also we ignore but however if there is a permanent decline it is accounted okay like I think I in my regular class I used to give you magika example ah also you could say because that heidenberg report what happened to Adon shares Left Right Center it fell correct no sir that at that time no they said adani is almost gone now they came back it's a big issue yeah all right because at that point of time did it look like a small downfall or look like a permanent downfall look like a permanent downfall yes or no due to covid many companies suffered a huge loss their share price fell drastically that was a temporary decline or look like a permanent decline permanent decline so if permanent if it looks like the decline is very substantial and it looks like a permanent decline means account to that decline okay let's say from share price from 10 lakh it became 2 lakh this is a small decline or big one from 10 lakh sir it value has become 2 lakh that means there is a reduction of what sir 8 lakh 80% value has fallen that means there's a small downfall or big big so if there is a permanent that means there's a temporary or permanent decline looks like it's a permanent decline that means in this case you will value the investment not at 10 lakh but at 2 lakh from 10 lakh you have to bring down its value and account it at how much value 2 lakh how much you need to reduce it by 8 lakh that 8 lakh loss you transfer it off to pel account pass the journal entry P account debit to investment 8 lakh and investment automatically will come back to its balance of 2 lakh like this so temporary decline ignore permanent decline accounted so how do we know it is permanent decline standard says you'll have to it based on case toase basis there is no particular parameter they told fall of market share or significant fall in the share price share price has fallen by a lot or if you have lost market share like due to pangali many people he and all lost their market share big way because almost everybody is using DTI now also many people use it if you remember you have not heard not a big deal okay maybe you are not big on that okay but yes when they kind of pump came into the market no they caused a big dent for the few big companies especially when it comes to few products especially that toothpaste and all will become their Flagship product okay so like that if you are lost any market share let's say your uh market share was 10% in the market 10% of the people in the market used to buy your product before now only 2% you have market share that means from 10% to 2% market share is a small value or big big value big so loss of market share fall in share price negative cash flows or continuous losses all this could be an indicator of a permanent decline so you have to basically there's no Benchmark all these are some indicators So based on this indicator assess whether it is a temporary decline or a permanent Decline and accordingly record them fine now and however for long-term investment you have to Value the investment only on individual basis because long-term Investments value will be quite substantial that's the reason so this is about the valuation next next aspect is what if your intention changes sir initially I thought I will hold the investment for 3 years later on I thought I will sell it off in one month only initially I when I bought it I thought I will hold it for 3 years after 3 months only my mind changed and I told I will sell it off for I'll sell it within the next one month so now what sir initially when I bought it since my idea was to hold it for more than 3 years I would have classified it as a long-term investment now I want to sell it within one month means now it has become current investment yes or no based on your intention if your intention changes your classification also should change so that's what I've written here if you're going from L to c l means long-term investment C for current investment this is how I remember if you want you can remember this like this but you still have to remember so if you are doing going from LC LC means CC LC means CC L here stands for long term investment see here stands for current investment if you are going from long-term investment to current investment then you have to Value the investment at CC first CC for first C for cost other C for carrying amount cost or carrying amount whichever is lower that is the first thing okay this is from what to what long term to short term it could be other way around also not a CL if you're going CL c c for current investment L for long-term investment if you're going from C to L then CL means CF CL means CF C here stands for you're confused now C could be for cost or it could be carrying amount you're going to which category now you're going to which category long-term category how should the long-term investment value that cost I mean this year denotes for what cost don't get confused it is not carrying am it is cost okay cost or and if here stands for what fair value cost or fair value whichever is lower like this so if your intention changes you do the classification on the day your intention changed find out here when you're going for LC means you have to find out CC C for cost another C for carrying am on the day your intention changed on that day find out cost on that day you find out carrying amount whichever is lower value the investment at that lower amount same if you're going from CL means you have to use CF find out the cost find out the fair value on the day your intention changed lower of the two will be adopted for to Value the investment number that is your classification change yes sir all this they will not give you you need to remember it okay so these things are things whatever is memory driven things no if you want you can use the chart books if you're buying one you can use a chartbook and underline that so that on the examination day know let's say when you have like 15 20 minutes on the examination day flip quickly you can run through them like in previous case turnover and borrowing limits now you may remember after one day if I ask you yes no because so much of information we'll not be able to remember so have those information either you can take that chartbook to your not to the examination Hall till the examination Hall and leave it outside after that okay and try to glance them once or if you don't have chart book if you have revised through the revision video of us it's fine all those limits write it in your one you maintain some two to three pages some maintain some sheets in that sheets write down okay it's a chit but don't carry that chit to your examination Hall quickly glance through that and throw it out okay like this so that you remember it okay because you have to remember this till your examination after that you don't have to remember because Google is there Google MAA will help you okay for till in examination no Google ma you're only ma you're only PA everybody you are only okay saru so do remember it so wherever there is a limit that's what I used to do for all your income tax and that time we didn't have so much of accounting standard so we didn't have so much of drama because we had accounts paper was mostly for us when we wrote CA final it was all consolidation amalgamation they used to give four four five five crazy big problems five five six six pages it used to go half of them used never used to understand what they're asking only that level of question used to come full head spinning questions it used to be now consult since the standard has become too complex now those sort of problems they have reduced now okay but income tax we had a lot of cases and all so I used to write down this some section number 32 stands for this well like 109 I mean what whatever things I used to write down like that so that it'll help me my with my memory if you feel that helps you can do that or I think every faculty is now giving chart book you can take help of that if you don't want to kind of put in the extra effort but anyways that I will leave it to you okay coming back to this sir maybe I'll quickly glance through this we will immediately apply all this in the question all these are question specific point as have written these are not Theory whatever you see in the problems I've brought it in over here one is the X interest price so next thing is they will ask you to prepare investment accounts we have to prepare investment accounts investment Ledger we need to prepare you can make an investment either in equity shares or in bonds or debentures so they will ask you to prepare that to what are all things you'll encounter in those first thing I've called out here one is the X interest price So when you buy the bonds or Deb VES okay so X interest here stands for purchase price excludes interest X here stands for exclusion the purchase price of the investment excludes interest just know that for the time being more about meaning if you have forgotten I will take you through the question okay come interest means purchase price includes interest the word X means excluding interest the word come means including interest okay that is one thing okay so now you think about it sir interest on debenture is it a balance sheet item or pendl item interest is a pendl item but debenture purchased and all as an investment is a asset it's a balance sheet item now both they have combined because com interest price means what purchase price or selling price of the debenture includes interest debure is a balance sheet component debenture interest is a pnl component both they have mered acceptable or not acceptable not acceptable hence what we have to do if they have given come interest price you need to find out how much interest is included and you need to exclude it exclude means you need to deduct it how how much problem may we will see now now this is the importance of this next next one important thing you need to remember is acred interest what is this acred interest is so normally acred interest comes when the in if you're holding some other company debenture as an investment you'll get returns periodically usually in the problems they say return is paid interest is paid on a half yearly basis usually that's how they give it in the question is it compulsory or it could be anything could be monthly also quarterly also half yearly also or yearly also but usually we seen the problem half yearly So based on that I've constructed my chart book of notes here okay so now let's say Sir interest is paid half yearly interest in first case let's say is paid on 30th June 1 and 30 31st December once company pays 6 months interest first on 30th June another 6 months interest they pay on 31st December this is the interest due date but we are following April to March whilea accounting year we are following April to March now you think you purchase some other company debenture our year is from April to March but you have received the interest till which date you have received the interest only till 31st December because after 31st December next interest you'll receive it on June but my year ends on 31st March that means I have received the interest only till 31st December January February March is it part of my financial Year yes has interest aced yes is it received no that only we calling it as acred interest so do not forget the acred interest here the interest will be for January February March they're part of your financial year but interest you have not yet received so basically if your interest due dates and if you're accounting year if it is not same if if it is not same then only there will be an acred interest take another scenario let's say interest is paid first on the other company where you made the investment they pay the interest only on two dates those two dates are 31st March and 30th September on 31st March they pay 6 months interest and 30th September again they pay 6 months interest half yearly interest they are pay you let's say following accounting year as J to December your following accounting year as jant to December now check sir you have received the interest till 30th September but your year ends on September or goes up till December your year ends on December but you have received the interest only till 30th September because after September you will receive the interest in March that is next march but before in that only only or 31st December only your year closes so you have received the interest till 30th September but your year ends 3 months later which is December so October November December is it part of your financial Year yes has interest aced has those three months passed yes for those three months did you have these debentures with you yes so has interest aced yes but have you received no so means you have to show aced interest again for how many months 3 months so if there is a clash between interest due date and accounting year you will get some aced interest do not forget that that will not be given to you in the question you need to remember suppose interest due date was 30th September and 31st March this is your interest car due date your accounting year is also 1st April to 31st March can you tell me will there be any aced interest here your due date for interest is September and March accounting year is also April to March now think is there any aced interest no why no acred interest sir you have received the interest till 31st March your interest also end or year also ends on 31st March so that means till whole year you already received interest that means is there any interest ACR interest here no so if the interest due date and if your accounting year is in sync if it is same then you will not have acred interest if it is not same here it is same or different different then only aced interest will come and aced interest will only come for 3 months fa enough in examination they'll always give you this scenario because if they give this scenario acur interest will not arise that is the reason and you see in the problems this one done people okay this is with respect to the debentures don't worry even if you have not got it or forgotten it's fine we are anyway we're going to do another problem one full-f problem I'm going to do with all this it will come but for those of you who are remember well and good okay the next is all these are uh relating to bonds or debenture held as investment next will be you can also buy Equity shares as an investment if you're buying Equity shares as an investment sir they use one term called Equity shares purchased on a come right basis or come dividend basis when they use this word come here in this uh is 13 terminology means what sir come means including X means excluding so here they're saying come right basis or come divided basis what this means is if you have purchased any shares on a come rate or come dividend basis the holder or the purchaser of these shares will get dividend he will get he'll be eligible to buy get right shares which I'll tell you and also he'll be eligible to get dividend this dividend he'll be able to get uh even if such dividend relates to last year but if it is declared in the current year still he will get it or let me do a thing this maybe I'll take you through one question maybe better to understand with the help of an example otherwise I have to waste some time giving you some data we which we are going to do one question we'll take it there is that okay better understood there this I'll take you one more problem through this for now let this be on hold so we have gone through this can we apply this in one other question okay come to question number nine one second uh maybe we'll take this is an RTP May 2024 question we'll run through this question only a holds 2,5% debentures of 100 each so how many debentures 2,000 each face value 100 in XY Z limited as on 1st April 2022 so they're saying a limited purchased or he holds holds that means what sir these investment did we purchase on this date or we had it already yeah I did already that means this is what NSA investment account opening balance because they did not use the word limited purchased they use the word he is holding on this on 1st April so this is opening balance of investment yeah at how much cost 2 lakh 50,000 great interest is payable on these debentures on June and December okay interest is payable on what basis monthly basis or half yearly basis half yearly first 6 months interest they will pay on 30th June next 6 months interest they'll pay on 31 December now you know what the interest what they will say here here only clue is there they holding the debenture on 1 April so year is beginning on 1 April 2022 and that means your year will end on which date 31st March 2023 so first interest you will receive on 30th June 2022 next interest you will receive on 30th 31st December 2022 agreed sir you have received the interest only till 31st December 2022 but your year ends 3 months later which is 3 March 2023 so what is the difference between these three Jan to March how many months three months for 3 months is it part of your financial Year yes where you holding the Investments yes has interest acur yes but have you received no I mean should your account acur interest very much yes okay saru all right let's go through the other data following details of 15% debentures are purchased and sold during the current year so current year we already wrote that okay so some they will give you in these problems multip purchases and multiple sales maybe two times they will give you purchase maximum two times they will give you sales but otherwise the problem will become really really leny usually we see that so on 1st May 2022 1,000 debentures we purchased but on what basis come interest basis come interest means what sir purchase price includes interest but debenture is an investment it's a balance sheet component but interest is a B&L component can you merge the two no but have they merged the two yes hence what we have to do we have to find out how much interest is included and we have to exclude it that is one how many how much did you pay for these debentures 1 lakh 5,000 few months later on 1st November 1,200 debentures are sold at what value X interest basis X interest means here selling price selling price includes interest or exclude excludes interest so interest is there just that the interest is not included in selling price X interest means interest is very much there but it is just that the interest is not included in the purchase price or selling price here it's a case of a selling price how much did you sell it for 128 200 again on 30th November 500 debentures you purchased on an X interest basis for 54500 then again 900 dentur you sold it on come interest for 1ak 180,000 okay these are all data they given some opening balance we had two times we purchased two times we sold what do you need to prepare investment account you need to prepare using what method fif method so normally when you sell an investment no you will end up making some profit or some loss and profit or loss can be derived either using fifo method or a more popular method is average cost basis if they don't mention the method always take average cost okay why I'll tell you after this problem when we do because fif means you have to do some extra calculation okay so but one problem I'll take you through fif another problem I will take you through weighted average so the both the things you'll be comfortable with Okay so let's run through this sir investment account Ledger is very very simple so what is the journal entry for investment purchased investment to bank what is the journal entry for investment sold Bank to investment okay so that is very very simple you not get marks for that the marks what you'll get is for the value because here they have told X interest to come interest to this so that to profit sale for all this working note you will get majority of the marks so that ledger not we will do it at the end because that is the easiest hardly any dumb in those question nothing it is okay the main important Concepts here are the work working notes so the first working note you'll put it up is the interest working note this this will be the most important working note okay sir and this working note sir we'll do it in a chronological order meaning date wise whatever transaction has happened date wise in that way we will present this working note and you when you prepare investment Ledger you have to post the entries we looking at this working note only postings you do because this is anyway arranged date wise ler posting also has to be done chronologically or date wise so this working note will help first sir let's have the interest due dates have they given the interest due date in the question yeah June and December I've called out that but year ends on December or goes up till March goes up till March so the first thing is acred interest so acred interest means interest income which you have not yet received interest income not yet received so what is the journal entry for interest received bank account debit to interest income account or interest received account or whatever you can call it maybe I'll call it as interest received let's say one lakh one LH okay sir this interest has aced but you have not received will you pass journal entry or ignore current year interest has aced but you have not yet received will you pass journal entry or ignore pass or ignora pass what entry you will pass can you pass Bank to interest no you'll write interest receivable account or you can write acred interest account whatever name you want to use interest receivable account or acred interest account debit correct you can't pass this entry instead of that you'll pass aced interest account debit to interest income account or interest received account correct this interest received as an income or it'll be transferred off to pendl what about this acred interest acred interest is what sir this AC we you have this interest is aced but you have not yet received means this this has debit balance no so you will show this as an asset in your balance sheet and current assets you will show this as an income correct you will show it as an as an current asset in your balance sheet agreed people now entire investment did you purchase it in the current year or some investment you had it in last year also sir look at this line they're saying albc limited holds 2,000 debentures they did not purchase it they are holding it I means they're holding it since last year sir aced interest concept only comes for current year or every year every year so last year also you have received the interest only till 31st December but your year is ending on March means how many months interest has ured but not yet received three months that is Jan Feb and March agreed so last year you would have already passed this entry correct that means this account will have an opening balance this account because last year closing balance only will become current year opening balance so last year have you passed this journal entry yes maybe may not be for one l 1 L have just has taken as a random number for explanation amount is different but entry order have passed yes so first first thing you will start in your interest working noce Acro interest car opening balance is that okay because do Acro interest is there in the last year yes that means last year closing will become current year opening is that given to you in the problem or not given not given we need to find out okay sir everybody sir interest is always calculated on what value face value sir how many debentures you own in the last year 2,000 what is the face value of each of them 2 lakh I mean each face value is 100 so total face value will become 2 LH how how many months interest ACR have you passed the journal entry for last year three months which are those three months Jan Feb and March so pH value is 2 lakh What percentage debentures are these 15% so 2 lakh into 15% if you do you'll get whole y interest whole y have you passed or only three months car So Into 3x2 You Do how much is that 7,500 so this is aced interest opening balance which has to be captured in The Ledger hence I've done this clear after this go on starting looking at the transaction and do it update one by one can we do that okay so this is over I'll put off a small take against this next uh next look at the table what came next May 1st 2022 what did you do you purchased the debentures on what basis come interest basis come interest means the purchase price includes interest how much interest is included is what we are trying to find out now when did you buy sir first may watch out for this you purchased on which date 1st May sir you have purchased the debenture means somebody else has sold you the debenture you have purchased the debenture means somebody has sold that somebody on these thousand debenture they have received the interest lastly on which date on 1 may they have sold theyve received the interest only till 31st what is the interest due date interest du date again I'll write it over what did they say interest du date is 30th June and 31st December 30th June and 31st December so on these thousand debentures the seller has received the interest only till December because after December he would have received the interest on 30th June before June only he has sold off correct so he has received the interest only till 31st December how many months interest has that seller lost you are the purchaser if you are purchaser somebody has to be seller seller on these thousand debentures how many months interest has he lost he has received the interest only till 31st December so count leave December January February March April it's 1 May so leave out 1 May how many months interest has he lost four months is he your cousin maybe sir we don't know no yeah obviously sir if seller has lost some interest means what will he say the buyer boss I have lost four months interest you compensate 4 months interest so basically 4 months interest is included in the purchase price that is the reason they're saying it is a come interest price understood H so we have to find out that four months interest and it excluded easy how four months they've received the interest only till 31st December but sale date is 1 May so if you count January February March April that is your four months we talk so calculate so how many debentures is sold 1,000 interest calculation always on the face value so write the date here on 1st May you write what kind of a sale is this or what kind of a purchase is interest on come interest purchase how many debentures you purchased 1,000 each face value 100,00 into 100 is how much 1 lakh one lakh is the value of face value of the debenture interest you'll calculate on face value so multiply 15% how many months interest four months interest if you calculate how much are you going to get 5,000 so basically this 5,000 is included in the purchase price which we need to exclude it that we will exclusion and and all we'll do it later first we'll calculate the interest till here good okay so after May as per them the transaction is on first November but I told this working node is done what sir chronologically do you think between 1st May and 1 November any other transaction is happening yeah interest due date is appearing now so yeah on 30th June you'll receive the interest on your holding how many other debenture you're holding on that you will receive interest check from year beginning you had how many debentures 2 lakh now you purchase how much more one lakh so how many you have now 2 lakh plus one lakh which is three lakh now you will receive the interest from the company on three lakh debentures at what rate 50% but other companies paying they're keeping it very simple they pay the interest on a half yearly basis so on 30th June how many months interest they will pay you 6 months again on 31st December again six months interest they will pay so into 6 by 12 you do because other company is paying you interest on a half yearly basis hence 6x2 okay so 3 lakh into 15% into 6x2 will give you 22,000 500 that you as an investor you have purchased the debenture means you will pay interest or you will receive interest don't think don't do the calculation from company perspective here okay now you are you are accounting this debenture from the from the company issuing perspective or investor perspective the chapter is as13 as13 talks about investment now you have invested in some other company debenture so that means that company will pay interest but you will receive from your perspective from the investor perspective we are doing all this working note now so you are receiving the interest hence I'm calling it as interest received on holding yes sir all right next go for the other one next what transaction happened on which date first November what did you do you sold okay sold at what price X interest so X interest means what excluding interest sale price excludes interest interest is there interest is there just that the interest is not included in the selling price X interest means don't confuse that interest is not there in X interest simply means purchase price or selling price does not include the interest element okay now how how interest is there sir check logically sir now you have sold no you have sold how many debenture 1,200 debenture on these, debentures 1,200 debentures rather you have received the interest from the company lastly on which date 30th June because next interest will be paid on December before December only you sold off so on these th000 debentures you as a seller have received the interest only till 30th June you sold it on 1 November so how many months interest have you lost how many months is that July August September October first November so leave out the one day so how many months interest four months interest you as a seller have lost what will you tell the buyer now boss I have lost four months interest so you compensate so you will recover this money from the buyer okay but how much of money you have recovered from the buyer that is not included in your selling price that's what x interest means X interest does not mean interest is not there X interest means interest is there just that it is not included in the purchase price or selling price is it easy so how many debentures you sold 1,200 so which date did you sell 1 November interest on X interest sale you call it 1,000 debentures you have sold each face value 100 so total 1,00 1,200 yeah 1,200 deur you have sold each face value 100 so total face value will be 1,000 or 1 lakh 120,000 interest calculation always on the face value 1 20,000 into 15% how many months interest you as a seller have lost 4 months so into 4 by 12 you do how much you're going to get 6,000 rupees like this this 6,000 you will recover from the buyer done now okay after 1 November what is an X transaction 30th November May what did you do 500 debentures you purchased on what basis X interest X interest means purchase price excludes interest does it mean interest is not there or interest is there interest is there just that it is not included in the purchase price okay now again your purchased your purchased means somebody has sold that somebody on these 500 debentures have received the interest from the company lastly on which date they have received the interest only till 30th June because after June interest will be paid on December but before December only they have sold off so how many months interest has a seller lost is receive the interest only till June so July August September October and 30th November you have sold so November also include so July August September October November how many months five months interest seller has lost so you as a purchaser should compensate how many months five months so calculate 500 debentures 500 into 100 is how much sir 50,000 how many months interest will you calculate 5 months that will become how much 31 24 like this done now okay next is 31st December you made a sale so 31st December you're receiving interest also you're making a sale also whenever they give you sale data purchase data okay so first account the sale data then account the interest received on holding car date when which dat did you sell 31st December how many months how many debentures have you sold 900 debentures what price may come interest price come interest price means means the selling price includes interest okay so now sir how many debentures did you sell 900 on these 900 debentures lastly have received the interest till 30th June so 31st December we will receive interest no no no no on the interest due date if they say we have purchased the debur or sold the debur here we have sold no we have sold the debenture means the other person whoever is purchasing They will receive the interest that is the reason they have purchased the interest on the lastday is that okay we will not get it because we have already sold so who will get it purchaser will get it so on these 9900 debentures we have received the interest only lastly on 30th June how many months interest have you lost 6 months because company will pay to the purchaser I will I have lost as a seller I have lost how many months interest 6 months interest so calculate that 900 into 100 is 90,000 how many months you interest will you calculate 6 months which will be how much 6750 that much I will recover from the seller and seller will take the collect this money from the the company like this okay now all right any other transaction they have given yeah immed medely on 31st December there is one more transaction called interest received on holding so on 31st December again interest received on holding check sir from the beginning if you want to calculate or calculate it from here till here how many debentures you were holding three lakh you sold 120 so that means value will increase or reduce reduce so 3 lakh minus 120 you do it is 180 again you purchase 50 180 + 50 is how much basically reduct this add this it will become 230 again you sold 90 so 230 - 90 is what 130 140 okay 140 okay then again you yeah that's one correct no fine so that means how much what is the face value of the debenture you are holding if you do all this plus minus 3 lakh - 120 plus 50 - 90 if you do how many debentures are you holding total face value of the debenture held is 1ak 140,000 so that much debenture if you're holding means you'll receive interest from the company for how many months 6 months so into 15% into 6 months that will be 10,500 that's where the transaction stops but they will not give you two hidden adjustments which you have to compulsorily do it which is what sir Acro interest opening balance if Acro interest has opening balance opening balance means it relates to last year current year also we have debentures so that means acred interest car will also have some opening balance because we have received the interest only till 31st December but our year ends on 31st March so January February March are we holding debenture yes okay has interest aced yes have you received no so calculate aced interest on 1 140,000 debentures because that much only we are holding till now okay so 1 lakh 140 into 15% for how many months 3 months this is your aced interest closing balance which becomes opening balance in the next year like this D this is working note number one for interest the most important one all right now have you purchased the debenture yes so let's do one working note for purchases here only I must have put it working note number two here actually it is in this problem it is not there but usually in the problems they give you some stamp Duty brokerage and all that that stuff so this working note becomes important so how many times have you purchased debentures in the current year two times one on 1 May another one on first 30th November first have those columns 1 May what kind of a purchase come interest purchase 30th November what kind of a purchase X interest they only told okay sir come to the first make a purchase how much did you pay for to buy these debentures 1 lak 5,000 so update that the purchase price or the how much is 1 lakh 5,000 keep this in mind what kind of a purchase is this come interest they only told in the problem you here you purchased on what basis come interest that's what I've listed out here it's a come interest purchase means the purchase price includes interest can it be included no but have they included yes so what we have to do excluded so that means some interest is included in 1ak 5,000 which you need to exclude so that means we have to calculate interest sir no no no no you already calculated check which day did you purchase 1 may come back to your interest working note on 1st May how much is a sir 5,000 rupe this much interest is included in your purchase price which you need to exclude so deduct 5,000 rupe okay now this you directly get it from working note number one no need to calculate again but whenever you buy the uh debentures you will have some stamp Duty and you'll have some brokerage if at all you have that add it in this problem it is not there but in the format I've just brought it so in case if it comes in your examination do not forget to add these acquisition cost so that gives you our net purchase price how much sir one lak rupees okay same data you do it for 30th November 30th November May again you purchased but on what basis X interest basis okay 30th November how many debentures did you buy 500 debentures how much did you pay for it 54500 so purchase price is 54500 is there any brokerage or Sam Duty no what kind of a purchase is this x interest soes does that 54500 include interest or no interest no interest so should you have to deduct anything no so this itself becomes your net purchase price an okay so this is your purchase price we'll finish off all the working note then post it into the Ledger next is Sir have you sold some debenture yes so when you sold some bonds or debentures you'll end up making some profit or you'll end up making some loss so next working note is to find out the profit or loss on sale okay so how many times have you sold this debenture here you have sold it two times one on 1st November and another one on 31st December 1 November sale is X interest 31st December sale is come interest so I'll note that down 1 November X interest 31st December coming test on first November at what price did you sell first November when you made a sale you sold it for 1 lak 12800 and here you sold it for 1 lak 18,000 so both I'll capture 1 lak 28200 and 1 lak 18,000 is your sale proceeds sir only at the time of purchase you'll incur brokerage or also at the time of sales also at the time of sales if there is brokerage here deducted so why there you in the purchase working note you added here you are deducting purchase may you are adding sales May you are deducting why sir sir when you purchase 1 lakh 5,000 all money will go out brokerage money also will go out and as13 says to buy this investment brokerage are necessary hence don't transfer this brokerage to pendl account add it to the cost of investment so we added in this problem it is not there but if it is there we would have added but when you sell no sir 1 lakh 28200 you will get 1 lak 128,000 you will recover it's an inflow yes know is 28200 is an inflow but brokerage is an inflow or outflow outflow so when you're talking about sale proceeds we want the net money okay let's say there is a brokerage of 1,000 that means what sir when you sold you recovered 12800 one hand may you are collecting 12800 another hand May you're paying 1,000 rupees to the broker as brokerage so how much money really come into your hand 12800 or 127200 127200 that's the reason if you have any brokerage it becomes an outflow redu it here so it's not partiality it's just pure logic okay now all right so sale proceeds you take and if there is brokerage you reduce it in this problem if you have any brokerage or no brokerage no brokerage if it all it is there what you have to do sir deduct it okay and if there is any interest component you need to reduce but you'll reduce it only for what only for come interest which interest is come interest here here is is it come interest or X interest X interest means interest is included or not included not included so anything to be deducted no so net sale proceeds will be same but here here when you sold what kind of a sale is this come Interest come interest means interest is included in the selling price which day did you sell 31st December should we have to find the interest or already did already did come to your 31st December car check interest on come interest sale is how much 675 so this much interest is already included here which you need to reduce it once you reduce you'll get net proceeds to be this much comfortable with these two okay so this is the cost I mean this is the selling price next selling price to get profit or loss what are the two things you'll compare cost price and selling price selling price you already got now the only thing we need to get it is what sir cost price but hang on what did the question say you have to calculate this using what basis fif basis what does fif say what does the first fif full form first in first out so what that means whatever investment you buy first you will sell that first correct that's what that's how fif works okay now you tell me sir which debentures did you Pipers this one or one more uh not this these are all debentures purchased and sold in the current year you already had some debentures since last year here they've given in the previous page how many debentures since you you had you were holding from the last year 2,000 okay first 2,000 debentures will be sold because that's how because they are asking fif method that's the reason okay now do you know the cost of this 2 2,000 debenture yeah all right sir 250,000 or maybe 1 minute I'll put it up the next next page 250,000 is a cost for how many debentures 2 2,000 debentures okay so first time when you sold how many debentures did you sell maybe I'll bring that data as well how many debentures did you sell 1,200 I'll write it over here here you sold 1,200 debenture and here how much did you sell as for the question next time you sold 900 debur so first you sold 1,200 and then 900 let's do 1,200 calculation first how many debentures you had it since last year 2,000 for first time you sold entire 2,000 or only 1,200 1,200 it's like this what is the cost of that opening balance we had 2,000 debentures from year beginning and cost was 250 yeah 250,000 2,000 debentures we had from the beginning and total cost of this is how much 2 lakh 50,000 so for 2,000 debentures the cost is 250,000 entire 2,000 debentures did you sell here or only 1,200 1,200 how much is the cost Pro how do you get X basically 250,000 divided by 2,000 into 1,200 so what is the cost 1 lakh 50,000 so cost is 150 you sold it for 12800 that means you sold this investment at a profit or loss loss how much loss 21800 easy now like this can we do it for the next one okay sir you had how many debentures from the last year 2,000 in that how much you already sold now, 200 so how much is remaining in this basket this I'll call it as Lot number one in this lot how many debentures are remaining 800 next time when you sold you sold how many deur 900 that means out of 9900 800 will come from first slot okay after that how much when did you buy after that you purchased two you'll take the what what purchases the earliest purchase earliest purchase is what here 1,000 or 500,000 right 1,000 you purchased on first May no how much did you pay one minute maybe I'll write that down next how many how many did you buy thousand right okay so one second th000 debentures don't say you purchased for how much value did you pay 1 lakh 5,000 okay I think here brought in there but you should not take 1 L 5,000 you should take one lakh why sir what kind of a purchase was this this th000 debentures was purchased on a come interest basis come interest basis means it includes interest will we include the interest or excluded that's the reason we already found out purchase working note check your purchase working note what is a net Purchase cost not 1ak 5,000 net Purchase cost is only 1 lakh because 5,000 interest was already included understood so we have to take the cost as what sir not 1 lak 5,000 but 1 lakh understood this this is a common mistake okay so you purchase th000 debentures by paying a cost of 1 lakh okay so totally you want to sell 900 sir totally you want to sell 900 this I'll call it as Lot number two so from lot Lot number one how much will you utilize 800 because only 800 is remaining another 100 debentures will come from Lot number two so that means you have to calculate for as a pro ration one calculation or two calculation two calculation like here 250,000 is a cost for 2,000 debentures original how much original debentures have been sold now only 800 for 800 how much so you have to Pro rate it like this how much will be that 2,000 will be the cost or 2 lakh for 2,000 debentures the cost is 250,000 for 8 00 how much how much is said ma 1 lakh that is a cost that there okay but are we selling only 800 or 900 900 so out of 900 800 came from previous year car debenture 100 you will sell from current year debenture current year debenture th000 debentures you have purchased by paying how much cost one lakh entire you sold or only 100 100 for 100 how much which will be 10,000 that means the cost for this will be 10,000 so what is the total cost 1 lak 10,000 EAS see so sale value is 1 lak 11,250 cost is 1 lakh 10,000 so you ended up making some loss or profit profit or 125 this way okay s all this calculation headache will not come for weighted average method that's the reason we say you always use weighted average method if the problem does not specify I'll take you through one problem okay but here we can't do weighted average cost because question specifically mentioned as F4 method okay that's the reason they gave this lot as 900 so one lot one debenture will be sold from Lot number one another debenture partial debenture will be sold sold from Lot number two so two times you need to calculate the cost that you need to be care and moreover the second time when you calculated cost some interest element was also included so don't take the value as 1 lak 5,000 we always have to take after deducting the interest what is the value net purchase price we need to take okay that does a take away of this problem okay sir all these are working nodes once these working nodes are done easily you can push the data into your Ledger because what is the journal entry for investment purchased investment to buy so like that we'll go on passing the entries now problem done no working notes are done now if this is done 95% of the question is done remaining thing is just putting in the format and updating normally investment in bonds no sir you will have 10 columns date particulars face value interest cost five columns on the debit side five columns on the credit side date particulars interest face value and cost cost column here or principal column some problem they'll refer it as cost some they call it as principal it's fine principal column here refer to the investment Ledger interest here refers to the interest account you remember in your golden days you used to prepare double column cash book and cash bank column together or triple column cash book for discount cash bank together this is that W format your interest and investment are put together are combined and prepared as a ledger okay IDE I also suggest so they've not asked interest Ledger no sir yes ideally they've not asked but in all our problems ICA presents in this format so I suggest you follow the same format in exam also okay sir all right sir we don't have to look at the question now anyway we have working note number one which is posted chronologically one by one we'll go on posting first interest AC opening balance sir interest AC is a liability or an asset asset asset opening balance where it will come debit side so you'll write it as two balance brought down okay how much is the face value here face value also I have what is the face value of debenture I own 2 lakh this 7,500 you'll write it in the cost column or interest column interest column so interest column is 7,500 you need to write what about principal column how much of debentures did you purchase you purchase this last year debenture for what value they told 250,000 that is given in the question update it here done now all right next next look at your table what is the next transaction interest on come interest purchase you purchase some debenture what is a journal entry for investment purchase sir ah thank you thank you so much I don't know what is this money concept somebody saying 40 rupees and all I don't understand what you can send money also huh what is that never aware of it huh you also don't know super CH Super Chat option H don't know what is it what is that sh sh Chan I don't know I think couple of times you sent that I thought you were just saying me mocking me all right but I don't know anyways no need to send money and all but don't send it it's fine okay all right but I don't know whether you can send also but you're saying 40 rupees and all I don't know what it is okay no need to send appreciate thank you you're liking the teaching that's good enough for me yeah all right don't have to measure that in money thank you the intention you have now that is good good enough for me okay come back to the question now I didn't know this only yeah okay all right new new things you learn every day I tell you in life okay so coming back to this interest on come interest purchase so you purchase the debenture what is the journal entry for debenture purchased investment account debit to bank account so that means you'll write in debenture account investment account debit to bank sir okay uh when you purchase the debenture was there any interest included yes how much interest is included 5,000 so that means sir when you purchase the interest seller would have lost the interest seller would have lost the interest can you keep quite or you have to compensate you have to compensate so this 5,000 interest you will receive or you have to pay since seller has lost it you as a buyer should compensate so you need to pay what is the journal entry for interest paid interest account debit to bank account so that means in your interest account you'll write two bank 5,000 rupees easy now this is under interest column all right and the principal column you need to show the purchase price for that we have already prepared working note number two check your working note number two what is your net purchase price sir net purchase price is 1 lakh that you put in under your cost column or principal column like that every data is there in our working mode just take it and dump it okay all right what is the next uh component sir this is over these two are over next will be interest received on holding what's the journal entry for interest received bank account debit to interest so that means the posting will be what you post it as by Bank how much value we told 20 to 500 face value column cost column nothing only under the interest column next uh this is over interest on X interest sale okay sir you have sold means now you as a seller have lost interest so you will you will compensate or you will get compensated you'll get compensated meaning you will ask this interest or you'll collect this interest from the buyer how much interest have you collected 6,000 rupees so this interest you are paying or receiving receiving what's the joural entry for interest received bank account debit to interest so that means in your interest Ledger you will post it as by Bank 6,000 what is the face value of the debenture sold 1 lak 120,000 so cost column what you have to write don't take the price given in the question you already done a working note check working note number three you have sale proceeds there what is the sale proceeds you have got it somewhere we here we return on 1st November what is the sale proceeds 1 lak 128 200 that is the sale proceeds that should come here and when you made the sale did you end up making some profit or loss yes you ended up making some loss I already told you the logic loss means it will come on the debit side credit side which side de la la loss loss will come on the credit side I've already told you the logic don't ask me once again yeah no time also loss will come on the credit side profit will come on the debit side okay that we have posted here come from the working note next this is over next is interest on come interest purchase your purchased means seller has lost interest so you as a seller should compensate so this 3125 is interest received or interest paid interest paid what is the journal entry for interest paid interest account debit to bank account so you'll write again here Bank 3125 face value of the debenture purchased is 50,000 cost column what will you write net purchase price which is there in working note number two come back to your working R number two what is your net purchase price 54500 check out the updated 54500 yes like that okay G ah all right uh next uh what is the next one come interest sale so if you have sold the debenture now means you as a seller have lost interest you'll recover this interest from the buyer so this six , 6750 interest you will pay or you will receive receive what's the journal entry for interest received bank account debit to interest so the posting will be by Bank 6750 yeah face value of the debenture sold is 90,000 Okay g and what about cost column cost column you have to show net sale proceeds so do you know the net sale proceeds on 1 31st December yes how much is that 1ak 11,250 update it here and when you sold these debentures did you end up making some profit or loss yeah you end up making some profit of one to 5 profit means credit side debit side which side debit side more importantly which column don't put it under interest column or face value column this profit or loss you will show under the investment column investment column here refers to principle if you don't like to call it as principle you can also call it as cost some problems me in ic material refers to this as a cost that is also okay next next what happened interest received on holding what's a journal entry for interest received on holding Bank to interest you will post it as buy Bank 10,500 done doesn't effect face value principal call then interest ACA closing balance the interest AC is an asset asset close opening balance comes on the debit side closing balance will come on the credit side how much value 5250 face value of the debure remaining is 1 lakh 40,000 so by balance carry down 1 140 here 5250 here this you'll arrive it as a balancing figure if you want you can calculate also but you can get it as balancing fig so all these interest are pendl components interest where it will be transferred to P account all the interest put together you transfer it off to pnl ledger balance that's that's all okay sir lengthy but very easy just that you can make a lot of clerical errors here instead of 3 months 4 months instead of posting the components in the principal column you may put it in face value column or interest column instead of posting profit on the debit side or you may post it on the credit side like these sort of small small mistakes can happen unintentionally you know it but fast when you're writing fast fast me these sort of small small mistakes can happen so watch out for that so solve it once if you have time and see what mistakes you're doing if you're not doing any mistakes shabash okay otherwise identify and correct it before the examination Hall let examination not become your practice hall okay all right so this is about bonds or debenture purchased as an investment you can also purchase equity share as an investment so what if you have Equity shares let's take a one question okay already time okay no problem time is running like zo you know H Target I'm crossing every topic of Target I'm crossing I don't know why okay fine no problem nonetheless we still need to cover it uh sir this one maybe this question quickly I'll just tell Innovative garments company they've invested in shares of another company on 1st October at a cost of 250,000 so they purchased some shares earlier they had purchased gold and silver also on March uh 2020 sir you are in which year October 2022 that means current year is 2022 2023 that we're talking about you purchased gold which year huh uh it'll be first March 2020 that means you purchase the shares debenture and all two three years back that means what sir this gold or silver looks like a short-term investment to you or a longterm longterm market value of all the instrument they've given okay so basically you need to guide how the investment should be valued but nowhere they have given the intention of holding meaning they've not told whether it is a short-term or a longterm now you have to make the Assumption okay sir shares you purchased it in the current year so you'll give a subjective answer if share is classified as a short-term investment because you purchased it which year current year okay so if you if your intention is to hold it for less than 12 months then it becomes short-term investment short-term investment will be validate cost or market value whichever is lower how much is the cost 250 how much is the market value 225 so in this case you'll value the investment at 2 lakh 25,000 however if you assume no no no know though we might have purchased it in current year we have an intention to hold it for more than 12 months in that shares also can become in that case shares will become long-term investment if it is long-term investment you'll value the shares also at Cost what is the cost 250,000 do you know the intention of holding not given that means you'll give a subjective answer if it is shortterm you'll value at this if it is longterm you'll value it at that however since they're saying gold and silver was purchased last year they've not given anything last year a lot two years before I'm going to assume that these are what s of Investments long-term Investments so long-term investment should be valid at what value cost how much is the cost of gold 4 lakh and silver crite is 2 lakh market value will be ignored in fact market value is lower than cost or much higher than cost cost of gold is how much sir four lakh market value is six lakh so appreciation do we record it here no as per as3 we don't record the increase we only record the decrease so long-term investment will be valued at Cost itself okay so that's all you need to give it as a subjective answer there all right yeah yes sir somebody is putting you some uh extra pointers they are saying sir shares and debentures both should not come in exams sir both comes means going the only half an hour for shares half an hour for debentures it's easy but it'll become really really lendy sometimes it has come we have also solved such question in our regular class combo questions you have some debentures also you have Equity shares also but the chance of they coming as a single question in exam is little rare but it can come also not conceptually difficult just that it'll become very lengthy so you have to be extremely fast in completing the paper that's all is a Crux okay fine anyways I don't know whether it'll come or not anyway I've thought you both if it comes also you should be able to solve it the only question is will you solve it within the stipulated or required time that's the only Essence okay let's go over one more question question if you have Equity shares as an investment what to do now on 1 April 20 X1 Sund Sunda he had he purchased a had had that means did he purchase it in the current year or it's there since last year he's holding this since last year that means this is what sir current year purchase or opening balance opening balance how many shares he has 25,000 he purchased this at what value book value of 15 rupees so 25,000 into 15 you do sir how much is that don't want to do okay I'll only do 3 lakh 75,000 correct okay sir in shares no sir you don't have to present the working node in that format because when it comes to shares no there will be a lot of adjustment if you try and present it in like last problem okay the number of working notes will become drastically big time also will be lot more it will take a lot more time so if the adjustment is simple don't put any working note here you you have 25,000 debentures each book value is how much 15 do you need any separate working out for this huh no so directly we'll capture this in your Ledger what's the journal entry for it's an investment this is investment account opening balance where will you write opening balance to balance brought down for shares no sir for debentures or bonds what was the columns date particulars face value interest principle okay same thing here no sir instead of face value substitute with number of shares because here no sir there will be some bonus shares on issue and bonus shares will you as an invest should you have to pay any money for bonus shares or you'll receive it at free of cost free of cost so instead of face value replace face value column with number of shares replace interest column with dividend cost column you keep it as it is Institute May does not put in some problems may they bring in dividend data dividend column they have some problems may they don't bring in dividend data so I think the choice is yours whether you want to do it or not but in all our regular class I had also shown you with the dividend here you can follow whatever you call okay now all right next up first St opening balance of debentures how opening balance of equity shares how many shares 25,000 25,000 into 15 is how much 3 lakh 75,000 so number of shares column 25 you write amount column you write 375,000 okay now next what happened on 20th June 20 X1 he purchased another 5,000 shares at 16 per share have they given any brokerage time Duty no so that means simple working note you have to put up a working note or inside only we will show inside The Ledger only you can show how many de how many shares you purchase 5,000 each value how much 16 16 5 are 80 so that means this is obviously what sir 80,000 rupees so what is the journal entry for investment purchased investment account debit to bank account 5,000 in the number of shares column 880,000 in the amount column over don't for everything don't put a working note only if they give brokerage stamp Duty and all then you prepare a working note I've showed you all this in regular class okay next what sir directors of X limited announced a bonus and rights issue obviously no dividend was payable on these issues so you don't have to pay any dividend on right shares and bonus shares usually on right shares and bonus shares also we will pay dividend but here problem is clearly saying don't calculate the dividend so means will we calculate dividend and bonus on bonus and right shares no problem a requirement don't ask me why I will not question the question I will not question you also okay the terms of issue are as follows you give bonus shares what is a bonus card date sir 16th August bonus is in what ratio 1 is to six meaning if you own six shares you will get one as bonus if you own six shares you will get one as bonus so what is the bonus card date again 16th August till 16th August how many shares does the company have they already had 25,000 before 5,000 additionally they purchased so how many shares they have now 30,000 25 + 5 so totally how many shares 30,000 for six one is the bonus shares for 30,000 how many 5,000 okay sir all right so don't say CR account debit to bonus to shareholders account D we are passing the journal entry not in the company issuing bonus shares we are passing all this in the books of investor okay all right you're right but you need to pass that in the books of the issuing company are we doing the books bonus the company who issued bonus shares in their books are we passing the journal entry or investor investor investor received the bonus shares did he pay any money no so that's the reason in the the investment column no in investment Ledger we have number of shares column so that we can show all this bonus so the investment Ledger just write to bonus how many bonus shares you have received 5,000 cost column write zero why because bonus Shares are received at free of cost that means amount is zero that is the reason all right okay next right shares theyve receed in what ratio 3 is to seven so three right shares the shareholders are eligible to buy if they are already owning seven shares what is the rights date 31st August okay at what price sir 15 first let's calculate number of eligible right shares so old shares if you have seven shares already you are eligible to buy right shares right Shares are also given to existing shareholders only okay but not at free of cost but at a lesser value let's say market value of the share is 50 rupees market market value of the share is 50 rupees face value of the share is 10 Rupees market value is 50 you will make the rights issue not at 50 rupes let's say you will give the right shares at 23 rupees you give the right shares at 23 rupees market May the value of the share is 50 rupees okay but here I'm issuing it at what price maybe I'll make this as 20 uh 20 I'll make it okay right price is how much 20 that means compared to market price you giving heavy discount so this is your right shares so right Shares are also given to existing shareholders but at a discounted price don't calculate the discount from Face Value you're not issuing right shares below face value company's act says no share shall be issued at a price below face value we are not issuing right shares below face value here when we say right Shares are issued at discount the discount is calculated from market value perspective compared to market price we are issuing the right shares at a discount that's all so right shares I used to say is like coupon is your like your Amazon coupon if you have flip cart or Amazon cpon what you can do with that you can you can utilize the coupon and buy some Goods okay or if you want you can sell this coupon to your friend if you're crazy you can also tear it off don't tear give it to me I will take it happily yeah all right so that tearing option will not be there over here there'll be two options which will be given for right shares so what here the right share Holder will do is he will utilize the right and he will buy the right shares that we call it as rights subscribe if the shareholder utilizes the right and he buys the shares we call it as rights subscribe or what he can do he can sell his rights only to somebody that we call it as rights renounced so first we he eligible how many eligible right shares the shareholder can buy if he has seven shares he can buy three how many shares currently he is holding check this table 25 he had at the beginning 5,000 he purchased another 5,000 he got it as bonus keep the date in mind bonus came first then right CH is coming so on the right shares how many shares is he holding 35,000 if he has seven means three 35,000 means how many how many right shares he's eligible to buy 15,000 do you think he has to buy 15,000 no his choice let's say what he has done check here uh shareholders were entitled to transfer the rights in full or part Sund sold 33% that is onethird of his entitlement to shake her at 2 rupees per share so Sund what did he do sir oneir of the rights did he subscribe or renounce renounce how many shares he was eligible to buy Here 15,000 15,000 shares he was eligible to buy in that he renounced how much oneir 1/3 of 15,000 is how much 5,000 shares this 5,000 shares did he buy or he G he gave this right to somebody else he gave this right to somebody else will he give this right to somebody else at free of cost or he's charging some money on each shair how much money is he's charging they told 2 rupees so 5,000 into 10 is how much or 5,000 into two is how much 10,000 rupees for Sund this is an income no because he sold his rights to somebody and collected 10,000 means this is an income this income will be straight away transferred off to pendl account are we preparing pendl account here are we preparing bank account here no that means this transaction will it come in in your investment Ledger no so just mention in the working note and say it will not get captured that's all okay s s onethird of the rights he renounced that means balance 2/3 he purchased subscribed 15,000 he was eligible in that 1/3 he sold means 2,00 2/3 he subscribed 15,000 into one 2 by3 if you do obviously you will get what sir 10,000 or if you can say in 15,000 if he sold 5,000 rights means balance 10,000 he subscribed like that also you can calculate write shares if he wants to subscribe means he has to pay money and only buy the right shares because right Shares are not given at free of cost right Shares are given at a discounted price and each right shares price is how much 15 if any shareholder wants to buy right shares on one right share he has to pay 15 rupees how many right shares here the investor wants to subscribe 10,000 and one share how much he has to pay 15 rupees so total will be how much 1 lakh 50,000 this much he sold or he purchased he purchased so right shares is also normally Equity shares only yes no I means this is also what like investment purchased what is the journal entry for investment purchased investment account debit to bank how many shares 10,000 what is the value 150 so you'll write here two bank and number of shares column 10,000 cost column 150,000 or amount column 150,000 easy next what happen sir dividends dividends for the year 31st March 20 X1 one minute sir we are in what is our current year they gave opening balances 1st April 20 X1 so current year begins on 1st April 20 X1 and ends on 31st March 20 X2 this is the current year that we talking about now check dividend for the year ended 31st March 20 X1 current year is ending on 31st March 20 X2 X1 relates to previous year so previous year you have declared the dividend at the rate of 20% normally that's the process no sir once the year ends then you'll conduct the AGM in the AGM you'll declare the dividend correct so you declare the dividend for last year at the date of 20% and it is received by Sund on which date 31st October 20 X1 correct now dividend on shares acquired be on 20th June are to be adjusted against cost of purchase what does that mean is Sir in the check here last year did Sund have any shares first we'll do that calculation last year how many shares Sund had 25,000 each share nominal value or face value is how much they told here 10 Rupees okay so last year Sund had 25,00 shares this dividend of 20% relates to current year or last year last year Sund had 25,000 shares in the last year so should he receive the dividend on this logically yes will he receive this yes this is pre-acquisition dividend or normal dividend normal dividend because he already had shares in the last year and dividend also relates to the last year so calculate sir first we will do the dividend first on normal dividend on how many shares 25,000 shares dividend is always calculated on the face value 25,000 is a number of of shares into 10 if you do means you're going to get total face value of the shares held by Sund we want only Sunda dividend we don't want Total dividend what is the total face value of the shares held by Sund 2 lakh 50,000 and how much dividend the company has declared 20% so multiply that how much is that 50,000 Rupees this is your pre-acquisition dividend or normal dividend normal dividend what is the journal entry for normal dividend bank account debit to dividend income account or dividend received account next entry will be dividend received to pel account so this dividend of 50,000 will be transferred off to P am I preparing dividend Ledger here no am I preparing P Ledger here no so that means this will not be captured here if you want you can prepare dividend Ledger also if at all you show dividend means this particular transaction you will be able to capture like that okay now one more that is not the problem here the problem is one more what are they saying dividend for the shares acquired by him by him on 20th June 20 X1 so 20th June 20 X1 means the shares were acquired last year or current year current year he has purchased the shares check here dividend for shares acquired by him on 20th June are to be adjusted against cost of Purchase cost of purchase means cost of investment what in the shares no sir current year if you buy any shares no sir normally shares you can buy on something called come right basis or come dividend basis you can purchase the shares on what basis come right or come dividend basis if you purchased any shares on a come right or come dividend basis bis what it means is after you have purchased if company issues or comes up with any rights issue you will be eligible to buy the right shares because you purchased on what basis come right basis you as an investor will be eligible to get right shares you as an investor will be eligible to get dividend even if that dividend relates to last year when did you buy the shares current year so ideally if any dividend is required for last year should you get it no but on what basis have you purchased the shares come dividend basis if they use the word either come right basis or come dividend basis then you as an investor will get right shares also or you are eligible to buy right shares also you are eligible to get dividend also even if that dividend relates to last year now you think logically last year did you have this 5,000 shares no so should you logically get the dividend no but you purchased on what basis come right basis or come dividend basis that means will you receive the dividend yes what is the nature of this dividend pre-acquisition dividend this is the nature is pre-acquisition dividend what is the journal entry for pre-acquisition dividend we already did in Consolidated financial statement what is the journal entry for pre-acquisition dividend Bank to investment pre-acquisition dividend has to be reduced from cost of investment that is what they're telling here whatever dividend you receive on 20th June are to be adjusted against cost of purchase so they saying the dividend amount you reduce it from cost of investment why because this dividend is a pre-acquisition dividend indirectly problem is telling you this dividend is a pre-acquisition dividend okay but nowhere they told shares is purchased on comate basis no sir but they told in this problem you know dividend on shares acquired by him are to be adjusted against cost of purchase you're receiving dividend on these shares you can receive this dividend on shares only if you purchased on what basis come right basis even if they don't use this word if this line is cut off dividend received on 20th June if they cut off this word still do the same adjust M because our Institute study material assum assumes every shares purchased in the current year is on a come rate or come dividend basis even whether it is mentioned in the problem or not mentioned in the problem IC study material makes this assumption okay so if dividend is declared in the current year but if it pertains to last year and if current year if you have purchased any shares you will calculate dividend on it and you will treat this dividend as what dividend pre-acquisition dividend irrespective of whether they mention come rate basis or different basis because that is assumption study material is doing for exam you also make the same assumption is that fine sir hidden adjustment this is every problem they do this adjustment that's okay Carry on that means here we have only normal dividend or also pre-acquisition dividend also pre-acquisition dividend pre-acquisition dividend you will receive on how many shares 5,000 shares each share face value how much 10 Rupees dividend is calculated on face value so on this 5,000 shares how much dividend will you get 10,000 so logically should you get the dividend on this 5,000 shares no why because this 5,000 shares is purchased in the current year but dividend relates to the last year logically you should not get it but reality May are you getting yes so what is the nature of this dividend pre-acquisition dividend what is the journal entry for pre-acquisition dividend bank account debit to investment how much value 10,000 and this adjustment is done as per what sir accounting standard 13 as13 only says that any pre-acquisition dividend should be reduced from cost of investment so this are you preparing investment Ledger here yes so will you post this entry into the Ledger yes in investment Ledger you'll post it as what by bank so have they posted as by Bank yeah they've written dividend but what sort of dividend is this pre-acquisition dividend yes or sir guys yeah all right next on 15th November 20 X1 Sund he sold off 25,000 shares this was one Bak okay he also sold shares at a premium of 5 per share so what is the face value of the share 10 he sold at a premium means the selling price is how much 15 per share any brokerage data and all is given no so what means what are the sale proceeds 25,000 into 15 how much is this 3 lakh 75,000 so first we'll do uh profit or loss working note what is the sale proceed sir 3 lakh 75,000 correct sir if you have sold the shares means okay maybe what is the journal entry for sale of shares Bank bank account debit to investment so in your investment Ledger you'll post it as by bank 375,000 number of shares sold is 25,000 so whenever you sell the shares you'll either end up making some profit or some loss so have they told how to compute profit or loss in this problem they has to prepare investment account which we are preparing and shares are to be valued at average cost basis so here they're saying don't use fif use average cost you know how to do P4 one problem we already gone here now we are working it under average cost basis okay if they don't mention the method always assume average cost because that is easy okay so how do you find out cost to find out profit or loss you need a sales price and cost price so how do you find out cost price and average cost is simple how do you find average cost if they give you three years of profit how do you find average total profit divided by number of years here can you take number of years no here you're purchasing number of here shares you are buying and selling so that means how do you find out the average cost toal total cost divided by total number of shares yes or no sir that's all so total cost when did you sell 25th or 15th November till 15th November what and all is your cost check first 375,000 is a cost yes take your calculator add it then you purchase right share by paying or you purchase additional shares by paying 80,000 add it 375 + 80 455 for bonus shares is there any cost no cost zero then right sh 150 add it so how much is it cost 6 lakh 5,000 ah don't be in a j don't add only this yeah all these are cost only no doubt but there is one more component pre-acquisition dividend what should you do for pre-acquisition dividend reduce it from cost of investment so do not forget to reduce 10,000 so minus 10,000 you do how much is that 5 lak 95,000 so this this is all your cost for purchase 10,000 rupes is pre-acquisition dividend you should not forget to reduce that this is the total cost divided by total number of shares add up all those shares 25 + 5 30 30 + 5 35 35 + 10 is 40 five so this is the cost for 45,000 shares this is the cost for 45,000 shares how 45 all this car addition okay now entire 45 did you sell No in fact if you do this what are you going to get if you do this what are you going to get you'll get cost of one share you'll get cost of one share we want cost of one share or cost of share sold sold how many shares did you sell 25,000 so multiply by 25,000 so if you wanted as formula it will be total cost divided by total number of shares multiplied by the number of shares sold do you really have to mug it up or you can construct your own can construct your own so what is the cost 330 so 37 you have sold it for 375 cost is only 330 so you ended up making some loss or profit profit how much profit 4445 profit where it will come credit side debit side debit side so posted on the debit side then it's your balancing figure get this as a balancing figure either you can calculate also or get it as balancing figure it's fine n they also asked you to prepare pendl account only extract two things will go off to pendl one is what sir one is rights you renounced know when you rights you renounced the 10,000 you got the journal entry you can pass is bank account debit to rights income and rights income account debit to pendl or directly you can pass the entry bank account debit to pendl account okay this is your rights renounced okay now so where will you show this in your pendl account you will credit as by sale of Rights 10,000 yes sir that's all or you got some normal divident also you got some normal dividend also dividend also is an income income will come on the debit side of P or credit side credit side you again show dividend 50,000 okay and then when you sold some investment you ended up making some profit no how much profit 445 that also will come that's all that's all you can prepare because no other data is given so hence we are calling it as we are not calling it as pnl we calling it as an extract extract means whatever pnl information is there only update that rest is not required okay zaru so with this yes 13 we have fully completed thank you hello people let's quickly now revise introduction and overview of accounting standards so this topic basically gives you the importance of accounting standards and which all entities has to apply the accounting standards basically accounting standards are some written policy documents issued by the government for companies accounting standard issue responsibility is with Ministry of corporate Affairs but for non-corporate entities uh the accounting standards are issued by our mother body that is icai okay so but they are basically gged documents released by the government that's all is accounting standards so why do we need have Accounting Standards basically to standardize the process because if accounting standard was not there maybe people would have done their own things so to avoid that and to bring the things some standardization into accounting so they've just brought in the account standards and also by since everybody is following the same thing the financial statements will become comparable so one company of financial statement if you want to compare to other one it'll be possible now because everyone will be following the same accounting treatment okay that is one and another part is Sir any standard for that matter take any accounting standards they only cover four areas okay that we used to call it as rmpd only four areas which every accounting standard tries to cover recognition measurement presentation disclosure meaning to recognize something or not to recognize something like if you have to pay if somebody has filed a case against me somebody has filed a case against me Cas is going on in the court of law immediately I'll recognize it as liability or I'll assess it further I'll assess it further so whether to recognize that or not to recognize that that is a first area accounting standard talks about it so if at all you say you have to recognize the next question will be how much to recognize that liability for 5 lakh 10 lakh 50 lakh 5 what value that is your measure M aspect Which accounting standard gives you the guidance third one is p p for presentation so where should you show this liability under current liability non-current liability if at all non-current liability which category if at all you say current liability under which category so that is your presentation aspect Which accounting standard gives you the guidance last is disclosure aspect suppose I make a provision somebody has filed a case against me I've made a provision for damages five cres in my balance sheet May I've showed this provision for damages under current liability 5 will anybody understand it will somebody who's reading my financial statement understand it no obviously they would like to know what is this 5 how the hell did this come through or come yes that means we need to give some extra information about it what is this five why it is come etc etc that is your disclosure aspect disclosure means giving some additional information so that the users of financial statement can understand the components better so every accounting standard just covers only these things recognition measurement presentation disclosure okay that is one benefits we already saw sir non-corporate entities no non-corporate sir accounting standards are applicable you non non-corporate entities also yes if you have sole proprietor partnership firms and all even for that you need to apply Accounting Standards so before you get to the application of accounting standards now sir non-corporate entities are categorized into four level one entity level two level three and level four entity there are four categories in which they are segregated okay why some some entity entities in the respective levels get some exemptions get some relaxation that's the reason four category this four categorization so for non-corporate entity I told issuing the accounting standard is whose responsibility our mother body icome only for corporate entities issuing the standard is a responsibility of Ministry of corporate Affairs so our ICI has categorized non-corporate entities into four level one level two level three limit so or level four yes so these sort of question this is little popular from this particular chapter if at all it comes probably it'll be this one or one more question which I will take you through okay they will give some data and they will ask you to classify an entity either as a level one level two level three or level four the same has been asked in RTP question also I'll take you through so there are certain limits or condition if those limits are satisfied it becomes the respective level so and you have to remember these limits this is pure memory no no logic these are simply rules which you need to remember and apply for it to be a level one entity or those entities we call it as level one entity one is if they are already listed or in the process of listing ing their shares or debentures whether in India or abroad that is one okay if you are already listed or if you in the process of listing then you become a level one entity or if you're doing a banking business or financial institution business if you're a banker financial institute or an insurance company then you become a level one entity doesn't matter what your turnover is what your net worth is irrelevant if you're Banker financial institution or insurance company you're automatically a level one entity for other entities if your turnover exceeds to 250 CR for you to be a level one entity your turnover should exceed 250 CR and your borrowing or your borrowing should exceed 50 CR if any of these are satisfied you are a level one entity okay these you need to remember is that okay turnover exceeding 250 CR borrowing exceeding 50 CR that's for level one next is your level two entity if you want to become a level one entity your turnover will exceed 50 CR but it will not exceed 250 the turnover exceeds 50 CR but does does not exceed 250 CR and your borrowing exceeds 10 CR but does not exceed 50 CR that is the limit for level two entity okay for level three entity what was the borrowing limit for level two exceeds 10 CR but does not exceed 50 CR that becomes your turnover limit for the level three entity level three entity are that entity where turnover exceeds 10 CR but does not exceed 50 CR or borrowing exceeds 2 CR but does not exceed 10 CR all these limits you have to remember they will not give you okay sir so this respective limits are reached means you become a respective entity okay level four entity is a residual category if you are not a level one not a level two not a level three automatically you are a level four entity like that the categorization is made so why the categorization is made because as I told you they will get some relaxation if you are a level two level three level four entity as3 17 21 23 27 all these are not applicable all these are not applicable for level two level three and level four entity if you are a level two level three or level four as 3 17 21 23 27 there are more remember this much that is good enough is that okay with you so for them it's not applicable however accounting standard 18 related party disclosure for level one and two applicable for L three and four not applicable this is for your level one entities because they get some exemptions fine sir okay so far we discussed uh corporate entities or non-corporate entities all these are limits for the non-corporate entities if you are a corporate entity means MCA will give MCA told I will not do four and all I you know our mother body we always like to go long and big so that's the reason how many categories four Ministry of corporate Affairs said we only will have two categories s SMC non SMC SMC non SMC SMC means small and mediumsized Company and non SMC means big companies so basically if you are an SMC company you get exemptions if if you are not in SMC companies you don't get exemption that what that's what I and a Ministry of corporate Affairs have segregated the limit so means for this again limit is there sir yeah limit is there but that is nothing but your level one entity what is level one limit level one entity limits tell me once again first is you should be either you are a listed or in the process of listing whether shares or any other Securities in India or abroad or you are a banker or a financial institute or a insurance company turnover exceeds 250 CR borrowing exceeds 50 CR yes no if none of the conditions are satisfied you are an SMC so if level one conditions are not satisfied means you become a SMC that means redraft the condition for SMC now SMC means there are those companies which are not listed or in the process of getting listed in India or abroad okay the SMC means that company which is not into banking or a financial institute or which is doing some insurance business their turnover will not exceed 250 their turnover the borrowing will not exceed 50 that's it so that means this limit is not new it is level one Ulta limits that's why okay if level one limit is not satisfied means you automatically become a SMC SMC also gets an exemption as17 is not applicable in full as7 talks about segment reporting that is not applicable in full SMC companies can take that relaxation and for with respect to few things like as 15 19 and 21 they get some disclosure and some other exception remember this much there are a lot of exceptions category it's maybe a little difficult to remember everything I feel this much is good enough is that fine with you sir okay this is about for corporate entity if you are not an SMC automatically you are a big company for big companies every standard has to be applicable no relaxations that's all all right so now some questions that's all is a concept that can come from this standard one or two questions we'll quickly take first I think you you told you know the limits or you remember the limits let's see how well you remember the limits so ah so they have given they've given different cases you need to tell whether the entity is level one level two level three or level four that's all Rama textiles turnover of this company exceeds 10 CR but does not exceed 50 CR okay so what sort of an entity is this Rama Tex level level level level three entity level one entity what is a turn turnover limit exceeds 250 level two car exceeds 50 CR but does not exceed 250 level three car exceeds 10 CR but does not exceed 50 here this turnover they're saying exceeds 10 CR but does not exceed 50 CR that means this is level three entity turnover okay so Rama textile here is a level three there's an RTP question only okay all right Star Industries is having a borrowing in excess of 2 but does not exceed 10 CR what's of an entity is this borrowing limit exceeds 2 CR but does not exceed 10 CR what limit level three entity perfect level one borrowing limit is exceeding 50 CR level two exceeds 10 CR but does not exceed 50 CR level three exceeds 2 CR but does not exceed 10 CR so here they've given two and not two and not exceeding 10 so it's a level three Newman Industries is having a borrowings less than 50 lakhs so level three limit is exceeding two but does not exceeding 10 here the borrowing is only 50 lakh that means is it level three no if you you're not a level three automatically are which entity level four entity okay the other three other three I don't have to even read it's a financial institution it's a finance and here it's a bank if you are a banker financial institution or insurance company you're automatically level one so all these are level one entity like this the question can come fine now okay next this one a company has class a company was classified as nonc non nonc means small company or big company MC means small company non smmc means they are big company will big company get any relaxation or everything is applicable everything is applicable there were a big company in 20 X1 X2 next year wasu in 20 X2 X3 it was classified as SMC someone's bad luu bad Koo everything fall on them rahu and all kind of came on their back and from big company they became what SMC when they were big company is exemption available no but when they become SMC is exemption available is certain standards not applicable for them yes okay so which year they became SMC two X2 X3 okay correct now I'm not telling problem correct no the management desires to Avail exemptions or relaxation available for SMC in 20 X2 X3 since it became SMC they're saying we will take the exemptions and relaxation whatever is applicable you need to commit however the accountant of the company does not agree with the same he's saying don't do you need to comment what we will fire the the accountant or we will give him shabash fire or shabash we will give him this time shabash he's right why is sir you are a big company and it became SMC what the standard say is okay from uh if it's this we call it as this I used to in my class purpose I used to call this as downg gradation I used to call this as downg gradation downg gradation means you're going moving up in Life or moving down here down from big company you have gone to a small company so it's a case of a downg gradation standard does not use it I used to call this like that okay I don't write downg gradation in exam okay so this is the case of a downg gradation what standard says is if you are going from if you're from big company if you're becoming a small company standard says wait for two consecutive years wait for two consecutive years and then take exemption immediately this year if you became SMC means you can't take relaxation this year only wait for two consecutive years meaning this year also you wait next year also you wait next year also if you remain in SMC category from next year onward start taking the exemption so this year they can't because you have to wait for how many years two consecutive years this is for safety question now you only think logically it was a big company they were following all the standards now suddenly some things happened and they become a small company their turnover has reduced drastically borrowing has reduced drastically means company is in a good place or a bad place bad place now this company sudden suddenly takes exemption okay now think from the investor perspective earlier this company used to give all the disclosure now they will stop disclosing because they have become an SMC but suddenly you become an SMC means don't the investor want to know the reason for it that don't the investor want to know the reason for it yes hence the standard has told immediately if there is a downg downg gradation don't take the exemption immediately wait for two consecutive years so that it will protect the interest of The Outsiders so with that in mind these Provisions are made okay so immed medely you won't get you have to wait for two consecutive years so this year Allah next year also you need to wait and next year also if you're still under SMC from next year onward start taking exemption that is the answer yes sir this is popular okay now yeah I think this is all the two question I see from this particular topic thank you so now first buy back of shares when we say buy back of shares here we refer to buy back of equity shares so what does the term buyback mean buyback means cancellation so when you say buyback of equity shares company is in a mood to do what now they are in a mood to cancel Equity shares so if at all company wants to cancel Equity shares what are the things you need to keep in mind or how and all accounting will change is the essence of this particular topic can we run through okay first so buyback has certain Provisions these Provisions are as per companies Act of 2013 these are not Accounting Standards these are companies act provision what company's ACC say is if any company wants to do buyback the shares must be fully paid up somewh it must be there no the shares must be fully paid up fully paid up means it should have reached face value Mark so only such preference shares or only such Equity shares can be cancelled that is one and buyback should be authorized or it should be mentioned in the Articles of Association article should give the power to the company or to its directors to do this particular buyback and obviously buyback requires a resolution the decision that so once you pass a resolution or a decision to do the buyback buyback has to be completed within 12 months from the resolution because generally we say resolution validity is only 1 year or 12 months that's the reason and once you do the buy back so you're canceling Equity shares earlier you had physical shares now company has bought back means who had the shares before Equity shareholder after buy back the shares will come to whose hands company hands so can company keep it in their wardrobe no they have to physically destroy within seven days once you do the buyback within 7 Days of buyback the shares must be physically destroyed that is one okay zaru all right so how much can you buyback sir for that there is a rule but before that up to 10% of buyback if company wants to do board resolution is good enough Beyond 10% if they want to do the buyback up to 25% up to 10% board resolution is good enough Beyond 10% but up to only 25% you need a special resolution board resolution means board board of directors if they agree good enough special resolution means 34 majority in shareholders who are whose voting power is who own 75% of equity shares should say yes to this particular buyback only then you can go through with this buyback otherwise you cannot okay that is your provision it may come as a McQ question I'm giving you most probably mcqs I'm expecting as a case- based McQ they'll give you a case some will be calculation one or two maybe straightforward majority I feel is going to be case based you don't have to do any extra preparation for McQ I'm getting a lot of queries or aw to practice how to do and all that stuff mcqs will be around your Concepts only I'll take you through some McQ questions also later later when the particular chapter comes in this chapter only probably it will come okay it'll be mostly based case studies so don't worry about extra books or extra practice and all revise your Concepts using that concept only they will build McQ don't get carried away by someone marketing there my test series and my mcqs and all that sir I can form if you give me one day time I will go form th000 mcqs and give you maybe th is too much I don't have so much time maybe 100 McQ question sir what is one one question no I'll only form a question only fully paid up shares can be bought back true or false for 25 a company wants to cancel 20% shares do you want to pass special resolution or board resolution like this using this concept only you can construct five McQ questions now you think about it if I make 10 questions around this is it really worth solving all the 10 or knowing provision is good enough knowing provision is good enough so don't waste your time going behind that book or McQ book and not required just practice more towards the things that you are aware of within that only mcqs will come one or two maybe bouncer I'm not denying that but for one or two marks we should not break our head okay concentrate more towards your strengths that will help you moving on to the next sir there is a limit for buyb or there is a maximum amount which a company can buy back one is there are three limits share test or number of shares outstanding test we used to call it a share outstanding test resource test debt Equity test we used to call it so what does the first test says is how much our company existing number of shares is there maximum company can buy 25% if company has let's say one lakh shares company can cancel only 1 lakh 25% which is 25,000 number of shares so how many other shares you have only 25% of that number of shares a company can cancel buy back that is the first limit second limit is resource test what does resource test say company can buy back up to a maximum limit so all these are What minimum limit these are all maximum limit if company wants to do lesser buyb acceptable but maximum they can do buyb only to this extent and not more so resource test says was uh test says what 25% company can cancel up of what 25% of paid up Capital plus free Reserve plus SECU is premium calculate 25% of paid up Capital free reserves and securities premium whatever value you get that is the maximum not number that is a maximum value of buyback a company can do because paid up capital and all will be in number or it be in value so when you multiply 25% you'll not get number of shares you'll get the value of shares take that value and they will give you buyback price in the problem 20 rupes 30 rupes or whatever so this value divided by buyback price will give you maximum number of shares a company can buy back as per limit number two which we call it as resource test okay s third one is debt Equity test this is the most important one but the question there is it's not debt Equity test it is a debt Equity what the third limit says this debt equity ratio should not exceed two debt equity ratio should not exceed two okay but what the problem there is they say debt equity ratio post buyback meaning after buy back debt equity ratio should not exceed two meaning debt divided by Equity should be maximum of two meaning you can have a debt of what sir two times of equity or in a way if you want debt Equity will be what sir half of debt like this the maximum debt a company can have is two times of equity or maximum equity Can Company have is lesser than I mean you can structure this equation this way okay saru all right this is the limit but the problem there is this equation is not before buback it is after buyback keep that in mind that will create some problems for us when we do some questions okay this one these are the three limits so you will do three limits and then what sir calculate under all these three limits whichever is the lowest number lower among these three is the one that the company can maximum buy okay so all the three you need to calculate and take the lowest number to find out the maximum amount of buy this is one such question that can popularly come from this particular topic we'll apply this also in questions okay sir companies buying back Equity shares means is the share Capital same or it will reduce share Capital will reduce because company is buying back Equity shares and this Equity shares only company is calling it as equity share Capital when you cancel equity share Capital obviously its balance will reduce whenever Capital reduces doesn't matter whether it is equity share Capital reducing or reference share Capital reducing company act comes into picture and say you have to create one reserve and that Reserve is capital Redemption Reserve so crr is created with to fill what Gap Capital Gap if capital is reduced by three lakh then you need to create crr to the extent of 3 lakh rupees how much of Gap is remaining that much Gap still you need to fill it up one way to fill up Gap is by issuing new shares or if you're not issuing new shares let's say you're only cancelling Equity shares did not issue any new shares that means Capital reduced that Gap has to be compulsorily filled up by creating something called C Capital Redemption Reserve okay and this is what I used to give it in our class notes crr is created to fill Capital Gap or how much of free Reserve you are utilizing to create crr to that extent you create crr is what I used to say this one I dictated in your class notes also correct no same thing okay so if you have any premium on buyback or if you have any premium on new issue of preferences you ignore it for what purpose crr purpose so as far as crr is concerned it fills only what Gap Capital Gap capital is shown at premium value or only at face value so if you let's say face value of equity share is 100 rupees but buyback price is let's say 120 that you that means how much extra you giving to equity shareholders 20 rupees will you consider this 20 for crr purpose no crr is created only to fill Capital Gap and capital is always shown at what value Bas value hence premium on buyback is always ignored for crr purpose that way if any new Shares are issued at premium if any new Shares are issued at premium means where will that premium go to security premium account so Securities premium again it will not affect CR okay that's the reason we say this this not tested now long back may they used to test this now I don't see this particular adjustment tested but it could come we never know that's the reason written it okay saru all right next so buyback entries we will go through so what is a bu back entry think logically equity share Capital same or reduced red equity share Capital has what balance credit balance how do you reduce it debit so the journal entry for buyback is equity share capital account debit let's say that is one lakh of assume so equity share Capital will always be debited at what value equity share capital is shown at face value so cancellation also will happen at face value itself so equity share Capital account debit one lakh of assume which is a face value two just because equity share face value is one lakh should we have to to pay Equity shareholders one lakh only or we could pay more we could pay more because cancellation is a negotiation sir between what Equity shareholders and company company told we'll buy your shares worth one lakh shareholders told my shares is already worth one lakh company told that much only I will give shareholders told to help with you I will not give my shares then Can Company do the buy back no now the company told okay don't feel bad I will give you 150,000 I'll give you 1 lakh 50,000 face value of the share is one but company is giving 1 lakh 50,000 how much extra 50,000 that extra means for company it is a profit or loss loss that loss shouldn't have a name no here we call that as what sir premium on premium on buyback means over and above the face value if company is is giving any payment means that we call it as premium on buy okay so here I assume the premium on buyback to be 20,000 it could be anything is that okay I means totally how much you need to pay the equity shareholders Now 1 lakh towards face value 20,000 towards premium so totally you need to pay 1 lak 20,000 to You'll write to equity share buyback account earlier may they used to write to equity share holders account because you have to pay this money to whom equity share holders but our study material don't uses Equity shareholders they use the term equity share buy back so I also changed and brought it this way okay so the entry is basically Capital account you'll debit equity share Capital account debit premium and buyback debit to equity share buyback account okay sir sir premium and buyback is a loss what will you do for that loss transfer it to pendl but hang on you have something called Securities premium yes sir which is backed by section 55 and what do section 55 of companies act 2013 says if you have any if if you are doing any buyback and if you have getting any premium on buyback instead of transferring that loss to pendl First you can set off the loss with Securities premium and Security Premium has only five users and pnl has limited uses or unlimited unlimited now you tell me this premium on buyback first you'll transfer with to pnl or first with Securities premium if company has security premium first priority to transfer this loss or to set off this loss will be with the Securities premium so what is the journal entry to transfer this premium with to Securities premium account premium you have debited here you're setting it off with Securities premium means what will be the entry security premium account debit to premium on buy bank so company does not have Security Premium then what to do transfer it either to free Reserve like General Reserve or PN free Reserve means those reserves which are freely available for dividend declaration those reserves from which you can pay the dividend we call it as free Reserve if Security Premium is not there you can utilize the free reserve of General Reserve or PN like this or instead of two entries directly instead of premium and buyback here only you can debit securi premium that approach is also acceptable okay five and enough people like that also you can do that is one sir here you you have canceled equity share Capital worth how much one L that mean share Capital reduced by 1 lakh whenever share Capital reduces that means there is a gap in capital to the extent of 1 lakh this Gap can we keep it or we need to fill it up fill it up how do we fill it up by creating one Reserve called crr Capital Redemption reserve and crr is always created from pre reserve and pre Reserve being General Reserve or PN our study material first uses General Reserve then they use pendl but both are Any Which Way free Reserve in my view you can do whatever or you can St to stick to study material and say first utilize what sir generalism to create CR first you use General reserve and then you use PN so what are the entry for CR can you tell me due to this this free Reserve balance will reduce crr balance will increase so Reserve has credit balance how do you reduce it debit it which Reserve is reducing General Reserve or PN which Reserve is increasing CR so what is the entry for crr creation General Reserve or pnl account debit to CR there was a capital gap of one lakh hence we created CR also to the extent of 1 L last entry is the payment entry which how much we calling it as Equity shareholders account or we calling it as equity share buy back is a liability when this liability is settled what will be the entry liability account debit to bank account what is the name of the liability we are calling equity share buyback so we'll write equity share buyback account debit to bank account okay that's all is a entry along with some extra fitting May Come like we have sold investment or we have sold property planning equipment or blah blah blah and all also they can add up or it may be there or it may not be there also so what is the use of CR sir sir crr if you have it can be used only for one and only one purpose only which is what sir to issue bonus shares I think that also brought in somewhere here okay if crra can be used only for one purpose that is to issue bonus shares earlier bonus shares was a separate Topic in your group one accounting now we had accounting and advanced accounting now both are merged so this bonus topic is entirely removed from you but study material doesn't let want to let go of this topic that's the reason this bonus issue they attach it to other topic so in this problem also they say after buyback companies issued some bonus shares like that they will bring in so old old Pacha or B or ghost it not living our back okay so what is the entry for bonus issue is first you use what reserve for bonus issue first priority for bonus issue we'll always give it for CR then second priority use security last priority for free because crr has only one utilization that is to give bonus shares hence the first priority you always give it to crr if crr does not have if we don't have cr or if crr does not have enough balance then the next best option we'll touch upon us Securities premium because Security Premium has five uses and one of the utilization being to issue bonus ships pre Reserve has no limitation that's the reason we give last priority to free reserve and what is the entry for bonus issue when you issue bonus shares these free Reserve balance will reduce or if you want it logically what is the journal entry for shares issued one lakh Equity shares issued one one lakh what is the journal entry don't worry about application allotment and all tell me one entry bank account debit to equity share Capital One lakh One lakh correct now sir bonus shares means what does the word bonus mean bonus shares means additional shares given to existing shareholders at free of cost bonus means OC okay South Indian language OC meaning it is a free the shareholders don't have to pay anything it is received absolutely free let's say company issued bonus shares worth one lakh can they pass the same entry can they write bank account debit to equity share Capital no because did company receive money no so instead of debiting bank account we will debit what Reserve account so we will basically what is the entry for bonus issue is reserve account debit to equity share capital account like this so which Reserve first priority to crr next priority to SP L priority to free Reserve so basically the entry is crr account debit to equity share capital but the problem is if today if the company declares bonus let's say there are one lakh shareholders all one lakh shareholders will get bonus today only if today company declares means in their account entire one lakh bonus shares will come today only or there will be a delay there will be a delay between the bonus declaration date and the bonus receip date there will be a delay hence no sir we don't write the entry Reserve to equity share Capital we split it up into two hence the entry for bonus issue will be which Reserve first you utilize cm so the entry crr account debit what should have been credited equity share Capital instead of that we create a Dy called bonus to equity shareholders account or bonus to shareholders account also you can call it okay so crr account debit to bonus to equity shareholders is this an actual account or dummy dummy so on the date of Declaration you pass this particular journal entry on the day bonus actually is issued then you'll write bonus to shareholders account debit what should have been actually credited equity share Capital so if you add these two entries bonus bonus will get credited effectively the entry is reserved to equity share Capital so that's the entry for bonuses all this how much extent and all the question may it will be clearly specified which we will take it up one question great the problem pakama okay I think conceptually we have done with everything now we have generally two types of questions they ask one is for bonus issue journal entry they will ask or maximum amount of buyback you need to calculate and give it those are the two types of question that popularly gets asked in this particular chapter so let's run through this chapter some questions first some RTP May 2024 question we'll take it out sir there is a company they've given a whole lot of information we don't want all this so first we want Equity shares what is a face value of each Equity shares 10 Rupees come back directly to the adjustment don't waste your time majority of Crux will be in the adjustment so don't waste your time reading each line of balance sheet directly come to the adjustment wherever you get stuck then you can go to the relevant balance sheet section or note section and figure out what the necessary informations are okay on 21st April first of all there's the balance sheet I think as on 31st March few days later on 21st April company announced buyback off 15,000 of his Equity shares of 15 rupees per share hang on Sir what is the face value of each share 10 but what is the buyback price 15 face value is 10 but buyback price is 15 that means is company paying extra yes how much extra five that only we call it as premium on Buy on one share the premium element is 5 rupees okay for this purpose company sold all of its investment for 2 and a half lak okay this is that's all next on 25th April company achieved the targeted buyb great on first May the company issued some bonus shares bonus we'll go a little later first can we complete the buyback entry so when did you go for BuyBacks first okay so what is the journal entry for buyback tell me that equity share capital account we directly go through it here equity share capital account debit how many shares are you buying back entire we have currently one lakh shares entire one lakh in company uh buy back or there is a limit sir should we have to test the limit sir no only if they say test whether buyback is within the company's act a provision like that if they'll ask or they will say tell us how much maximum can the company buy and buy back and pass journal entry for it like that they will ask if they don't ask you the provision or maximum amount of buyb you don't calculate and waste your time some problems may clearly they will ask here have they asked anywhere no simply they told you are required to pass necessary journal entry for about transaction I means in these transaction it is assumed that buyback is crossing the limit or within the limit within the limit so you don't have to again calculate the limits and show it not required F now so how many shares did they cancel 15,000 shares and share equity share Capital always shown at face value so cancellation also at face value so you'll write equity share capital account debit 15,000 into 10 150,000 but is there any premium yeah premium is one 5 rupees per share how many shares are you canceling 15,000 so 15,000 into 5 is how much 75,000 either you can write premium on buyb or this preum buyback is anyways a loss this loss first will be adjusted against what securities premium check the question do we have enough balance in Securities premium yeah we have three lakh but premium on buyback is only 75 so entire premium on buyback we can set it off with the Securities premium so if you want you can write premium on buyback or directly debit Securities premium your choice okay sir and to credit will be given to equity shareholders account no our study material uses equity share buy back how much we need to pay pay 225,000 that is one uh premium we have already transferred to Security Premium so that premium entry will not come generally we say four entries are there with uh buyback one is cancellation second entry to transfer premium third entry to create crr fourth entry is to make the payment here first and second entry already we have clubbed and passed third entry is for crr did you cancel any Capital yeah how much did your debit debbit share Capital buy 150,000 that means is a share Capital value same or it reduced reduced that means is there any Gap in capital yes how much Gap in capital since Capital reduced by 150 there is a gap in capital to the extent of 150 can you keep it idle or you need to fill it up you need to fill that Capital Gap how by creating CR and CR is always created from free Reserve free Reserve means those Reserve which are available for divident declaration and generally in all our problems they will give you only General reserve and PN both are free reserves but if they say some other reserve and in bracket May if they say available for dividend declaration then this other Reserve also will become free Reserve basically any reserve from which you can pay dividend is a free Reserve here how much CR we need to create 150 I told our study material prioritizes which free reserve for crr creation first they will utilize General Reserve do we have any general Reserve here yes how much General Reserve we have 2 lh50 how much we need to create crr for 1 l50 what is the entry to create CR General Reserve balance will reduce crr balance will increase so the entry will be General Reserve account debit to CR account 1 l50 150 last will be your payment entry what is the payment entry equity share buyback account debit to bank fine but uh to finance this buyback I think company here also sold some investment they told no for this purpose they sold all the investment for two and a half lakh what is the value of investment in the balance sheet sir two lakh you sold it for how much two and a half lakh that means company made profit or loss profit don't say Capital reduction account this is internal reconstruction I know we did this topic after internal reconstruction Left Right centr Dr bring in everywhere okay this it happens it may be a silly matter suppose they give this question after internal reconstruction in the question our mind will be like every profit every expense everything to reconstruction account so this profit also through reconstruction account our mind will say pnl but our hand will write reconstruction and our mind hand thought process invigilator will not give a damn he will say zero silly mistakes can happen because sir 100% we are not Vigilant even in class now see we are doing the topic about more than 150 students are there in online Lively watching them every moment every second are you listening to me no you're actually chatting who's doing what chat let's check what is happening in Instagram what happened to our raki Bo Love Story yeah we will check 100 things in between also because sir one of the difficult things thing to keep a track of is our mind they say Beyond 15 minutes if you are able to retain someone's attention you are God literally because yeah because it is next to Impossible they say mean 100% attention very difficult because suddenly you know somebody will be like ah this boring somewhere we go yeah it's always the case very difficult so that all that happens same happens in exam also though examination is a very serious Affair we want to be as present as possible but mind to it wants to roam around G yeah so it wants to say I want to finish the examination and chill out with my girlfriend boyfriend or go there go here and all that stuff so it can happen so these sort of silly mistakes you'll identify only when you write some papers I can't identify for you whatever I feel I have known or have seen or have committed I can tell with you but you are creative you know it I don't have to tell you you'll commit new new new things yeah which I will tell in the next next next next batch no I can't tell yeah okay for now let's go with this so what is the journal entry for investment sold bank account debit 250,000 to investment 2 lakh to profit on sale or to P account 50,000 this is the journal entry okay that's all is the drama sir or one more is there sir that's all is the drama on 25th April next what happened on 1st May the company is issued one fully paid up shares of 10 each by the way of bonus so the moment they say bonus shares is the company is issuing bonus shares for cash or free free free okay so that means which Reserve will be utilized for bonus shares first don't blindly use crr you can use CR for bonus issue provided crr has enough balance you need to check that if crr does not have enough balance you have to go for security PR still if there is a shortage you have to go for free risk like that so here how many bonus Shares are given the company will issue one fully paid up bonus shares of 10 each for every eight Equity shares so if you're owning eight shares already you will get one bonus Shar not me question telling correct so when did you go for bonus 1 May on 1 May does company have one lakh shares no no no no G on 25th Only You canel 15,000 shares no buying back of shares means cancellation of equity shares now means on 1st May Company does not have one lakh shares in this 1ak 15,000 is already canc so if you have eight you will get one if you have 85,000 how much if you calculated I think I've already done so the number of bonus shares will be 10,625 sir this 85,000 is the value of shares or number of shares number of shares so this 10,625 also is the value of bonus shares or number of bonus shares number of bonus shares each bonus shares value they only told in the question which is 10 each 10 Rupees one share worth is 10 Rupees we have 10,625 bonus shares so total value will be 1H 6,250 rupees that is the value of bonus shares which the company has issued go back how much crra did you create previously for buyback 1 lh50 how much you need for bonus issue one second you need a bonus issue only 106 so do we have enough B do we have shortage or we have enough balance in CR only we have enough balance so tell me the journal entry for bonus issue let me see crr account debit to equity share Capital no no no crr account debit to bonus to equity shareholders account or bonus to shareholders account then bonus to shareholders account 106 252 equity share capital account I told two entries because there will be a delay between the date of Declaration of bonus issue and the date of issue of bonus issue there will be a slight delay maybe one week delay 10 days delay whatever because of delay we pass two entries for bonus issue and not just one okay s all right so one more way they can bring it in here is some Reserve called limitation they will bring it in sir how much is the balance in general Reserve here check how much is the balance in general of 2 lak 50,000 okay sometimes what they'll tell in the problem is I think I've written it down suppose they mention in the problem maintain a balance of 2 lakh in generalism like this Al they'll bring it as extra fitting there not there in this problem this is a supposed scenario one more way of asking the same question they will say maintain a minimum balance in general reserve of 2 lakh so go back to the balance sheet how much balance is available in general Reserve 250 so after doing buy back how much you need to maintain 2 lak so you do whatever you want but balance in general Reser should not come below 2 lakh that means how much of General Reser can you actually utilize though you have two and a half lakh entire 2 and a half lakh you can utilize or only 50,000 only 50,000 because they told you have to maintain General Reserve balance of two lakhs so can you touch that 2 lakh no only how much you can touch or how much you can utilize only 50,000 that means how much can you utilize means general Reserve you use this per se for what for crr creation so in this case you can use General Reserve to create crr only to the extent of 50,000 is this there in this problem or just a different case just a different case discussing this also could come in the exam so discuss done now so how much CR we need to create one and a half lakh entire one and a half lakh can you pick from General Reserve in this case no you can only utilize how much 50,000 so in this case the journal entry will be General Reserve account debit 50,000 balance you'll pick it from other free Reserve after General Reserve what is other free Reserve remaining P so how much shortage is there one so we'll use that shortage to the extent of one lakh from pnd and create the CR there's another way this particular adjustment can come through yeah MTP also it came next question is that only okay all right don't worry that what was my next question okay this is the MTP question you're talking about yeah see I told you about McQ questions no see here this is an MTP question which has come they've given four McQ question each carries about two mark so they'll basically give you a case study and ask you four McQ questions maybe some may be Theory some may be calculation I personally feel most be it will be a calculator based question unless they make consolidation amalgamation question lendy if they make those chapter question really lendy these questions they have to ask it as Theory because otherwise people will not be student will not be in a position to complete the paper so they will take that paper length into consideration and accordingly it could be a case study or or it could be a straightforward Theory or calculation based attempt to it may vary so don't worry too much about it now this is an McQ question we have not even solved one McQ question if few we have solved in questions correct but these sort of case study have you solved no but now you will see this after reading I'll ask you the same question you tell me do you read extra practice for this this came in MTP March 2024 ker one company is there they're giving full stories they have plans to repurchase 25,000 Equity shares of how much each 10 so what is this 10 B Val at a price of 20 per share so what is this 20 buy back price so 10 rupees worth face value of the share they are buying it at 20 rupees so is there any premium yes the premium per share is 10 Rupees okay they've given all ons story resolution we have passed this that and all we don't have time to listen to their story you don't have time to listen to my story and all will you listen to them no so here is a snapshot of Kera balance sheet they have given so share Capital they've given fully paid up shares of 10 each 12 lakh 50,000 mind you this is not number of shares it is share capital and they clearly use the word rupees also okay reserves in Surplus SP is 2 and a half pnl is 125 Revenue Reserve Revenue Reserve means your general Reserve which is 15 lakh okay long-term borrowings is we have debentures and we have unsecured loan two debts we have then they have given assets information what are they first asking first look at the first question by using share outstanding test calculate the number of shares bought back new thing for us or we know this we know this calculate the number of test shares that can be bought back using share outstanding test what does our share outstanding test say how much of shares you have 25% of the maximum you can buy back this 12 50,000 is a number of shares or share Capital 150,000 is a share Capital each share face value is how much 10 so divide by 10 you do how many shares the company has 1 lak 125,000 1 lak 25,000 is a number of existing shares entire you can cancel or only 25% so calculate 25% of 125 is how much 31 250 SEL like b as balur right option that's all over don't have to show the working in McQ question most probably in McQ they'll be giving you a separate booklet omr sheet where you have to tick in my opinion let's see when one attempt does not pass no I can also can't say with certainty that's what I heard and I believe that's the way to do it because most probably mcqs and all will be mostly computerized testing I think manual testing will not happen so make sure that you you Circle them properly yeah don't go stingy there okay properly Circle and do it okay next second McQ they given is by using resource test so one second sir resource test do we know yeah what does resour resource test condition say 25% of paid up Capital plus free Reserve plus Securities premium so first find out that so 25% of to take your calculator 12 and a half lakh plus 2 and a half lakh 15 lakh plus 1.25 16 25,000 plus 15 312,000 adding all this you're getting 31 l 25,000 correct a yes sir okay yes correct or no adding all this 31 25,000 multiply 25% of that how much you're going to get 7 lakh 81250 sir they want number of shares but the 71 7 lak 81250 is a number of shares or value of shares value of shares and each share how much are you buying back at 20 rupe so totally value of buy back that you can do is 781 250 and each share buy back price is how much 20 means how many shares can you buy back so basically this 25% of share Capital free reserve and SP gives you the value of buyback to get number of shares of buyback what do you have to do take the value don't divide by face value take the buyback price because this is a total value of buyback that you're doing and are you buying back at face value or it's actual price actual price so always denominator should be the buyback price not face value in these cases so if you do that you're going to get 39 62.5 which option has that this the round of select the expect option D for Delhi is the correct option here what do you think next McQ question will be shares test over resource test over obviously next one will be that Equity test you do and find out the number of shares buy by but the problem with debt Equity test is debt equity ratio should not exceed two but this dat equity ratio should be after P after you do the buy back Deb equity ratio should not exceed two okay that's what the conditions is do you know the number of shares bought back no that means can you calculate debt equity ratio because the condition is debt equity ratio after buyback should not cross two maximum it can be two but do you know the buyback no that only we are trying to find out no so condition say after buyback we don't know how many shares we are buying how do we do this is not straightforward hence you have to assume some variables you can do in simultaneous equation approach X and Y I feel that is little complex the easier method is just assume one variable and that could be your X not your X just a variable X so how do we do this problem is you know I think anybody remembers can you tell me what do we do forgotten online May online I think I'll get a response after 5 Seconds yeah there is a delay maybe they know but yeah okay no problem in the interest of time I'll only run through sir do we know the value of shares bought back no hence what we assume is let the total face value of the shares bought back let the total face value of the shares bought back be X you can assume any variable I like X so I will take X okay let the total face value of the shares not face value of one share I assume total face value let the total face value of the shares bought back be X that is one okay so now let's bring this number into our equation what does our equation say debt equity ratio should not exceed two meaning debt divided by Equity can be a maximum of two so equate this equation debt divided by Equity should be equal to two so debt for this purpose includes both short-term debt as well as long-term debt short-term as well as long-term here shortterm they have not given so add these two these are the debts they have given both are long-term here shortterm is not given if at all shortterm is given add that also in some of the problems we have seen that so add these two sir how much are you getting so it is what sir 40 30 40 4 4525 yeah adding these two you're going to get 45 lak 25,000 that is your numerator which is debt divided by Equity one second one second sir this debt by Equity is before buyb or after buyb after buyback keep that in mind so do you think what are you buying back Equity Shares are you cancelling debt no that means will be will due to buy back will there be any changes in debt or same data whatever debt you had before buyback same debt you will have after buyback also so numerator will not change whatever is given debt value given in balance sheet or question take the same date how denominator is equity Equity here refers to this one sir Equity here refers to paid up share Capital plus free Reserve plus Securities premium should we have to calculate this or already done for resource test we already did that no and we got how much 31 lakh 25,000 yes sir again no need to add up Equity here refers to equity share Capital plus free reserves and it is premium we have already added here and got how much 31 lakh 25,000 so take that in the denominator yes sir minus 3x you have to do sir what is this 3x sir one sir after you buy back equity share Capital will be same or it will reduce it'll reduce equity share Capital always shown at face value so when you do buy back it'll also Reduce by face value how much is the face value of the shares have assumed X not face value of one shares I assume total face value of the shares bought back to be X so that means this is only our equity share capital and I've assume this to be what sir x correct no so if you do the buy back will equity share Capital be same or it'll reduce it'll reduce it'll Reduce by 1 x this 1X reduction is for equity share Capital correct because after you buy back equity share Capital will reduce that reduction only I've assumed it as X that is one okay sir sir the moment you do buy back of equity shares company that will come throwing at you for what if you do buy back of equity shares Capital will reduce so Capital Gap will be there can we keep that Gap as it is or we need to fill up that Gap we need to fill up that Gap how do you fill up that Gap by creating C so you'll create crr for buyback price or only Capital Gap capit Capital Gap and capital is always shown at face value how much face value of the shares you cancel X that means how much Gap will be created to to the extent of X like suppose you're canceling Equity shares worth 1 lakh you'll create CR also to the extent of 1 lakh like that so if you equity share Capital if you're cancelling to the extent of X your crr also you need to create for X so why did you reduce sir crr you'll create from what you'll create crr from free Reserve when you create crr free Reserve balance will be same or it will reduce reduce this 31 lak 25,000 includes free Reserve also no after buy back will free Reserve balance be same or redu reduced by what amount x amount only hence one more reduction this is for General Reserve or pnl reduction due to crr Creation why now sir if you're issuing new shares sir have they told in the problem anywhere they issued new shares no that means what if you do buy back Capital Gap will be there for full buyback so you have to create CR also for full buyback because no new Equity Shares are issued that's the reason if you have canceled equity share capital for X means CR also you need to create for EXO correct so Capital cancellation accounted crr accounted one more your account whenever in confusion go back to your four journal entry basic journal entries for buyback what is that one is capital cancellation accounted yes another one is you have premium what do you do for premium transfer it to Securities premium accounted or not yet accounted not yet accounted one more is crr creation accounted crr yes another one is Bank entry will Bank affect debt or Equity no so ignore that so two things we already accounted Capital cancellation crr creation one more impact we have not given which is Securities premium because if you buy the shares at premium security pre that loss that loss only we call it as premium on buyback that premium on buyback you don't transfer it to pnl we set it off with Securities premium first okay now look at this sir what is the buyback price in this problem 20 what is the face value of the share they only given here face value of each share is given to be how much sir 10 sir buyback price is 20 face value is 10 that means what is the premium 10 you're buying face value of the share is 10 and if you're buying back at 20 means how much extra are you giving 10 only now have a quick look these two are different or same face value and premium here different or same same so this only I've assumed it as X that means premium also will be X because both these these two are different or same same that's the reason if you are buying back to the extent of X means premium also element will premium also will be there to the extent of x and due to this premium Security Premium balance will be same or it'll reduce reduce that means one more minus you have to do as minus X why minus because Security Premium balance will reduce that's the reason minus X this minus X is for Security Premium reduction these are the three x's in this question Okay g solve the equation that's all minus 3x if you do if you solve the equation you're going to get X to be 2 lakh 87500 okay sir any doubt sir no sir sir this 2 lak 87500 is a number of shares or value of shares value of shares sir this 2 lak 87500 you take sir divid by buyback price you do sir you'll get number of shares sir I will throw everything at you sir yeah why sir sir X is what don't divide 2ak 87500 by buyback price divided by 10 so partiality sir that you divided by 20 here you're dividing by 10 die not like that what is this x what is this x x is the total value or total face value x what did we assume we assumed as what x is the total face value of equity shares bought back and total face value of equity shares bought back is 2875 and face value of one share is 20 or only 10 total face value of the share bought back is 287 500 and the face value of one share bought back is 10 so how many shares maximum you can buy back 287 500 divided by 10 you have to do not 20 understood not partiality based on the assumptions or what we have assumed accordingly we need to do yes or sir so how much are you getting sir 287 500 that is what we said over okay all right so this is the thing about uh buyback so how many shares did you get it over here 28 750 which option has 28750 Chen Chennai has this okay Chennai always has the right option okay beat in terms of team or beat in terms of IPL trophy looks like they're nowhere going wrong know T I tell you a different League only whether he plays or not but ultimately when he walks in that full I think I saw that video there where he walks in that full T music you know I don't know that music I think it Wasa music or something they played I think yeah memes CRA has a different level now can we get to this gra yeah what do you think will be the fourth question s how many maximum shares can you buy back check on the basis of all the three test maximum number of shares company can buy back what does a company's act say test all the three limits take the highest or take the lowest first option gave you 31250 second G give you 39 third one give you 28 what is the lowest 28 that means you select a c for again 28 750 okay so new thing or same thing same thing this how probably you'll get an McQ question so is this around A New Concept or something which you have learned learned so I feel they're going to revolve the MC like this so you don't have to freak out too much about the McQ questions now can I get to the other one just for my confidence I thought I will create another question or question I didn't create question is already there we'll solve one more question on this debt equity ratio Al just for my I know you have got it and all just me know I want to practice once more for myself that's all okay can we take one more question for my satisfaction okay sir pram limited this is a study material question has the following capital structure their face value is how much 10 uh General Reserve General Reserve General Reserve is a free is it a free Reserve sir yes is Security Premium free Reserve no is pn a free Reserve yes so is the revaluation Reserve or free Reserve or no so if they give you revaluation reserve and all don't bring it into debt Equity Tes okay loan funds Loan Fund is your debt which is given us 42 lakh you are required to compute by debt Equity T not everything only debt Equity test maximum number of shares that can be bought back and buyback price here they've assumed it to be 30 last problem 20 this problem 30 but face value is so 10 only so can we quickly run through this so what does our date Equity test say debt divided by Equity should not exceed two meaning maximum it can be is two we are trying to find out maximum by back only so we'll do debt divided by equity and we'll equate with what sir two so due to buyback will debt change or same same how much is the value of debt 42 LH bring it in the numerator okay divided by equity in the denom minator so what is equity for debt equity ratio purpose take equity share capital and free Reserve free Reserve means general reserve and P so are these two only free Reserve no any other Reserve if it is there and if it is available for dividend declaration that also can become free Reserve but usually in the problem they'll only specify General reserve and P okay that this is your free Reserve that's all one more one more is your securities premium so take your calculator do 30 lakh is your equity share Capital add this Plus 32.5 which is 62.5 + 6 so 68.5 + 4.5 68.5 is 68.8 72.8 73. 72.8 okay no problem whatever number you're getting or maybe we look at this only it's okay so I've added all this okay now sir I've added all these now can I take that number or this Equity should be after buyback this Equity should be after buy back after buy back will equity share Capital be same no hence what do we assume first what is assumption we'll write let the face value or total face value let total face value of the equity shares bought back be yes share capital is always shown at face value and I'm telling let the face value of equity shares bought back also be X so what first what we have to do first minus X we have to do why we have to do minus X first because after buy back equity share Capital will not be same it will reduce that reduce number only I'm assuming it as X so one reduction of X is for share Capital reduction next one is what the moment share Capital reduce Capital Gap got created can we keep the Gap pending or create CR create CR we create crr for only Capital Gap and capital always shown at face value so if Capital got reduced by X means crr you'll create it for x and crr you create it from what Reserve pre Reserve so that is usually General res or Pendle study material first I told utilizes General Reserve so the moment you create crr General Reserve balance will reduce so another minus for that okay that's all no no no no did you what is the face value of the share 10 but did you buy it at 10 or you bought it at 30 buyback price is 30 10 worth of share you buying it at 30 means premium element is how much 20 is the premium correct yes sir now compare sir only this face value is 10 means premium will be 20 face value is 10 means premium will be 20 that means premium is equal to face value like Pro last problem or double double this is 10 means this is 20 so double face value of the shares I assumed it as X that means the premium will be X in this problem or twice that means the premium in this problem will be 2X and due to premium and buyback Security Premium balance will be same or reduce that means again we have to do minus 2x that will be for Security Premium reduction so you have to solve this equation once you solve the equation you're going to get 12 lakh 95,000 as the XA value what is this x total buyback or total face value of Buy back I've assumed X has total face value so total face value of the shares bought back is 12 lak 95,000 will I divide by 30 the buy back Price N no this is the not total value it is a total face value and face value of one share is 10 so how many shares can you bought by why buy back 1ak 95,000 divided by 10 which will be 1 29,500 yes yeah all right yeah crr is not included in this equation equity for this purpose crr is not created correct F now see crr we can include in this equation somebody saying sir though General Reserve reduced due to crr crr got created no so that means why can't be that this equity for this purpose includes only I didn't frame this rule this rule is framed by companies act Equity when we say Equity here it refers to only equity share Capital free reserves and securities premium nothing else if you just check we had revaluation Reserve also did we consider that no only these has to be considered nothing else other than that like that okay saru that's all is this particular problem so with this uh this chapter is also we have completed well uh hello people so for the One Last Time hello hello hello and happy afternoon okay yes now finally we have come to that day where I can say we have completed our marathon okay so at this point of time from my end marathon is completed so whatever possible from my end I have done I'm not saying I am the best I'm just saying best possible things that I could do with the time available have done now it's for you efforts to take over okay now onwards entirely your game the way you prepare the way you think the way you execute is going to determine your results if you're going to think that I can make it I will do it then that's the way things are going to work out for you if you think no no no syllabus is too much means Abus will be heavy for you if you think I'll not be able to do it in the certain means it will not happen for you first change your thinking approach always everything with a positive mindset okay it is after all an exam your life is not at stake right we are not losing life right we are losing only our time though time is equally precious but just saying that after all it is one exam till now we have experience of writing so many so many so many exam from our lkg ukg first standard second standard we have been tested by giving exams after exams after exams none of the exams we failed and I feel as for accounting standard 5 as well as as1 accounting policy should be consistently followed so since you are examination consistently you passed CA examination also maintain that same consistency but the only thing that is required here is little bit of a little bit a lot more of positive attitude little little bit of a smart thinking okay lot more of positive attitude that's what I would say all right so now let us stop giving that excuses first of all so now let's throw off that particular words that too much syllabus is pending I don't have time and all that stuff as of now the way I check still one month of time is still pending correctly for the examination roughly yes around 30 35 days are there 30 35 days mind your people are good enough some of you are writing even only one group not even both the groups Aram say you can manage with our one month 1 30 35 days easily one time you can study and one time you can do revision also in my view the last month is a time where you should actually revise this is not the time to prepare this is actually time to revise write mock papers write mtps rtps and all and identify small small mistakes whatever you have done and try to correct them this is the time for that but I know that in spite of whatever we say how much other blade we put 90% or more than 95% of the audience will be there who has a lot of pending syllabus they'll think that okay this is pending that is pending that is there this is there so much will be there it is okay if you're in that category not the ideal place to be but if at all you are there in that category means it is okay it is fine let's accept the fact that yes not a good place to be but we are there we are there over there let's accept it and give our best in the last one month whatever best possible let's put it okay think that it is possible one month is good enough time people yes for both the groups maybe little bit of and you'll have to put yourself under a little more pressur situation but it's okay after all it is a case of 1 month after 1 month anyway ICA will give you two months bitty leave they will give you that time you chill it is not now the time to chill it is time for you to execute now onwards don't say Sir how many hours I should study study whatever the hell hours you need I don't know how much of the syllabus you have completed if you feel you make a plan now don't now go to YouTube and say give a study plan sir boss you have one one month means you just check how much syllabus is your pending accordingly you figure it out how much time I need to spend for each topic for each subject or whatever it is all right if you have to study 14 hours a day means study accept it sometimes we'll have to stretch Beyond comfort zone there always lies a secret very good thing it's okay all right so if you are in that scenario no problem if you have to study 14 hours means we will do I'm not saying study for 14 hours you check how much time you need to complete the syllabus if you feel 9 hours is good enough I'll complete the syllabus means do 9 hours good enough whatever whatever time is required according to you you plan for that and execute it many of us are experts at planning also we will do plan after plan after plan after right we will write right right right and then you we will change this it's not time to do that okay once you have executed a plan means now it is a time to execute that with pinpoint procession if you say if you have made a plan to study 14 hours means you should study 15 hours and say shabash Macha proud of myself ma love you Macha I should stand in the mirror and say love you love you love you every day not to others okay only in front of the mirror that to appreciation you should feel about yourself because you have executed the target so it's time to be in that particular positive space okay so stop giving excuses excuses is not going to help you if at all what it does is it adds you more pressure and don't compare your examination you only have to prepare you only have to write and you will only get the degree your examination your friend cannot write so do not worry about friendship because normally we have this comparison K we keep comparing how much you studied MAA someone will always be there I I only did two times revision they will say here you have not even studied two topics there someone is saying two times I already I have completed the syllabus and done two times revision then bukuu will start a don't compare it is okay everyone this is your own race you only have to run it friendship is important but maintain after exam it is okay your friend will not run away if he runs away he's not your true friend let him run we'll catch up later on okay so you prepare you plan and you execute it's okay whatever time whatever study us we will sit and we will do it no skipping the attempt okay I've seen many students say that time is not sufficient sir I'm thinking I'll skip May exam write it in September sir or I'll skip September and I'll write January sir anyway 3 months now only sir I'll wait and write better sir that attitude is not a good thing to have people I know it is easy see everyone takes an easy option even me also right I did Marathon about 6 months back only even I could have said why anyway cut and paste you refer old Marathon only I would have told right I don't have to like 6 six hours I don't have to spoil my throat right but you'll have to do some exercise people it is you have to go out of your comfort zone sometimes everything will not go in your favor all right so that giving up attitude no it's overall a very bad feeling to have right if you have registered for a particular examination go and write whenever I know that the thoughts can come especially in this one month May you'll get all sorts of creepy thoughts should I write it should I not write it both the groups are one group are what I should do all 101 things will happen it is okay whenever a negative negative thoughts come just don't think over it leave it leave it aside think substitute that with a positive thought think like okay after clearing my examination what And all I'll do I'll go with that girlfriend I'll find this boyfriend I'll go this place I'll buy this phone think about your happy Zone whatever makes you happy so substitute a negative thought with a positive thought whenever that negative comes into picture okay don't think over it because more and more you think over it that pattern will get keep repeating it and more and more it'll create more pressure for you stop it or replace it that's the best way but either way we are still writing for our attempt if you have registered means we will write because we have made a compromise once you we once we have registered for for our examination we have made a commitment to ourselves what commitment when you registered you made a commitment to yourself that you will AR sir you can disrespect your family your parents your friends your teachers whoever but you should never disrespect a wonderful person in your life that is if you want to find that person go and stand in front of mirror you'll find that person yourself always keep up the commitment that you have made to yourself now you have made a commitment that you write the examination come what may we will go we will write irrespective of the results we will try our best to cover everything okay and we will go and write rest we will live it to Mother bodies let her take care of things our efforts let us do it that is the first thing okay people one is a study plan and two is a positive mindset few other things I personally feel you should better to take care of is one is the health people do not ignore the health many of you stay in p I know some of you would have come from your hometown to Bangalore or Chennai or wherever I don't know where you are you might be staying in pgs for the sake of our classes right so doesn't matter where you are okay eat proper food just because in your house normally when you when you go after after study holidays when you go to home your mom also may be full happy oh y you have come after so many months so I'll prepare very very nice items for you and go on hugging don't go on eating Left Right Center all junk food because the last thing you you want is what sir to fall sick on the examination day or on the examination week and miss out the examination we have seen some of our students our own students saying that sir I was not keeping well so I did not write the examination sir not writing the examination of not for not being prepared that is still acceptable missing the examination that my health did not permit that is kind of not acceptable in my view so take care of your health eat proper food cut down the oily food and junk food as much as possible little compromise as I keep saying if you want to gain something sir there is always a price tack to pay if you want to be successful at something mean certain compromises you'll have to make right so today is Saturday all my friends are chilling today they called yesterday come we'll go but I have Marathon there's a commitment I made to myself I made a commitment to you now it's very easy I can always cancel yours I can say like guys anyway I'm not charging any fees okay Saturday Sunday class cut to come on Monday we will continue the marathon on Monday I could have said that I could have enjoyed with them but would it be fair for you you have trusted now for you every minute counts for me it's after all two days I've cleared my examination it will not make any difference but for you that two days makes a world of difference so I cancel that plan because I am in this profession this is a price tag to pay of course they felt very bad because every time I give excuses I've lost many friendship because of this profession because I hardly get to meet them somewhere or the other we are occupied but I'm okay with that if it is a true friend they will understand otherwise it's never meant to be enjoy your life it's okay I have you wonderful people good enough s rice feeders for my family good enough but it's okay sir every profession requires certain or every aspect requires certain compromise and for you the time for compromise has come what compromise you don't have to go to the Minefield and work see there are lacks and lacks of people in the country here they have a choice you know what choice whether to have lunch or whether to have dinner if they have lunch they have money to have dinner they have to either skip lunch or they have to skip dinner you have such a choice no all you have the choice you need to make is study or to get distracted right your parents your family everybody is helping you out I'm not saying you might be from the luxurious family at least you getting three times food no we are in a country or we are in a world where 20% of our world population is below poverty line so are we not grateful enough that we are getting food we getting nice clothes we getting shelter all we have to do is what sir for one one and a half months we have to probably like sit at one place and study where everything will be served to us correct no along with your uh along with you your mom or your parents also will probably like wake up with you and provide you that milk or whatever right Papa my my K my my my student my my B is studying working hard so much your parents also will help you out in a big way yes or no they'll try to feed you they'll try to put your AC or whatever yes or no they'll try to give as much as facility as possible from their end so it's time that we also repay something right because it is not just your results the moment to you clear no yes definitely you'll be happy but indirectly you'll bring happiness to so many of others people you can't even imagine right on the results as I keep telling it all the teachers of us indirectly they'll be smiling some of that feeling it's just that though you wrote your Examination for us it feels as though we only wrote and we only cracked that examination so like that your friends your family your teachers you you have an opportunity to bring happiness to bring that big smile on so many people's face don't don't let go of that opportunity I'm not putting pressure on you I'm just saying that at least puts efforts in that direction okay one month I think we can we have that capability right so many of our Olympic athletes and all they work 3 three 44 10 10 years just for that one gold medal they have to consistently follow a particular practice for 10 years 15 years now for for us it's not about 10 or 15 years it's hardly a matter of one one and a half months I think that much compromise we should be willing to do because we are not writing any small examination we are writing one of the reputed exams of the country so that much of awareness and kind of that positive attitude or attitude in that direction is required if you want to be in this particular profession is what I personally feel okay so watch out for that okay Health mainly Health to wealth wealth wealth you will get it later on first you have to learn to earn yes so for you are in the learning phase now write it it'll happen don't worry okay so many people before you have cleared the examination so have the confidence that you and you also have each and every one of you also has the ability to crack the examination just that you need to believe and you also need to put the efforts in that direction I know sometimes when you say that I I have to study 14 hours it becomes daunting if that bigger plan is daunting for you means break it down break your day into smaller units suppose day one if I say you have to study for 14 hours for the next two months it may become very demotivating you P so much study you tell yourself I have to study only 1 hour a day I have to study only 1 hour a day sir how sir after 1 hour Take 5 minutes break convince yourself your mind that I have to just study don't think about one month don't think about two day don't think about whole day just tell yourself I have to study next one with the concentration no phone no nothing one hour I have to study if I study 1 hour I will get 5 or 10 minutes break that 5 minutes 10 minutes break whatever you want to do whatever gr Instagram horse gr whatever gr you use you no problem then again go back to study again 1 hour again 5 10 minutes break so look forward for that break and convince yourself to study like this stretch it out and make sure that you satisfy your Target on a particular date whatever Target you have made satisfy that particular Target okay as much as possible cover don't worry all right there is always a time to learn you still can pick up on the things so wherever help is required you can take the help refer the marathons buy our classes or someone else's classes don't be scared to ask ask someone's help it is okay self- study is a good practice self discipline is a great discipline correct but if you need help if you need some topics help don't hesitate all right because your ca students time value of money is very important I'm not saying things cannot be done with self-study if someone is putting efforts in the direction and reducing the time you should use that because if you sit and study a particular topic it may take two hours someone can explain it to you in one hour right so it is okay after all like you know spending five or 10,000 rupees in that regard is what big deal right overall at coaching level you don't even spend 30 to 40,000 rupees when you become a chartered accountant 30,000 rupees is not even your 15 days salary your salary will be more than 70 80,000 rupees so time value of money you have to understand if you have the time with you dedication with you to do it on a self uh self basis do it great that brings a lot of clarity to you definitely acknowledge but if you feel you're struggling take help I'm not saying buy our classes anyone's help your friend's help or some other teacher help refer there is nothing wrong everyone needs help one area or the other even sometimes when we get a out also when IND and all even we call up practicing chared accountant and ask this provision I'm seeing I'm not getting any area can you help me out nothing wrong everyone is in a face of learning similarly if they have a doubt they may be having 20 years of experience they will call me they don't have any ego in that right so ego should not come be the learning phase so approach if you need help okay all right so so having said that and one more probably the thing is and I think I've already told this to you sir expect the paper to be lengthy expect the paper to be lengthy or tricky so overall with the choices I think roughly you will get 114 marks of paper with the choice right mcqs everything put together overall I think 114 marks of paper will be there in this always approach with a mindset that 20 to 30 marks will be bouncer new questions okay doesn't matter how much of study material you do how many rtps you do how many mtps you do there will be 20 to 30 marks which will definitely new question doesn't matter you take the coaching from whichever faculty this will be 100% new so don't freak out by looking at this sir out of 10 110 marks if 20 to 30 is new means around 70 to 75 at least will be from straightforward study material try your energy and focus put your energy and focus and scoring well here if you write properly in proper format along with Provisions remembering properly phrasing it properly there is a good chance seen so many students scoring 60 65 70 in this people will give you marks it's just that if you write what is required definitely they will give you marks okay so focus on this sir 60 65 is an exemption Mark exemption is smaller no it's definitely a great score yes or no so Focus your time and energy here okay that's what I keep telling sir this one you should you should focus here this you just need to manage just need to manage so doesn't matter if you write this one very nicely if you write this one very nicely with proper time with great speed automatically what will happen to your confidence if you know that this one you attempted superbly you know that by definitely I will get 60 65 that means automatically the confidence level will increase when it comes to this then with such high confidence this one easily you can manage something will click some provision something some your friend would have told some teacher would have told something examination is an alien atmosphere something and all will click to us sometimes our old girlfriend and all will come to our if you don't know the paper at all yes or no so something will click if your confidence is high instead of getting two to three marks you may score five to six marks also so ultimately from 60 65 your score May become 70 75 also so all you have to keep this keep don't make this pressure cooker keep this very cool and come and when you give when they give you the time to read the paper read it properly and figure out what questions you are comfortable and write them first the more and more questions you are able to answer properly that if you present the confidence will go up and the new new questions May somehow you'll be able to manage and score something out of it okay trust me and moreover to clear the paper out of 100 you need to score 100 no clearing marks is only 40 sir and in aggregate at best you need to score 50 sir IA is expecting you just 50% sir you don't have to be correct 100% of the time you just have to be correct 50% that means other 50% IC is only telling you can make mistakes so that much we can take no sir even if you feel some syllabus some some topics if I have skipped 50% of the syllabus you will skip h no maybe in maybe if topic has 10 topics means or if it has 20 topics means one or two topics you may not be comfortable that is okay believe in your wasu sometimes ouru our sh rahu ketu Shani may be in our side whatever we have skipped they may not ask only and what or rather whatever we know they may give easy questions from that so you never know right whatever we have studied only can come we have seen such students where they tell I only wrote for 75 marks or I got 70 marks yeah we have seen so many of our students but the point is they would have written that 75 marks very clearly very precisely so it happens so don't freak out and after after the first paper is over please don't do this exercise of I will evaluate uh this question I will get two marks this five marks overall 25 marks I will get you did your whole CA okay all your Cal ation you did and how much marks eventually you are saying 25 marks then say go in what D teacher what did he teach CH I spent money time I wasted 101 things will come then you will say this attempt anyway gone let's go to the movie next attempt next paper let's not write let's skip the attempt we have seen so many students write that especially after first paper first paper is scul prit and unfortunately I only handle that first paper so unfortunately I only have to bear all that brunt okay so much nothing came he thought so much nothing came and then they will skip that attempt sir please don't do that evaluation is not your job you your job is only to study and write there is a team that does it in your valuation and final evaluation 100% will not match we've seen so many students tell I'll get 25 they end up getting 45 50 25 to 50 Almost 100% increase and equally other way around also some students will say PKA 80 sir not even 20 and that is also there evaluation is not your game don't do it so once that particular paper is over literally I say throw it literally throw it because once you have it now you'll not be able to control it you'll be able to 5 minutes I'll do it that's been the trend now also so many students after exam they'll say do paper review on hey study for next exam paper review you do sir McQ question sir I want to test sir what you will do whether you have written all the McQ correctly or even all the McQ even if you have written wrongly now can something be done now no what you can do is now is to prepare the next paper prepare that no if you feel you have done a lot of mistakes will you get confidence to prepare for the next paper h no that's the reason don't believe that market I mean don't go into that particular evaluation mode of things if you want once all the paper is over then you do all the evaluation you so your friends who your daddies who everybody's you no problem but till then please don't evaluate the paper let it be anyway even if you throw it out also you will get the question paper from IA website so that is okay so follow that that is important okay right so these are the few things I thought I should share with you but at the end of the day remember it is just a confidence game we all have cleared you two can clear just that little efforts little discipline will definitely help you crack this course okay so hopefully the next time when I meet you we will not be at CA inter level we will be at CA final level that's what is is my hope and blessing and I hope that that day comes to you a lot sooner in your life okay so with this ultimately I think we have come to a day that we can say that we have completed our marathon so make the best use of it I'm not saying I'm the best I've tried my best as much as possible make how however you feel that you have to utilize that Marathon you can utilize it so wish you all the very best take care happy to know about your results doesn't matter what it is let's hope for a positive results and give our best efforts efforts is at the end of the day matters okay people wish you all the very best again take care