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[Music] yes happy morning one and all so welcome to the first session of what is this now Marathon classes of CA Intermediate Accounting Advanced accounting Advanced accounting now accounting is no more in our syllabus we have become Advanced students and we only will learn Advanced topic okay so before I get started with the topic first I would like to say thank you for your amazing love and support you have shown us till now okay really overwhelming I know that I may not say this enough to you but thank you for being with us for so I mean in I mean supporting us so much okay recent I took a small session in Chennai we have opened a branch in Chennai right so I took a small session there about 15 days or 16 days is what I went to take Advanced Tax Advanced accounting classes for there also even though it was just for 15 16 days the support they gave the love they showered was really really amazing I mean walking on the road people are coming up to me and saying sir we are watching your classes and all so thank you so much for the things that you're showing so in fact your love and support will is definitely inspiring and motivating us to do a lot more okay so what I would like to probably like uh promise you is that I'll try my best to keep up or if not try to improve it okay so again thank you once again for that all right and one more uh before I dive into the session normally when we start the class many people ask I think about Sir how to buy these books is the books available so soft copy of these books are not available sir if you want to buy hard copy of these books I I'm sh you there's a chart book so those of you have taken uh regular classes from me are aware of this uh colored chart book so those of you who are new I'm called CA sandesh by the way all right so this is our chartbook and we'll be covering all the concepts with the help of this chartbook itself so if you want to buy these chartbook you can log into to our website just quickly showing you where that is okay you can visit our website learn. aru pro.com or online.upr pro.com that's another website as well so just pop into that under that select CA select CA intermediate if you want to buy our classes you can select online classes online classes here refers to the recorded classes I mean so the price of all the subjects will pop in have various validity options as well you can choose as per your convenience okay that is one with respect to the classes if you want to buy books same thing under CA and C intermediate select books so you we have two types of books let's say you want to buy books for advanced accounting so we have chart book and study book study book is our normal class notes chart book is what I just showed you now revision book is not there leave that out select chart book option give your right name and address or uh the numbers and address the books will be delivered to your place okay sir so that is with respect to the books and classes yeah little marketing yeah okay that is one another one is uh sir uh before I dive into the marathon one of the requirements of revision of marathon classes once you should have already studied the syllabus once you should have already studied the syllabus once okay if you have not done revision that's fine revision we are there we are doing that only now but once you should have studied so I've not studied at all once can I only watch your revision classes will that help me helpful for my exam ideally that is not what is recommended I wouldn't recommend that to you but by God forbid if you are in that particular scenario where you don't have time you only have about one one week or so then I'll try my best to cover everything conceptually we'll cover try to cover 100% okay problems may not be 100% meaning let's say we normally do around 20 25 problems for each topics okay I'll not be having time to cover entire 25 problems in revision session problems also will be taking but not that many problems as we used to do it in our regular class that is one and the pace the pace at which I speak will be little faster compared to our regular class because the whole intention is to cover the entire syllabus in as less time as possible I'm keeping the target as around 20 hours so in about 20 hours we'll try to finish everything normally in the market people do it for 10 15 hours but I want to do it a little more with the problem so I'm keeping the deadline is 20 it may go here and there okay but that is our deadline so keeping that in mind we I may have to increase the speed a little bit okay okay so these are the few things that I wanted you to be aware of okay so with that uh in mind can we finally dive into the syllabus sir yes sir that's the Jo how's the J yes sir online man lot of Jo in online offline only few Joes online a lot of Joes yeah okay thank you thank you for so many people are Shing Your Love you're joining your I mean you're coming on online that's great to see you okay so yes without wasting much time so let's get started sir so the first topic we will be uh starting up hearers just one second 1 minute people I think we lost that sir what will be the agenda agenda is to revise that is all his agenda nothing for I am a simple man I like to keep things very simple just to revise a nothing else okay sir I watched full classes through recorded but I haven't revised can I watch this yeah this if you already watched recorded classes this will help you okay this will revise you yes but correct all right with that being said let's dive in so the first topic we are starting with is internal reconstruction so internal reconstruction is generally done by the loss making Company the company who are suffering losses generally do this activity called internal reconstruction meaning internally they're trying to work out something so that from loss making scenario they go to no profit or no loss scenario or little profit making scenario but basically this is done by a loss making scen loss making company compulsory only loss making companies are no could be done by anybody but generally it is done by loss making company so in this particular internal reconstruction what does the company do they will approach the stakeholders not shareholders the company will approach the stakeholders stakeholders means sharehold Equity shareholders preference shareholders credit cards debenture holders bank loan people everybody will be approached by the company and what will the company tell all the stakeholders to sacrifice a portion of them claims let's say credit are we have company has to pay the credit are one lakh company will tell hey credit MAA I don't have money instead of 1 lakh except only 90,000 meaning from 1 lakh this liability decreased by how much 10,000 meaning credit are indirectly sacrificed how much 10,000 like this all the stakeholders will be asked to sacrifice a portion of their claims it could be 10% 50% 60% whatever all that sacrifice portion journal entry we need to pass in this particular topic and all this journal entry is rooted through one dummy not dumy dummy account what is that dummy account can name Capital reduction account or also known as reconstruction account so all this increase in liability etc etc is rooted through one account called reconstruction account reconstruction account another name is capital reduction account some books also will call this as reorganization account but our study material only uses these two one of those two you can use okay sir all right then sir uh let's say asset value reduced what is the journal entry you will pass sir asset has debit balance how do you reduce it credit what will you debit the God who is the god in this chapter reconstruction account so the journal entry will be reconstruction account debit to assets account if asset has reduced by one lakh you'll pass the journal entry reconstruction account debit to asset account one LH whichever asset if land and building is reduced by one lakh you'll pass the entry reconstruction account debit to land and building one L like that so if liability has reduced means liability has what balance credit balance how do you reduce that debited credit will be given to God God is reconstruction so the journal entry will be liabilities account debit to reconstruction account like this so only assets and liability will get reduced or even share Capital may get reduced share Capital Also may get reduced let's say share Capital reduce the existing share capital is one lakh okay you put full chuna to equity shareholders and how much you told them to how much you told them to sacrifice 60,000 existing equity share Capital was 1 lakh revised share capital is only 40 that means they sacrificed how much 60,000 so if equity share capital or preference share Capital if it is reduced what do the journal entry will pass don't pass the journal entry equity share capital account debit to reconstruction account we have to pass it what sir old share Capital you need to cancel fully issue new shares to the extent of whatever value and the balance sacrifice portion only you transfer it to reconstruction account so why can't we pass like this your equity share Capital reduced only by 60,000 no why can't we do it like this sir a currently know the face here what will happen in internal reconstruction is the face value of the share will be reduced let's say original face value of the share was 10 revised face value of the share may become 5 10 six or whatever okay in this example it has become four because 6 Rupees is sacrific no that means from face value 10 it has become four face value is a value printed on share certificate old shareed certificate has what value now 10 Rupees is that old certificate of any value now or go the go in the that means what what will the shareholders tell take back your old certificate and give me new certificate which has how much value 4 rupees as a value hence entire old share Capital you need to cancel and issue new shares to the new face value and balancing figure only we transfer it to reconstruction account so all this we will apply in problems quickly we are revising this and then we will apply that's first how the approach here is we will con uh Concepts everything we'll revise in one shot then we will take up few questions and again develop or redevelop or rework on our Concepts that's the approach we'll be following for all of our chapters is that okay all right so after doing all this drama if reconstruction account has a balance you need to transfer it to capital reserve but before that first check if pendl account has a debit balance this internal reconstruction is done by which company I told loss making companies yes sir even after doing internal reconstruction can you still show the laa first of all why did the company do internal reconstruction to get away from this la loss making position yes no sir if all the liability holders if they are sacrificing means the loss will be same or loss will get reduced like here earlier you had to pay the credit ARS 1 lakh now you are paying only 90,000 that means 10,000 if you are not paying means is this a loss or is this profit for the company so whenever shareholders or stakeholders sacrifice the portion of their claim it's a profitable scenario for company no that's the reason after doing internal reconstruction if you have any pnl debit balance pnl debit balance means what sir be debit balance means loss that has to be compulsorily written off whether the question says this or doesn't say it compulsorily you need to do okay so P andl has debit balance how do you cancel it credit it what will you debit reconstruction account so the journal entry will be reconstruction account debit to P account this may not be given in the adjustment so watch out every prop construction problem we still have to do this okay s g yes sir next one sir that's what I've written here write off pendel preliminary expense preliminary expense deferred expenditure and all is outdated concept most probably it will not get tested in your current syllabus but if at all they give that also you cancel sir why sir sir preliminary expense where will it eventually be transferred to pnd what are you doing for pnl debit balance in this chapter cancel it that means this also preliminary expense defer Revenue expenditure also you need to cancel is that okay sir whether the question says this or doesn't mention this you still have to compulsorily do this provided internal or reconstruction account has a balance if reconstruction account has balance write off these sorry if no balance is there means don't do it like that how much hour balance is there to that extent you do this particular activity yes sir rare scenario but if at all in this chapter may they give you company already has some Reserve General Reserve capital reserve and all if at all they say quite stupidity in my view because sir it's a loss making companies loss making companies will have reserves reserves will be created from profits is this company making profits or full loss full loss but if at all they give this in the question don't question the question whatever is there take it so if at all they give you reserves like General Reserve or capital reserve you you can utilize that you can utilize means transfer this General Reserve or capital reserve first to reconstruction account or to Capital reduction account and then do all this particular activi okay then afterwards if Capital reconstruction account still has any balance transfer it finally to what capitalism first only capital reserve as a balance means from capital reserve you transfer it to reconstruction account after doing all this activity again you transfer it to capital reserve that's what they say in Canada okay like that okay first you take it from capital reserve do all your drama then again push it back to capital reserve that is what is all this drama about yes s Super S okay so one more point is if any dividend is sacrificed if in the problem if they tell some Equity shareholders or preference shareholders if they have sacrificed their dividend should we have to pass any journal entry for it no no journal entry is required for such transaction sir why sir sir to cancel something first you need to account correct now I tell you to cancel creditor one second I'll delete all this this extra sir I ask you to cancel this credit R can you cancel yeah because credit R is shown in our books currently at what value 1 lakh so can you cancel yeah you can cancel by passing a journal entry credits account debit to reconstruction account sir dividend dividend it's what sort of company profit making company or loss making company loss making companies will they declare dividend no that means is this dividend there in company balance sheet sir is this particular dividend there in company balance sheet no because company has not declared IT company will declare only if they make profit but this company is suffering loss after loss after loss so this dividend is not declared in the adjustment they will tell we have not paid the dividend to preference shareholders since 5 years they sacrifice that should we pass any journal entry for it 5 years dividend have you already accounted no if you have accounted something then you can cancel it if you have not even accounted means how can you cancel so for such a transaction no cancellation journal entry is required okay saru okay all right sir in this particular transaction May or in this internal reconstruction may they also give you something called some expense will be there we incurred some penalty of 10,000 rupees sir penalty is an expense okay for one expense you want to prepare whole pnl account h no so every expense here will be rooted through which account reconstruction normally what is the journal entry for penalty paid sir penalty account debit to bank account how much penalty you pay let's say it is 10,000 then penalty is a loss where will you transfer that loss to pendal account so the second journal entry will be Pendle account debit to penalty 10,000 10,000 this is the journal entry you will pass so add these two entries what happened penalty debit penalty credit effectively what is the journal entry pendel account debit to bank account how much sir 10,000 correct logically this is a journal entry for every expense in this chapter pendl are you showing or cancelling cancelling using which account reconstruction account hence instead of pendl what will be debit here for all the expense the journal entry we passes reconstruction account debit to bank account okay s s if for expense this is the journal entry means for income the journal entry will be Ulta which will be what bank account debit to reconstruction account all this they will give it in adjustments all you have to Simply do is pass journal entry and after after that you need to prepare balance sheet reconstruction account yeah mean you need to prepare reconstruction called Ledger that is your working note after that you need to present it in balance sheet okay Zar so that's all is a scope of this particular chapter now can we understand this things better with the help of few questions done so let's go for online also everybody are there all [Music] good yes awesome great okay so we so how any idea how many chapters will be covered today we'll be covering about five or six I'll tell you at the end for now we'll get started with this okay don't worry I planned it in about 5 days in about by Wednesday I'll finish all your syllabus H everything will be covered so now same approach sir first all the concepts then immediately apply all the concepts in problems okay see uh the thing is if I want to cover this revision faster I can only revise through Concepts but I feel no sir revision will be more effective when you apply it in problems because Accounts at the end of the day is still a numerical paper so unless you solve few questions now you'll not feel like you did accounts you'll feel like you did law which I don't want to give you that feeling so let's take up some questions can we go any problem someone someone has comeing means we can ours is like our Dharma chhatra okay anytime you can come in anytime you can go they're asking yeah yeah come come it's okay come come okay Madam came nice diversity unity and diversity we say no yeah we reach that okay sir is there class on Sunday Sunday I'm traveling people so Sunday we not have class the schedule will be Friday Saturday Monday Tuesday Wednesday these are the five days okay I'll tell you the schedule once again tomorrow for now let's not waste time in that regard Okay so balance sheet of this particular company they have given sir in this problem no balance sheet is waste reason is everything will be there in the adjustments what you simply have to do is forget the balance sheet later go over all the adjustments adjustment f f we start going through one by one Court approved a scheme of reconstruction with effect from first ail 20 X2 first prefering shareholders have to be written down by Allah written down 275 that means from whatever value you are bringing it to 75 now go back to balance sheet what is preference share Capital face value 100 from 100 you are bringing it down to 75 so how much is a sacrifice 25 so what is the journal entry for this you only passed entry for sacrifice portion or old shares you'll cancel sir from Face Value from 100 you brought it down to 75 so old preference share Capital fully you need to cancel and issue new preference shares worth 75 okay so what will be the journal entry for this preference share Capital account or use the same name that they have given in the question what sort of preferen shes are these 6% cumulative preferen share Capital account debit how much 4 lakhs okay just check the screen okay to what account two did you change the dividend percentage or S so they did not mention anything okay if you don't mention anything you can just write preference share capital or keep it as same you can write 2 6% preference share Capital how much now value 75 each how many preference shares you had sir before 4,000 preference shares so 4,000 preference Shares are there each car revised value is now only 75 754 are 300 so this will be 300 from 4 lakh the share Capital value became 3 lakh means how much have they sacrificed 1 lakh that will go off where to reconstruction account or Capital reduction account arrived as a balancing figure or you can do 4,000 into 25 also first entry okay all right this space is okay for everybody I would like to maintain this for all the chapters that's okay right online also you have to be okay because I don't have much time yeah sir Equity Shares are reduced to 2 rupees sir what is the existing face value of the share 10 rupes from face value 10 the new face value has become two so how much has it reduced by 8 rupees so 8 rupees has been sacrificed so the journal entry will be equity share capital account debit how many shares 75,000 so the journal entry will be equity share capital account debit 75,000 into 10 which is 7 and a half lakh to what to equity share Capital account how much is the revised face value of equity shares 2 rupees so 75,000 into 2 which is 1 and a half lakh balance portion is your sacrifice which will go off to either reconstruction account orh Capital reduction account that is one next adjustment of the preference shares dividend which are in a for four years so the moment you did dividend a adjustment now go back to balance sheet quickly scan M whom not the people balance sheet okay here any preference dividend are you able to see in this balance sheet sir no loss making company no so will they declare dividend no so is it accounted no now you know what they'll say in adjustment this is sacrificed for this sacrifice portion will you pass any journal entry no but check what they told in the problem how many years it is in are for four years entire dividend got sacrificed no 34 to be waved that means 34 is sacrificed so how much over is the dividend in that 34 they have waved off means they have sacrificed so for this do we need to pass journal entry or no entry no entry required so in 34 of the sacrifice means balance 1/4 has to be settled what did they told and the and Equity shares of two to be allotted for the remaining quarter meaning remaining quarter means 1/4 for the 1/4th portion is it sacrificed or is it paid paid did you pay this dividend in cash or through shares shares what shares Equity shares so if you what there an expense only what should be the entry reconstruction account debit to bank account but did you pay cash or bank here or Equity shares that means will you write reconstruction account debit to bank no what will you write reconstruction account debit to equity share Capital to what extent 1/4 extent first of all calculate sir how much is the preference share Capital 4 lakh what percentage preferen are these 6% so 4 lakh into 6% if you do you're going to get 24,000 that is one year dividend here was one year dividend in our years or four years four years 25 four is 96,000 so totally 96,000 was the dividend in aers okay in this 34 they waved up for sacrificed any journal entry for that no for 1/4 you calculate sir 96,000 into 1/4 is how much 24,000 for this 24,000 for this 24,000 also will you say no entry or you have to pass entry pass entry what is the entry sir reconstruction account debit to equity share Capital pass. checko perfect this D A okay that's all can I move on to the next okay look at the next adjustment interest payable on debentures to be paid in cash not sacrificed no paid if it is settled first of all go back to your balance sheet have you accounted any interest payable in your balance sheet yeah this is your notes to accounts you are able to see in other current liability they' have included interest payable on debentures how much 225 it's a liability basically there's nothing but your outstanding interest is it sacrificed or settled settled what's the journal entry outstanding debenture interest or use the same name what name are they saying interest payable on 6% debentures account account debit to bank account 225 pass some pass here interest payable account debit to bank is what they pass I say use the same name as given in the question don't change the names better it is okay saru yes saru next one what is the next one debenture holders agreed to take over freeold property whose Book value is 1 lakh but at a valuation of 120 Book value of that property here Book value of that property is only one was it taken over at one or 120 that means property value same or property value increased increased from how much sir from 1 lakh it became 1 L 120,000 means property value increased by 20,000 yes or S sir if any property value increases asset value if it increases should we pass any journal entry here yes what is a journal entry to increase the asset by 20,000 asset account debit which asset is this freeold property so the journal entry will be freeold property account debit to revaluation this is done through reconstruction account so don't apply as1 concept and say I'll pass it to revaluation Reserve no no no all this has come through internal reconstruction so the journal entry will be freeold property account debit 20,000 to reconstruction account a capital reduction account 20,000 that F but this asset is it there with you or taken over taken over by whom debenture holders do you have any debentures in the balance sheet yeah how much 3 lakh 75 ,000 okay so that means will the value of the debentures be 375 now or some portion settled already in this 1 120,000 is already settled anything else they have told they what did they say in part payment of their holding is this full settlement or only part payment denture holder say give me your property for the time being later we will see the later portion balance portion you can pay later okay and also to provide additional cash of 130,000 secured by a floating charge on company assets at the rate of 8% so let do a thing let's put that on hold first can we pass an entry for this okay so first you have to increase the asset what is the journal entry for that pre-old property account debit to reconstruction account how much sir 20,000 they have done 80 to find I'll come to that so far we have identified how much 20,000 so we have given the entry for this yeah that's all or this property was taken over taken over by whom debenture holders what are we calling it as deure holders in our books or are we calling it as debentures we are calling it as 6% debentures so that means after take over this liability value will be same or it will reduce reduce how much value do they take it over by 1 lakh 120,000 what's the journal entry de holders 6% debentures account don't say debenture holders you have to use use your common sense whenever confusion is there are we do we show debenture holders account in our balance sheet or debenture account debenture so only liability is called in the name of debenture means that name only you should use so the entry will be 6% debentures account debit 1 120,000 to freeold profit like that so what about remaining remaining you will pay later okay so the chance pay dance no sir yeah not everybody will sacrifice some portion may also say give me extra possible okay so reconstruction need not necessarily be every time sacrificed some of them may get this extra benefit also don't question the question a okay let's move on to the next thing okay look at this part and to provide additional cash of 130,000 secured by floating charge of company's assets at the rate of interest rate of 8% drama unnecessary drama queen what they trying to say new debenture company has issued whose interest rate is how much 8% so that's all that's what they mean by provide additional cash of 130,000 who will give additional cash debenture holders will they give it at free of cost or no company will issue debentures to them and debenture holders will issue what to the company cash so this is a simple transaction where where some additional debentures are issued so if you want to do internal reconstr ruction means you want to survive or revive your business for that you need Rocka money correct no not Roa Rocka yeah Canada R how much money you got it here 1 lakh 30,000 so new debentures has been issued for 1 lakh 30,000 which carries an interest rate of 8% so simply what is the entry for this bank account debit where somewhere and all they pass study material I tell you bank account debit to 8% dentur 1 lakh 30,000 okay s g that's all next one patents and Goodwill to be written off sir both are assets both have debit balance how do you cancel something which has debit balance credited here the debit will be given to our D who's what here reconstruction account so the journal entry will be reconstruction account debit to there is reconstruction here yeah to patent account to Goodwill account how much is a patent shown in our book sir 1 l30 and 37,500 respectively that is what they' have credited over here okay all right just observe even if you don't have the notes not a big deal all these are some are study material questions some are RTP MTP question I can share the notes to you later also if you wanted for now just check the screen don't waste your time in searching where is this notes so what the guy this guy is saying and all that revise me just AR sit with me whole day we will cover if you want I'll share the notes with you at the end of the day just be with me okay next to what is next to inventory to be written off written off by written off to Allah always in this chapter concentrate on the word to and byy if they the World by 65,000 that means its value itself is reduced by 65,000 what is the journal entry to write off inventory same reconstruction account debit to inventory account so have they written inventory by 65 yes next adjustment amount of 68500 to be provided for bad debts if bad debts means it will affect what your creditor or dear debt provision for doubtful debts what do you do you'll show it separately in balance sheet or reduce it from debt reduce it from datar so indirectly what are they trying to say datar is reduced by 68 F so what is the journal entry for this datar has debit balance how do you reduce it credit it so debit will be given to reconstruction or Capital reduction account debit to provision for doubtful debts or you can directly write tradeables it's fine this's provision for doubtful debts any which way we'll reduce it from dears in balance sheet okay next is what sir uh remaining freeold property after giving to the debenture holders are revalued at 387 500 one proper of one freeold property or one portion of freeold property denture holder took off freeold property means maybe your building we had two building one building debenture holder took off another building is there its value is same or it is revalued Ral it's what is its revised value now 3875 okay go back to your question how much is a total free old property value 4 lakh 25 so in this 425 who how Book value worth 1 lakh was taken over by deure holders so in this 425 1 lakh Book value worth of debenture was taken over by somebody have they already accounted this or pending already done now in this 425 one lakh book value is already taken over means how much is the remaining 325 so the value of Freehold property remaining with us is 325 is its value 325 now or increased increased it became how much 3 87500 currently we are showing it at 325 its revised value is 38 7500 so this Freehold property has it reduced in value or increased in value increased how much 60 to if a freeold property value is if it is increased means should we pass journal entry or ignore we have to pass journal entry what entry asset value you need to increase so what is the entry reconstruction account or rather asset account what is the name of the asset over here Freehold property account debit to reconstruction how much value 60 to5 both they clubbed together and pass one Journal it is that okay see earlier we already got 20,000 here now we got how much 6 to 500 both they have passed combine journal entry if you don't like this you can pass separate journal entry for 20,000 separate entry for 60 to 500 that is also same magal g g okay adjustment investment sold for 1ak 140,000 what is the value of investment in your balance sheet sir check where is the investment here 505,000 correct no hey super duper come to note number seven yeah investment value is 15 5,000 how much was it sold for 1ak 140,000 so you made loss or bumper profit profit what is the journal entry bank account debit where first we'll find journal entry wait study material finding that only is a big thing bank account debit 1 lakh 40,000 to investment 55 to R right profit on sale we will transfer to pnl sir in this chapter pnl are you keeping or cancelling can so every expense every income everything will be rooted through reconstruction or Capital reduction account itself so there's nothing but your profit on sale that also will be transferred off to reconstruction account itself yes super next what is next directors accept settlement of their loan to the extent of 90% by allotment of equity shares of Two And as to 5% in cash balance 5% wave down so that means 100% of director's loan is canceled can I say so yeah to the extent of 90% they want new Equity shares to the extent of 5% they are saying give me cash to the extent of another 5% they are saying we will wave off meaning they will sacrifice that means 100% of the loan is cancelled or settled what is the value of director's Loan in the balance sheet check how much is that where not able to find only okay in node stock on we will see yeah loan from directors how much one he got it over here so there is a liability it is settled what's the journal entry debit it loan from director's account debit how much 1 lakh yes to the extent of 90% what did we give Equity shares if company isues Equity shares will you just write Equity shares or it is equity share capital for the company issuing shares it becomes equity share Capital so you'll write to equity share Capital 90,000 another 5% they told give me cash Gandhi note so that means you'll write to cash or Bank 5% basically one lakh of 5% this is one lakh of 5% will give you 5% another 5% they only put themselves go go go another 5,000 is a saave off that goes off to Capital reduction account or capital reserve account sir you will cover entire syllabus sir somebody's asking first year only if you're not planning to cover we will not attend only sir I will cover don't worry leave that portion to me you focus on just on coming on time leaving time I will tell you yeah yeah come on time that's all okay next anything else is there Asar there are capital commitments toing 2 lakh 50,000 there some contract we had the contract value is how much 2 lakh 50,000 these contracts are cancelled sir if you cancel a contract Midway the other party will keep quiet or he'll demand some penalty he'll demand some penalty on payment of 5% of contract price as penalty what is the contract price 250,000 and that he's asking 5% penalty me what this is 12,500 yes so penalty is a loss for the company or expense for the company for this journal entry you'll write pnl to bank no for all the expense in internal reconstruction the entry will be reconstruction account debit to bank account they would have passed as a compound entry somewh check in compound entry this will be there Capital reduction account debit to bank 12,5 they study matal always prefers a compound entry if you don't like compound entry pass separate journ separate entry also it is acceptable that is your presentation ignore Taxation and cost of the scheme show Journal ENT that's okay now sir Journal ENT all done after this they will ask one topic which can come in any topic that is balance sheet balance sheet is one that is extra fitting it's like us we will fit in anywhere okay it's like that okay anyway any chapter me they can say prepare of balance sheet we have preparation of balance sheet as a separate topic there we will do it in detail here I'll not worry about it for the time being is that okay but before that I want to know how much you have studied can you give me a quick recap what is the format of balance sheet just for my satisfaction yeah balance sheet of which company here sir balance sheet of a and Co in bracket May one word you should not forget that is called and reduced whenever you prepare balance sheet you have to remember to add this words extra fitting called and reduced that is one and other format of balance sheet without looking at screen whe I push it off that side tell me heading is what sir first equity and liabilities under that point number one shareholders funds under shareholders funds Point number a share capital and you prepare note number one for share Capital under share Capital you'll show equity share capital and preference share Capital no time means show equity share Capital preference share Capital here only time is there if your writing speed is good means prepare note number one and show okay then reserves and surplus here only one reserves and surplus will come that is after doing all this activity if reconstruction account has a balance you need to transfer it to capital reserve in fact two entries we have not done there once again I'll come back to that okay that is your reserves and surplus then point number two is your noncurrent liabilities under non-current liabilities you will show long-term borrowings under long-term borrowings you will show debentures bank loan if any I think it is there here then all your current liabilities like credit hours outstanding expense bills payable etc etc etc will come then Roman letter to assets under assets Point number one noncurrent assets under non-current assets Point number a property plant and equipment we don't call it as fixed asset anymore instead of fixed asset we call it as property planted equipment then any if you have any uh intangible assets show that then if you have any Investments show it some others are also there we are only discussing the common things then it's your current assets so all your current assets blah blah blah blah that is your format of balance sheet just to take the data and dump it into the format but due to one easy way to prepare balance sheet here is check the journal entry sir check the always keep don't check question balance sheet and prepare solution balance sheet if you want to identify which component is there refer question but to get the value always check the uh journal entry like just to give you an example how to prepare quickly over here first you have to show equity share Capital don't go back to question C question will give you 101 data here only just check where in all have you credited equity share Capital here first you credited here by how much sir 1 lakh 50,000 then here you're credited by how much 24,000 maybe we'll do par preference share Capital also how much is prefer share Capital car you have credited here 3 LH here you credited again equity share Capital by how much 24,000 anywhere else you have credited are only journal entry check journal entry here again you credited by 90,000 anywhere else that's all that's all so add this now how much it will be 240 so 264 this is three that means the total value of equity share capital in balance sheet has to be 5 lakh 64 check solution balance sheet 5 lakh 6 that's F so don't have to look at question C data at all okay only journal entries and go on doing this way you'll never go wrong in balance sheet balance sheet and all in this topic if you go wrong no my blood will boil literally okay literally whether yours will boil or not mine will definitely boil because it's very very simple sir just look at the journal entry and go on updating the amount okay some asset value would have reduced so reduce it some asset value would have increased increase it okay just one more thing for me tell me what what is the value of free old property here there is one adjustment around that no that only one portion you tell me I've shown you over here tell me what is the value of free old property everybody type in tell me let's see how will you have paid attention till now free old property value go go hey not going the tell it's here only what is the value of re old property perfect 387,000 F so they only gave the question sir remaining freeold property is valued at 3ak 87500 so what are you wasting your calculator and energy for they only told remaining free property value is 387 fine that itself will come in your property plan and equipment to the extent of freeold property like that okay rest of the assets you want me to show or is it okay manageable this much is okay all right whatever assets is reduced reduce it best place to look for increase or decrease is journal entries okay but in this problem couple of journal entries we missed can someone point out me what are those things we missed so whether the problem says or not two things we need to compulsorily do which is what transfer or first cancel off p and Dela debit balance did we see anything that in the adjustment no they will not give because it is a hidden adjustment first you need to prepare reconstruction called a ledger balance you need to prepare here they've not done it's okay but you need to prepare reconstruction account or Capital reduction called Ledger that will give you how much balance is available if you have balance you have to compulsory write off pnl what is a pnl balance over here sir pnl balance here your reserves iness debit balance of p is how much 535 if you have B balance in reconstruction account will you cancel this yes what is the journal entry reconstruction account debit to pnl account I think theyve passed it over here reconstru account debit to P account 5 lakh 35,000 even after writing of pendl still every construction account has a balance means transfer it to capital reserve so that particular Ledger Capital reduction Ledger or reconstruction account Ledger will give you that particular balance so I have to present it in Ledger only no just present it as a statement or as a ledger based on your convenience but do present it okay and the writing speed has to be extremely good okay only then you'll be able to complete the paper okay I'm already telling you paper will be lengthy don't crib later on okay paper was lendy Sir everything you taught we remembered sir we knew also sir but still I did not complete sir don't give that excuse okay from day one I've been telling you paper will be lengthy which paper depends one or two papers in each attempt will definitely be on the lenier or tricky side so don't worry about something if it is tricky or something if it is lengthy don't freak out you don't have to get 100 on 100 to pass the passing marks is far 40 in single Paper in aggregate May 50 but our Target should at least be to score 65 to 70 because if you get aggregate that particular group will be passed okay the target is don't say oh I'll only try 50 and all it'll be difficult always try to get exemption in one or two papers so that the whole group will get cleared out okay so focus more on your strength whatever topic you feel you have absolutely comfort with where you feel you have not done any you will not do any mistake answer that first the moment that you answer one question with full energy with full properly automatically the confidence level that you get no sir will drastically increase that will help you to tackle tricky questions so C exam is all about Confidence Game so don't take the lengthy questions and all first take the question which is little less lengthy and which you are more comfortable so that you when you solve it on time and if you solve it perfectly automatically you will get that separate feeler then automatically hands things everything will start moving faster which will help you to score better in exam that's Sol is a simple trick keep keep this much as simple or as clean as possible don't take too much pressure after all one zind only one exam okay many of thousands of people have cleared you will also clear already already cleared also yeah me can clear means you thought only like that it'll happen so keep the confidence high so that is one so can I go for some next questions I plan to do not just one or two two three questions like this I'll go on someone saying sir you did tell your dialogue throw pencil and scale yeah throw pencils and scale out do not use that because we will not have time not bad people are remembering so much that's the reason I told love and support you are showing know that dialogue and all people are coming and telling us thank you thank you so much yeah amazing but I'll try to keep up yeah I'll try to keep up the same work for the next batches also probably try to put in a lot more effort in that direction okay awesome can I get to the next question sir this is RTP May 2024 question so let's run through this sharehold okay as part of reconstruction scheme of getting better limited ha name they are only getting better so we'll make them better yeah the following terms were agreed upon shareholders to receive in Li of their present holding in Li the English word in Li means instead of instead of their present holding they s want something else so they want present Holdings or we have to cancel it we have to cancel because they don't want who are those these guys who don't want the shareholders currently how many shares we have 10,000 shares of 50 each that means so if they don't tell what type of shareholder we always assume it as Equity shareholders only because preference Shares are optional Equity Shares are if a company is surviving if a company is there means obviously they will have what Equity shares preference shares may be there may not be there we don't know so if they just mention Equity shareholders they always take it as Equity shares only so how many Equity shares 10,000 or 50 each so instead of this we need to give something else what in all we need to give 15,000 fully paid up Equity shares of 10 each so what was the original face value of the share 50 now it has become 10 so what is the entry you will pass old shares fully you need to cancel what is the entry for this where is it P oh here equity share Capital don't write share Capital write it as equity share capital account debit how much 10,000 into 50 which is 5 to what account sir they have written just share Capital because we don't know the value you can write equity share Capital which in my view is okay two two equity share Capital how much 10,000 into what is the new face Val 15,000 15,000 right is not 10,000 H okay I wrote number wrong 15,000 into 10 it is first one correct the second one going then H okay so this is 10,000 into p and is doing creativity today okay 10,000 into 50 which is 5 lakh so how many shares are you shuing 15,000 shares of 10 each so this is 1 and a half lakh so we have passed the entry that's all or some more is there some more they also want they want in fact first over they want one more which is what 12% fully paid up preference shares equals to 25 of the total equity share sir what is the total equity share value 10,000 into 50 how much 5 lakh okay now you are giving a new preference sh to 5 lak value or 25th 25th what is original preference sh Equity shares value five of that 25 value you are giving it as new preference shares so p lak cut 2 by pi how much 2 lakh so your company issued preferen sh did they get money or there is a barter system going on bar old preferen old Equity shares cancelled instead of that we give new Equity shares and new preference shares if a company has issued preference shares means what should we credit preferen share Capital what percentage preference shes are these 12% so what will you credit to 12% preference share Capital 5 lak 2x5 which is 2 lakhs show the calculations better for you also for the evaluator also here only no need for any work note here only like the way I'm showing in Brackets show it that's all ah no next what did they say to pay them 50,000 so 50,000 we are paying how paying means obviously through cash or bank so what will write here two bank account so entry completed h no no no still a lot of things are there to bank 50,000 anything else and the transfer the remaining to reconstruction account balance if you have to pay anything means they are ready to sacrifice that will be transferred off to reconstruction account to reconstruction account calculate or balancing figure balancing figure is 1 lakh which we transferred to reconstruction account yes or first entry done done can we go for second one okay 8% preference share Capital value is 3 lakh to write down the value of preference shares to 50 original face value was 100 so preference share same or face value reduced whenever face value reduced can you pass the journal entry only for sacrifice or full by full we mean old preferen capital should be fully cancell issue new preference shes to the extent of new face value balance you transfer it to reconstruction account so what is the journal entry to preference sh Capital has credit balance how do you cancel it debit it so the entry will be 8% preference share Capital always write the percentage better 8% preferen share capital account how much 3 LH to what account sir from 100 the face value got reduced to 50 from 100 this became 50 that means indirectly they're telling how much 50% is a sacrifice correct so that means what will be the value of new preferen shares 3 lakh 50% which will be one and a half lakh 50% they sacrificed for the 50% they want preference shes has been reduced that's all to You'll write here 2 8% preference share Capital 1 and a half lakh and to balance to reconstruction account that next what is next to 14% debentures of the nominal value nominal value means face value 2 lakh along with acred interest of 56,000 was waved off hang on read further was waved off for 34 of the total amount so entire thing is sacrificed or only 34 3 34 of the debenture value and 3/4 of the interest both are waved off okay and balance balance means 1 by fourth the balance what do they want cash 34 extent waved off 1/4 extent settled in cash so is this debenture there in our books or fully cancelled fully canceled some by sacrif iing sum by payment so what do the journal interv will pass both both these are acur interest and debenture both are liability they have what balance credit balance how do you cancel them debit so the journal entry will passes 14% debentures account debit 2 lakh interest account debit 56,000 there's not interest is actually outstanding interest okay so to what sir calculate to bank account this if you add how much are you getting these two cardition will be 2 lak 56,000 full 256 are you paying or only 1/4 1/4 extent to 256,000 into 1/4 extend we will pay settle to bank you'll right balance 34 it sacrificed so you'll transfer it off to reconstruction account F now great uh anything else or that's all that's all so sir if they don't say anything we have to still do right of what sir pel debit balance have they told anything no so that means if PN debit balance is not there means check does reconstruction account has any balance H yes if reconstruction account has any balance what will you do for that transfer it off to Capital Reserve account so that's what they've done here because P debit balance information is given or missing missing that's the reason entire amount of reconstruction they have transferred to capital reserve like that okay zaru all right so this is about uh chintu problem no correct chint for level what as I told no nothing is Big okay yes only a few few questions in this reconstruction account will be one or two adjustments may be trickier rest everything will be rinse and repeat okay almost 80% of this chapters runs through the same thing recycling process one or two or two or three adjustment maximum may be a little different so at best even if you don't know them at best still you will get what 80% of the marks out of 10 if you get eight I'm happy if you maintain the same aggregate 100 80% is 80 full happy yeah like that okay keep like that it's okay one or two things will definitely don't go wrong in examination maybe intentionally or unintentionally something will happen okay it's happened maybe it'll happen for you also I wish that it doesn't happen but it is definitely happened to me though I'm teaching accounts I didn't score 100 on 100 in accounts nobody most of them don't do it I think only one person in India allel has scored 100 on 100 I think maybe s Pras someone if my memory is correct that only one in the history of 65 years okay because that is very very rare because study material evat full when it comes to reducing the marks okay giving the marks they are very very very very not stingy careful okay let's not call them stingy they are super duper guys you want marks no yeah you have to phase them okay next is MTP 2024 questions we have given so let's take up that so balance sheet should we have to worry about balance sheet or not required not required directly dive into the adjustments huh but maybe one thing in balance sheet you can keep aware of is the face value because face value of equity shares and preference shares will be same or it will get reduced so just underline that don't underline McQ questions and all okay now it's have to be very careful what you're underlining at all because because mean may look a silly matter but it may be a grave mistake because if you're confiscated means you can't attempt I don't know exact Provisions one or two attempts you I think I don't know what's the rule 2 3 years or two or three attempts you're not supposed to three years you're not supposed to attempt the paper only so silly mistake maybe unintentional but it is very difficult to prove all the unintentional mistakes to the invigilator because he doesn't know you nor do you know him okay so be careful okay what you're underlining and all if you want to play it safe don't underline anything directly do whatever you want to do write it in aners script only later on if you want you cancel answer script it will not be awarded once you cancel write something and if you write this cancel off no it will not be awarded people will not check that like that if you do to play it on real safe site okay directly coming to adjustments preferent shareholders will give up 30% of their capital in exchange for allotment of 11% debentures to them so how much are they giving up 30% okay in allotment for exchange of debentures means what are they trying to say is 100% of preferen share capital cancell for 30% extent they're ready to sacrifice for balance 70% % of them they want debentures so 100% of the preference share capital is cancell okay saru all right how much is preference share Capital zaru 6 lakh so what is the entry 8% preferen share capital account debit 6 lakh how much is sacrificed 30% so 6 lakh 30% is 1 L 80,000 that you transfer it to Capital reduction account balance you transfer it to what did you give them 11% debentures calculate one and other one other one you arrive it as balancing figure don't waste time calculating both in exam one is good enough okay next one deure holders having a charge on planted missionary would accept planted missionary in full settlement so always pay a key attention whenever a Deen holder or creditor is taking over some asset always check because in our mind no we always say it a sacrifice the moment internal reconstruction we always think it is sacrifice it need not be in the previous problem debenture holders took it in part payment okay but always check here what are they using the word full settlement full settlement means 100% of the debenture value you need to cancel what is the value of debenture 12 lakh what did they take over planted missionary what is planted missionary value 9 lakh for 12 lakh worth of liability they took over asset only worth n lakh so and this is part settlement or full settlement that means three lakh rupees what is that sacrificed which will be transferred off to reconstruction account so the entry will be what 9% debentures account debit 12 lakh to planted missionary 9 lakh and balancing figure is capital reduction account okay sir all right and also in narration also i' had given you some keywords anybody remembers whenever equity share Capital preference share capital and all is reduced always use the keyword approved scheme of reconstruction dated dot dot dot always write this term approved don't remember H okay no problem approved scheme of reconstruction data dot like being preferen as reduced as per approved scheme of reconstruction data dot dot dot WR this in one or two narrations wherever equity share Capital preference share capital is reduced write this these words the key word there is approved scheme of reconstruction rest everything your vocabulary your this thing don't give goes and all right it in your own simple terms but narration is compulsory if there is a journal entry it has to be backed by a narration only if the problem says narration not required then you can skip otherwise compulsorily you need to write it okay sir next is what sir inventory equal to 5 lakh in Book value will be taken over by trade payable in full settlement so what is the value of credit R they give in the balance sheet check here how much is that 5 lakh 92 what did they take over inventory what is the inventory value they took over 5 LH for 590 to worth of liability we gave inventory only worth 5 LH so remaining is what sir sacrifice sacrifice so the journal entry will be trade payable account debit 590 to inventory 5 lakh to reconstruction account 92 either use reconstruction or Capital reduction one one General entry don't use one one either Capital reduction or reconstruction account for all the entries of your choice but only one in one problem only one okay like that next investment to be reduced to market price So currently what is the investment value 68 from that market value reduction is 55 so investment value is increasing or reducing reducing entry is what capital reduction to investment account how much is the reduction 68 - 55 is 13,000 is the reduction okay yes s not profit loss from 68 you're bringing it down to 55 so loss company would issue 11% debentures for three lakh so they're issuing debentures for three lakh means there nothing but debenture is issued for cash what's a journal entry those we when we use the word term cash cash is Loosely used cash here refers to cash in hand as well as cash at buy so what is the journal entry for uh issue of debentures bank account debit to 11% debentures 3 lakh three lakh then and argument its working capital requirement to meet their working capital requirement they issue the debentures they can issue for whatever Joy what do we care for it yeah after settlement of Bank overdraft so Bank overdraft there or settle go back to your balance sheet do you see Bank overdraft anywhere in your balance sheet yeah Bank overdraft how much is there sir 150,000 this is there or settled settled what is the journal entry for liability not sacrificed settled entry is what uh the liability has credit balance if you have settled it you have to cancel it how do you cancel something which has credit balance debiting it so the entry will be Bank overdraft account debit to bank account that is the entry that past year after doing this drama if first of all check if pnl has a debit balance here reserves and surplus has a debit check check come to note number two how much is the debit balance of pnl 4 lak 5 so can we keep it as it is or we need to cancel cancel every problem yes provided reconstruction account has a balance so here I think we do have balance hence that's the reason entire pnl they have written off if you have only suppose only three lakh balance suppose Capital reduction account or reconstruction account has only three lakh balance in that case what you'll do write off Pendle only to the extend of three LH like that okay suppose you have five lakh balance then don't write off 5 lakh how much pnl balance is there 4 lakh 5,000 write off pend to the extent of 4 lakh 5,000 so in 5 lakh 4 lakh 5,000 gone means how much remains still 95,000 that will be transferred of where the capital reserve that this particular and all know this particular information you will get when you prepare Capital reduction reconstruction account Ledger okay either presented as Ledger or as a statement your choice so if still any balance remains in capital deduction means that will be transferred off to Capital RIS that's the thing okay suu yes s but one more thing you need to keep in mind is this they're doing the latest format man sir Bank overdraft no check here maybe I think it was there in the last problem it missed out I'll come back to the last problem only maybe it's better here this is the first problem we covered right here check are you having Bank overdraft sir yeah how much is a Bank overdraft in the question balance sheet 195 okay some problems ICA is doing this some there not doing sir Bank overdraft is a cash equivalent Bank overdraft is a cash equivalent so in some problems what IC material does is they'll show banking overdraft separately under current liabilities in some problem they'll reduce it from cash because it is what it is a cash equivalent the main category in balance sheet is what sir under current assets we have cash and cash equivalent cash and cash equivalent have what balance cash and cash equivalent have a debit balance let's say cash and cash equivalent balance is 5 lakh or in this problem only we'll take it or Avail it it's okay I just tell cash and cash equivalent has a balance of how much 5 LH cash and cash equivalent here refers to cash in hand as as well as cash at bank it has how much balance have assumed five there is also an overdraft how much 195 this overdraft they not show it on the liability side instead of that they have they will show it under cash but the problem here is Cash has debit balance overdraft has a credit balance that means what you will do they will reduce the overdraft how much is overdraft in this problem sir 195 so this they will reduce and the balance will become how much 3 lakh 5,000 so this 3 lakh 5,000 will be shown in the balance sheet you also do the same approach some problems may they are doing this some problems may they are not doing it I suggest do it like this only and every problem better okay zaru fine this is the one thing H strategy attempt full marks uh last minute sir let's not waste time during the topic discussing extra things the first priority is no we will finish off all the chapters first last May last day I will give you some strategies whatever I think or some of the things which I followed I'll share with you last 10 15 minutes on the marathon day we'll keep it as general discussion for now every time if we discussing it will lead to a wastage of time so let's not do that is that fine end maybe we'll do it some things if it is important if I feel I'll forget it all I'll share it right in there with you otherwise we'll do it at the end okay great so with this uh all this chapters if you see RTP MTP question any dumb in this question or nothing nothing so just with this this particular topic I think we have one minute I'll quickly run through I think all the adjustments of this question we did now yeah so this particular question or this particular chapter we have completely revised thank you so much end of classes sir in your dreams right so I'll be adopting this approach for the remaining topics as well does it work with you even if it does you have to make two I never said no to you sir correct for so nice that you are yeah one second maybe we'll do buy back and then we will stick to this Yes Man online so many people are there give me a quick heads up so far all good everybody in the online the approach wise understanding wise EX etc etc all good all right now can I get dive into the next chapter so the next chapter we talking about is buyback of shares it's actually buyback of shares and shares with differential rights shares with the differential rights is removed from your new syllabus it was there in Old syllabus now it's been removed so one good thing for us something is gone means we are always happy something is added means that is only problem something is removed means ah J Institute yeah but they also added four to five extra topic from CA final now Murad like that yeah interesting topics on don't worry any which way I had to learn it in C final so you're learning now only so that will improve your knowledge that's all don't freak out about the new new new things added and all so now first buback of shares when we say buyback of shares here we refer to buyback 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 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 and as per companies Act of 2013 these are not Accounting Standards these are companies act provision what companies act says is if any company wants to do buy back the shares must be fully paid up some must be there 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 date because generally we say resolution validity is only 1 year or 12 month that's the reason and once you do the buyback 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 buyback 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 7even days of buyback the shares must be physically destroyed that is one okay zaru all right so how much can you buy back 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 buyb 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 may be 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 aware 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 on 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 thousand 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 buyback 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 of 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 or 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 allow these are all maximum limit if company wants to do lesser buyback acceptable but maximum they can do buyback 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 Securities 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 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 third limit says is 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 buyb 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 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 buyback it is after buyback keep that in mind that will create some problems for us when we do some questions okay this one this are the three limits so you'll 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 by 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 apply this also in questions okay sir companies buying back Equity shares means is the share Capital same or it'll 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 preference 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 gaps Capital Gap if Capital has reduced by three lakh then you need to create CR 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 only cancelling Equity shares you did not issue any new shares that means Capital reduced that Gap has to be compulsorily filled up by creating something called crr 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 a 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 or new issue of preferen you ignore it for what purpose crr purpose so as per a CR 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 face 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 is not tested now long back me they used to test this now I don't see this particular adjustment test it 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 buyback entry think logically equity share Capital same or reduced reduced 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 to just because equity share face value is 1 lakh should we have to pay Equity shareholders one lakh only or we could pay more we could pay more 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 LH company told that much only I will give shareholders told to hell 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 an 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 giving any payment means that we call it as premium on buy okay so here I assume the premium on buy back 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 lakh 20,000 so you'll write to equity share buyback account earlier they used to WR to equity shareholders 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 buyb so I have 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 on buyback is a loss what will you do for that loss transfer it to pendl but hang on you have something called Securities premium which is backed by section 55 and what is section 55 of companies Act 13 says if you have any if if you are doing any buyback and if you getting any premium on buyback instead of transferring that loss to pendl First you can set off the loss with securi premium and Security Premium has only five uses and pnl has limited users are 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 Securities premium first priority to transfer this loss or to set off this loss will be with the Securities premium so what do 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 Prem that approach is also acceptable okay for enough people like that also you can do that is one sir here you you have canceled equity share Capital worth how much one lakh that means 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 upill fill it up how do we fill it 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 P our study material first uses General Reserve then they use P but both are in 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 generalis to create CR first use General reserve and then you use PN so what is the journal entry for crr can you tell me due to this uh 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 P 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 crr also to the extent of one last entry is the payment entry which how much we calling it as Equity shareholders account or we calling it as equity sh 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 buy back so we'll write equity share buyback account debit to bank account G okay that's all is the entry along with it some extra fitting May Come like we have sold investment or we have sold property planning equipment to blah blah blah and all also they can add up or it may be there or it may not be there also sir what is the use of crr 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 shes I think that also brought in somewhere here okay if CR 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 buy back 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 CR first priority for bonus issue we'll always give it for crr then second priority use security last priority for free res because CR has only one utilization that is to give bonus shares hence the first priority you'll always give it to CR if crr does not have if we don't have crr or if crr does not have enough balance then the next best option we'll touch upon is Securities premium because Security Premium has five uses and one of the utilization being to issue bonus shares free 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 1 lakh Equity shares issued 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 O 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 the 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 last priority to free Reserve so basically the ENT is crr account debit to equity share Capital but the problem is if today 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 lak 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 re date there will be a delay hence no sir we don't write the entry reserved to equity share Capital we split it up into two hence the entry for bonus issue will be which Reserve first you will utilize CR so the entry crr account debit what should have been credited equity share Capital instead of that we create a dumy called bonus to equity share holders 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 in 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 bonus is 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 okay I think conceptually we have done with everything now we have generally two types of questions they one is for bonus issue a 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 whole lot of information we don't want all this so first we want Equity shares what is the 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 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 a balance sheet I think as on 31st March few days later on 21st April company announced buyback off 15,000 off his Equity shares of 15 rupees per share hang on Sir what is the face value of each sh 10 but what is the buyback price face value is 10 but buyback price is 15 that means this company paying extra yes how much extra five that only we call it as premium on Buy on one share the premium element is five rupees okay for this purpose company sold all of its investment for 2 and a half lakh okay this is that's all next on 25th April company achieved the targeted buyb great on 1st May the company issued some bonus shares bonus will go a little later first can we complete the buyback entry so when did you go for buyback sir first okay so what is the journal entry for buyback tell me that equity share Capital account we'll 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 so should we have to test the limit or 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 buyback you don't calculate and waste your time some problems may clearly they will ask here have they asked anywhere now simply they told you are required to pass necessary journal entry for above transaction that 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 buyback or this premium 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 Securities premium itself 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 by back how much we need to pay 225,000 that is one uhe 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 you debit debit share Capital buy 1 lakh 15,000 that means is the 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 dividend declaration and generally in all our problems they will give you only General reserve and payn both are free reserves but if they say some other reserve and in 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 crr General balance will reduce crr balance will increase so the entry will be General Reserve account debit to CR account 150 150 last will be your payment entry what is the payment entry equity share buy back account debit to bank account 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 2 and a half lakh what is the value of investment in the balance sheet sir 2 lakh you sold it for how much 2 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 Center don't bring in everywhere okay 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 through 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 no 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 so who is doing what chat let's check what is happening in Instagram what happened to our raki love story yeah we will check 100 things in between also because sir one of the difficult 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 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 come in new 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 so bank account debit 250,000 to invest m 2 L 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 a drama on 25th April next what happened on 1st May the compan 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 first don't blindly use crr you can use crr 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 Prem 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 a bonus shares of 10 each for every eight Equity shares so if you're owning eight shares already you will get one bonus shares not to me question telling correct so when did you go for bonus first May on 1 May does company have 1 lakh shares h on 25th only you cancelled 15,000 shares no buying back of shares means cancellation of equity shares now means on 1 May Company does not have one lakh shares in this 1 15,000 is already canc so if you have eight you'll get one if you have 85,000 how much if you calculate 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 1 lakh 6,250 rupees that is the value of bonus shares which the company has issued go back how much crra did you create previous obiously for buyback 1 lh50 how much you need for bonus issue one second you need 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 share holders account or bonus to shareholders account then bonus to shareholders account debit 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 limitation they will bring it in sir how much is the balance in general Reserve here check how much is the balance in general Reserve 2 lak 50,000 okay sometimes what they'll tell in the problem is I think I've written down suppose they mention in the problem maintain a balance of 2 lakh in generalism like this Al they'll bring in as extra fitting there not there in this problem this is supposed scenario one more way of asking the same question they will say maintain a minimum balance in generalis of of 2 lakh sir go back to the balance sheet how much balance is available in general iser 250 so after doing buyb how much you need to maintain 2 LH so you do whatever you want but balance in generalism should not come below 2 lakh that means how much of General Reserve can you actually utilize though you have 2 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 2 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 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 it 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 PN so how much shortage is there one so we'll use that shortage to the extent of one lakh from pnl and create the CRM there's another way this particular adjustment can come through yeah MTP also it came next question is that only okay all don't worry that is 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 a consolidation amalgamation question lengthy if they make those chapter question really lengthy 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 ATT 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 few we have solved in questions correct but the sort of case study have we 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 caser 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 Bas value 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 theyve given all nonsense 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 Kara balance sheet they have given so share Capital they have 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 p 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 12 lak 15,000 is a share Capital each share face value is how much 10 so divid by 10 you do how many shares the company has 1ak 125,000 1ak 125,000 is a number of existing shares entire you can cancel or only 25% so calculate 25% of 125 is how much 31 250 select BS 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 even 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 Circle them properly yeah don't go stingy there okay properly Circle and do it okay next second McQ they've 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 L 25,000 plus 15 31 l 25,000 adding all this you're getting 312,000 correct a yes sir okay yes correct or no adding all this 312,000 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 so totally value of buyback that you can do is 781 250 and each buyback price is how much 20 means how many shares can you buy back so basically this 25% of share Capital free Reserve in Sp gives you the value of buyb 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 there 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 390 62.5 which option has that this they rounded of seling the next 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 debt equity ratio should be after buy after you do the buyback Deb equity ratio should not exceed two okay that's what the condition ISS do you know the number of shares bought back no that means can you calculate de equity ratio because the condition is dead 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 buy back we don't know how many shares we are buying back 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 so do we know the value of shares bought by 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 uh I like X so I will take a x okay let the total face value of the shares not face value 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 shortterm as well as longterm here shortterm they've not given so add these two these are the debts they' have given both are longterm here shortterm is not given if at all short term is given add that also in some of the problems we have seen that so add these two so how much are you getting so it is what sir 40 30 44 4525 yeah adding these two you're going to get 45 lakh 25,000 that is your numerator which is debt divided by Equity one second one second sir this debt by Equity is before buy back or after buy back after buy back 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 buyback will there be any changes in debt or same data whatever debt you had before buyb same debt you will have after buyb also so numer will not change whatever is given debt value given in balance sheet or question take the same date however denominator is equity Equity here refers to this one 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 securities 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 so 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 I've assumed X not face value of one shares I've assumed total face value of the shares bought back to be X so that means this is only your 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 1X this 1X reduction is for equity share Capital correct because after you buy back equity share Capital will reduce that reduction only have assumed it as X that is one okay sir sir the moment you do buy back of equity shares companies 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 crr sir you'll create crr for buyback price or only Capital Gap cap 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 the extent of X like suppose you're canceling Equity shares worth 1 LH you'll create CR also to the extent of 1 lakh like that so if your equity share Capital if you're canceling to the extent of X your cr r so you need to create for X so why did you reduce sir crr you'll create from what you'll create crr from free res when you create crr free Reserve balance will be same or it will reduce reduce this 312,000 includes free Reserve also no after buy back will free Reserve balance be same or it will reduce reduced by what amount x amount only hence one more reduction this is for General Reserve or pel reduction due to crr Creation why now so if you're issuing new shares sir have they told in the problem anywhere they issued new shares sir no that means what if you do buy back Capital Gap will be there for full buyback so you have to create crr 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 XO correct sir so Capital cancellation account 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 securi premium because if you buy the shares at premium security preum that loss that loss only we call it as premium on buyback but 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 no 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 reduce reduce that means one more minus you have to do as- 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 allus 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 28,500 you take sir divide 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 sir don't divide 2ak 87500 by buyback price divided by 10 so partiality sir there 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 toal face value x what did we assume we assumed as what x is the total face value of equity shares bottom and total face value of equity shares bought back is 2ak 87500 and face value one share is 20 or only 10 now 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 or not partiality based on the assumptions or what we have assumed according 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 buy back so how many shares did you get it over here 28 750 which option has 28750 Chen Chennai has this okay all Chennai always has the right option okay beat in terms of team or beat in terms of IPL toy looks like they're nowhere going wrong know T tal I tell you is in 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 craze has on a different level now can we get to this craze yeah what do you think will be the fourth question so 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 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 so I feel they're going to revolve the mcqs 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 allow 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 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 free Reserve yes sir is the revaluation reserve a free Reserve or no so if they give you revaluation reserve and all don't bring it into debt Equity testing okay loan funds loan funds is your debt which is given us 42 lakh you are required to compute by debt Equity test 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 10 only so can we quickly run through this so what does our debt Equity test say debt divided by Equity should not exceed two meaning maximum it can be is two we trying to find out maximum by back only so we'll do debt divided by equity and we equate with what sir two so due to buy back will debt change or same same how much is the value of debt 42 lakh bring it in the numerator okay divided by equity in the denominator 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 plus 6 so 6 8.5 plus 4.5 68.5 is 68.8 72.8 732 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 buyback after buy back will equity share Capital be same no h what do we assume first what is assumption we'll write let the face 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 sh 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 sir 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 created from what Reserve pre Reserve so that is usually General Reserve or P study material first I told utilize General Reserve so the moment you create crr generaliz of 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 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 dou this is 10 means this is 20 so double face value the shares 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 x value what is this x total buyback or total face value of buyback 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 buyback Price N no this is the not total value it is a total face value and face value one share is 10 so how many shares can you bought back buy back 1 195,000 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 cannot include in this equation somebody saying sir though General Reserve reduced due to 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 that's all you guys are brilliant I tell you hope you understand yeah online also heads up good so far oh they will respond after 5 Seconds not that they are late streaming happens like that some some first I'll cover up these one one1 one uh now no little in the interest of time first I'll run through this then some extra we will take it at the end because sir the the problem with Marathon here is know some of them are watching it for the very first time I get a lot of audience like that also so I'll have to fill in something which commonly comes the target is to make them comfortable with the topic okay see once you know the topic no extra adjustment you can build upon okay so the thing is many of them don't have that base only properly they would have taken the coaching long back they would have forgotten and all that stuff so to bring them up I have to keep the equilibrium there okay so I'm keeping that in mind whol sale everyone's audience have just taken a few few questions okay one two adjustments maybe a little new or in examination that is always expected in every attend so don't freak out because of that okay one will always be there if you have doubt later maybe we take it out that's much easier there than bringing it in here okay next can we go for next topic next so break sir no break today Marathon no so Marathon name itself is saying Marathon so we also have to go as a marathon only okay no not like that we will give you a lunch break but priorities as much as possible we'll try to finish I have a certain Target in mind and also I have a deadline also they already told me after 4:00 if you stay we will hit and send you is what they've told me so beyond four even if I want to stay I cannot stay so within 4 as within because after sa know food our mind also like it'll go like that yeah so before that happens I want to cover off topics as much as possible then we'll take a lunch break AC working H looks pretty hot no maybe one of you can just get the remote it was there here maybe he took it back Kumar Kumar keep it there only and adjust it accordingly okay uh can we get started with this topic now yeah one of the big ticket topics which is amalgamation they're saying work from home sir some students wanted to come so that's a reason no work from home for me work from Academy only yeah see final I did from work from home yeah this one I can't do it yeah all right uh we'll see so amalgamation of company sir amalgamation is backed by accounting standard 14 as14 talks about amalgamation of companies so amalgamation means one company absorbing another company suppose if a limited acquired B limited that is also amalgamation sir a limited B limited came to together a limited B limited came together they merged and formed a new company called C limited this is this merger also is accounted as amalgam it could be one company purchasing other company or two other companies merging and forming a new company all together both are treated as amalgamation and both are accounted as per as14 itself that is one maining okay next so for accounting purpose sir there are two types of amalgamations for accounting purpose one we call it as purchase Method another one is merger method purchase Method or merger method for merger method they have specified five conditions for merger they've given five conditions if all the five are satisfied it becomes merger method even if one among five fails it automatically becomes purchase Method like that so if the questions call out the method if question only says it is purchase Method or merger method don't bother testing the five conditions okay directly start with the problems if at all they don't give which method then you test and accordingly find out whether it is purchase or merger and do your further accounting treatment so what are the five conditions of merger method one all assets and liabilities of the selling company have to be taken over by the purchasing company or new company and all the assets and liabilities have to be taken over at Book value only no adjustments to be done okay second one is this third one the shareholders who are holding in minimum 90% Equity shares in selling company that shareholders who are holding minimum 90% shares in selling company should also become Equity shareholders of the purchasing company that is one whoever is owning 90% selling company should also become shareholders in new company it's not necessary they have to own 90% in new company it is just that they have to become shareholders they could own 5% 20% 90% 100% whatever but they should become shareholders also in the new company fourth one is the PC payable to above shareholders the purchase consideration payable to above shareholders has to be in equity shares only there's one exception called fractional shares where which you can pay cash that we have discussed in class now I not go too much in details there the last one is the business of the selling company should be intended to be carried on by the purchasing company meaning after takeover the business of selling company should not be shut down it should be carried on if all of this are satisfied then merger method if one of them also fails then automatically it becomes purchase Method merger method another name is pooling of Interest method okay that is one now if you remember in a regular class i' given you some notes also or steps to solve purchase Method and merger method so the way we'll do it here is we will run through the concepts of all of this and then apply it in few questions okay all right the first is let's run through the purchase Method purchase Method what is the first method of first tyep of purchase Method anybody remembers first is to calculate net assets first calculate something called net assets so name itself is saying net assets how it's not assets it is net assets how do you calculate net assets assets minus liability not as simple as that net asset is asset taken over at agreed value minus outside liabilities taken over at agreed value because when one one company is purchasing another company means selling company call assets and liability ities selling company assets and liabilities will be taken over by purchasing company suppose somebody purchased aru Pro our business somebody purchased okay yeah hopefully it doesn't happen yeah if it happens mean probably when some student only will purchase a thing this guys have bugged us too much take care of them yeah so if somebody purchases our company is it necessary every assets of aru pro company they should take it over may not be they feel this laptop is old as you we don't want it possible so some assets they may not take over they may not take over so here net assets means what sir all the assets taken over by which company new company or purchasing company at what value not book value at agreed value so just now you said Book value that is for merger method I'll tell you the logic of all that also in a bit here we talking PCH merger method or purchase Method purchase Method so first calculate assets taken over at agreed value and minus what sir outside liability taken over at a do that you find out that is your net assets sir when you buy someone's business can you buy it at free of cost or you have to pay some money money money you usually pay to Outsiders or owners owners which company is shutting down over here selling company who are the owners of selling company shareholders who are or what are the types of shareholders we could have Equity shareholders and preference shareholders so if purchasing company is giving anything purchasing compan is giving anything to the owners that we call it as purchase consideration purchase consideration is simply amount paid or payable by the purchasing company to the owners of the selling company and who are the owners of selling company Equity shareholders and preference share owners okay you can give anything to these owners you can give them cash you can give them debentures Equity shares preference shares some assets doesn't matter everything will come under the Ambit of or or everything will constitute purchase consideration if you're giving it to owners it becomes P what you give is irrelevant and compare compare net asset with PC compare net assets with PC so suppose I have a cash of one lakh I have to pay 20,000 to let's say kumara I have cash of 1 lakh I have to pay 20,000 to our Kumar that means what is my net worth sir how much is my worth of Mino I don't have I have cash means this is my asset correct and I have to pay him how much 20,000 means this is my liability how much is am I worth now I don't have any other asset or any other liability how much am I worth 80,000 so my net worth is 80,000 correct so hence sir asset minus liability gives you what from assets if you deduct liability what are you going to get net assets hence net worth we call it as or net asset we call it as net worth of the company Net asset is nothing but net worth of the company thank you valuable class awesome uh this is over all right so first you have calculated net assets then you have calculated PC for what drama for comparison purpose so but before that if PC is not given in the problem if PC is missing in the problem some problems may they don't tell how much is purchase consideration so if PC is missing in the problem what do we do calculate net assets and net asset itself becomes a PC because net asset means worth of the business no so if the worth of the business is 880,000 means and they don't tell how much selling company how much purchasing company paid if the worth of selling company is 80,000 and a purchasing company does not tell how much I have paid how much you have to pay logically whatever is a worth that much you need to pay and acquire worth is how much 80,000 that worth only we call it as net assets so if PC is missing net asset itself becomes your PC you adopt this methodology only if PC is missing if PC is given in the problem don't say sry I'll will do this no because PC is a negotiation sometimes you could pay more than the worth sometimes you could pay less than the Worth or sometimes you could pay exactly the worth amount because all these are negotiated numbers okay so if they give the PC calculate the way they have told if PC is missing then calculate net asset and that itself becomes your PC this is important in question always watch out for this that is one and then you compare what do you compare worth with PC basically net assets with the PC you compare net asset means net worth here let's say your net assets this is your PC in the first case sir net asset is 5 lakh rupees I think this oh yeah net asset is how much 5 lak of assume PC you paid 8 lakh net asset means net worth no sir so how much is the worth of the business in first case 5 L but how much do the purchasing company pay 8 lakh for 5 lakh worth of business purchasing company paid 8 lakh so purchasing company paid less or they paid more more how much more they paid three lakh so purchasing company made profit or they made loss purchasing company made a loss because they paid I'm not talking from selling company perspective I'm talking from purchasing company perspective 5 lakh worth of business they paid 8 lakh so purchasing company made a loss this loss only in as14 terminology we call it as Goodwill okay we don't know why we paid this extra for that as14 is asking us to treat it as good willll that's all right sir is is it has to be this scenario or it could be opposite scenario also opposite scenario so net worth is or net asset or net worth is 10 lakh but PC paid was only n lakh what is the worth of the business 10 but PC paid is only n that means think from purchasing company perspective so purchasing company made a profit loss what they made a profit these are recurring or non-recurring profits every day do you do amalgamation or once's in a Blue Moon activity once in a blue moon activity so it's a revenue profit or a capital profit Capital profit all capital profit you'll transfer it to capital reserve so this one lakh you'll transfer it off to Capital risk like this so compare PC with net assets either you make may get some Goodwill or you may get some capital reserve if PC is equal to R assets then neither you'll get Goodwill nor you'll get capital reserve that D usually we didn't do this in bigger problem because in bigger problem they used to ask journal entry okay and normally journal entry number two used to get Goodwill or capital reserve as a balancing figure so if you're doing journal entry I'll also tell you that in the problem then this particular working note may not be necessary but sometimes they tell in the problem directly do balance sheet no journal entry directly balance sheet will this Goodwill or capital reserve come in balance sheet yeah if you're doing journal entry Goodwill or capital reserve value anyway you'll get it as balancing figure but if you're not even doing journal entry means how do you know the value then you'll have to put up a working note okay so take a call if they was journal entry in the books of purchasing company this steps need not be followed otherwise you need to follow the steps like that we'll solve one or two questions like that also fine all right uh so why can't we compare this profit or loss from selling company perspective sir because you saying profit or loss is made by purchasing company but selling if purchasing company makes loss means selling company made profit no sir why can't we take it from their perspective sir sir selling company there are going going that is shutting down right so all this accounting is done by whom purchasing company hence profit or loss is always accounted from the purchaser who purchased your business seller or purchaser purchaser so profit or loss you'll assertain from the purchasing company perspective or new company perspective and not selling company perspective that is a logic okay move on to the next all right sir they will ask you to also prepare balance sheet now you think sir selling company will have some assets it'll have some liabilities it'll also have share capital and reserves in service in purchase Method what and all of selling company purchasing company will take over in purchase Method what and all of selling company purchasing company will take over will they take over assets yeah they may be interested will they take over outside liability yes but what about shareholders funds like share capital and reserves and surplus like Aro we have a reserve anybody interested to take over our reserves h no sir they are only interested in our assets they are only interested in our liabilities what will they do with our share Capital can we give our share Capital to them my company only is shutting down so what will be the value of my shares zero what will be the value of my reserves and all going going going so in purchase Method or in in purchase Method what will the buying company take over they'll only take over assets and outside liabilities of selling company basically reserves and surplus share capital and all will not be taken over under which method purchase Method on to the next next we have another method called merger method okay now this merger method no stupid method what sir yeah stupid method why sir check this sir let's take a small example sir there was one Mr EXO he was controlling a limited also he was controlling B limited also because he was a majority shareholder in both 100% of share let's say 100% of shares was held by a limited or Mr X 100% shares in B limited was also held by Mr X so he was controlling two two companies a is a separate legal entity B limited as a separate legal entity separate company one day he got bugged he like two two companies I'm bored of controlling you both you become one marry marry and become one I don't want to control you two two individually I want to control only one company so you took a marriage happen meaning let you a limited and B limited get merged so these two companies got merged and they formed a new company called y b limited okay now a limited and B limited got merged and a new company called AB limited was formed now sir AB limited as a new company means they have to give purchasing company has to pay PC here new company is abl limited or purchasing company is AB limited they have to give pc pc is given to any Tom Dick and Harry or owners owners of which company selling company so PC will be given to owners of selling company who's the owner of a limited Mr exu so who will get PC AB limited will give shares to whom Mr X so now B limited also got sold so B limited PC again will be paid to whom Mr X so PC will be given to whom now Mr X that means now Mr X will control which company a li because AB limited is a new company Mr X got majority shares in the new company now now X is still controlling which company now AB okay now you tell me is this really a business purchase or reorganization this is merger method is not really a sale of business it is just a reorganization or reshuffling of business okay this is your merger method understood everybody this IND 103 CA final we call it as common control transaction meaning before business purchase who was controlling X after the amalgamation also who's controlling Mr X like that understood same thing you learn it there also now you think logically previous method we already studied what is the name of previous method purchase Method under purchase Method assets and liabilities of selling company you took over at Book value or agreed value agreed value yes no because maybe this mic Book value maybe 10,000 but its market value maybe only 7,000 because we have used it left right center okay sometimes we have thrown a lot at students yeah just saying it has fallen and maybe its value has broken yes no sir now Book value of this asset is 10,000 but market value is only 7,000 now if somebody acquires our business he will value this mic at Book value of 10 or or its correct value it's correct value which is how much 7 correct no because he's he will only pay what is its correct worth yes sir that is in the case of actual business purchase this scenario is an actual business purchase or it is just a reshuffling it's a reshuffling now you logically understand selling company all assets and liabilities will be taken over at revalued amount agreed amount or Book value only book value because this is really a purchase just or reshuffling reshuffling instead of a limited and B limited now it has become a limited all the data of a limited you transfer it to a limited all the DAT of B limited you transfer it to a limited at at same value hence for merger method since it's a reshuffling now you think logically will any assets be left out by the purchasing company or everything will be taken over every assets and outside liabilities will be taken over at revalued amount or at Book value at Book value that's the merger condition is that okay people that's a reason okay now once again assets and liabilities taken over only assets and outside liabilities are also reserves and surplus even the reserves and surplus of A and B limited will be taken over by AB limited whatever is possible to be taken over everything they will take over and sure because this is just a reorganization that mean what about share Capital sir sir share Capital you cannot show because share Capital belongs to a limited now is a limited there or closed closed if company itself is not there the closed company equity share Capital can can new company take over and show off no so share capital of a limited we will not take over similarly B limited there or gone gone so B limited equity share Capital you will not show rather than that a limited issued new shares instead of existing Equity shares new company will issue new shares so only thing that will come as a substitute is what new equity share capital or new preference share Capital old equity share Capital old preference share Capital will get cancelled instead of that new will come rest all assets all liabilities all reserves and surplus will be taken over by new company and accounted at Book value itself that is your merger method easy understood can we move on to the next one so for merger method also if you remember I had given you some steps first step is easy sir same thing which is PC no separate thinging on PC can calculation is same okay if PC is missing calculate net assets and that becomes BC that is one okay sometimes they'll only give you the PC fine out that second sir in previous method what did we compare PC with net assets how did you calculate net assets asset minus liability okay now here we can't compare PC with net assets because only assets and liabilities are taken over or also reserves and surplus in merger method assets of selling company outside liabilities of selling company and result reserves and surplus of selling companies also taken over what is not taken over or what is the only thing that is not taken over paid up Capital yes no paid up equity share capital and paid up preference share Capital so PC no sir you compare it with paid up Capital because that was the only thing that was not taken over okay so it was not taken over means it's I mean you just check what is given instead of that paid up equity share Capital was 10 lakh let's say company had only selling company had only paid up equity share capital of 10 LH so ideally new company also should give you issue prefer Equity shares worth how much 10 usually it'll be same because do you think this is really business purchase or reorganization reorganization that means the PC value and paid up Capital value will be usually same but for question sake know they may alter it okay so what you do is first find out PC and then find out paid up Capital paid up Capital we need to find out or just take it from balance sheet they will give you balance sheet not paid up equity share Capital paid up Capital here refers to paid up equity share capital and preference share Capital it will be given to you in the question sum it up let's say this is 1 lakh this is 80,000 assumption this is 1 lakh and this is 80,000 now compare these two compare these two how much is pc 1 lakh how much is paid up Capital 80,000 now here paid up capital for your understanding purpose you can treat it as net worth don't tell I told this only for the sake of comparison so how much was the worth sir 80,000 because this 80,000 is the only comp in which new company is not taken over so that means this is the 80,000 is the worth so ID for 80,000 worth you should have paid only 80,000 but how much did the new company pay one so for 80,000 worth of business the new company paid 1 lakh so new company made profit or they made loss loss how much loss 20,000 okay so this 20,000 don't account it as Goodwill you adjust it in the reserves because here in merger method will we take over only assets and liabilities of selling company or reserves and surplus reserves and surplus so this 20,000 in my example loss no it'll be adjusted in reserves so which Reserve usually in generalism usually not necessary you can adjust it in generalism or P it's fine okay Naru so why can't be accounted as Goodwill sir sir if you account it as Goodwill it will become self-generated Goodwill if you account it as Goodwill it will become self-generated Goodwill how sir so what is self-generated Goodwill sir you know in your bpan in your 10th grade or 12th grade and all you you calculated Goodwill under average profit method super profit method annual method capitalization blah blah blah and all did you pay any money for it or it was just an internal calculation internal calculation all those are self-generated Goodwill now you think logically the the legal papers may say a limited has acquired a limited and B limited that's what papers will say but reality is is it really a business sale or just a reorganization is just a reorganization whatever data a limited and B limited had in two different companies now it has come in one new company that's all so is this really a sale of business no now if you account this as Goodwill it will become self-generated Goodwill because it is not really a sale of business it is just a reorganization hence we don't account it as Goodwill rather we adjust it in the reserves understood that is a logic fine this is the case of loss if PC is greater than paid up capit it could be other way around also like suppose the PC is 2 lakh this is three lakh PC is uh 2 L rupees this is paid up capital is three lakh so worth of the company selling company is three lakh paid up capital is three lakh means here that only we are thinking as net worth and doing the calculation so worth is how much three lakh PC paid is how much 2 lakh so purchasing company made a what loss or profit profit ideally in my opinion that profit should have gone to capital reserve but our IC study m our mother body okay amazing body they're transferring it to P so going forward you also do the same practice in ex there one change is that okay don't transfer it to capital reserve transfer it off to P in my view it should have been capital reserve but what I think has no two cents value what study material says that's all we need this is only for merger method Okay purchase Method same only merger method instead of transferring it to Capital Reser transfer it off to p and okay fine okay so this is one change is that okay so that means wherein all entry you had capitalism and merger method substitute with pel account our mother body is doing so I will not question the Judgment of it okay so I'll just move on and do the same practice final people in my opinion this is wrong even in India is c a final also India is 103 it's okay okay there's some extra poins which we should not do this okay but uh still let's not worry about that first we need to pass C intermediate and then come to ca final so we'll worry about CA final when we come to ca final for now what is the main change there l means adjust it in reserve profit means don't transfer it to capital reserve transfer it off to if study material changes I will also change for now let it be like this they have not changed so I will also not change okay now that is a fun and which which method only for merger method you will do this purchase Method whatever we discussed is the same thing now one more thing if I have to call out in merger method what and all relating to selling company will be taken over by purchasing company what and all of selling company will be taken over assets liabilities and reserves and surplus also of selling company will be taken over and shown by the purchasing company obviously at what value book value itself in purchase Method we only take over assets and liabilities because it's an actual business purchase and when you purchase someone's business you are only interested in assets and liability Burger method is not actually a business purchase it is only a reorganization hence we take over assets liabilities and reserves and surplus only at Book value and record done people that is a step okay some extra fittings will come in amalgamation quickly we'll run over them and then we'll apply everything in questions okay because we're not doing normally the way we did in class with first we did purchase Method then we applied some problems merger and some problems and all we did but now we are not taking one one one problem we'll we'll take one problem which has some good adjustments so that's the reason we need to know all the adjustments first and then we will apply it in some questions okay don't worry about the number of what questions we are picking up and whatever may be the question some in some attempt question will be very straightforward in some question may the question will be like what the hell is this question that kind of a question will come okay so we have to just prepare at a medium level it's fine okay one or two always go with a mentality that one or two questions in your paper will be a bouncer doesn't matter how many rtps you do mtps you do I'm not demotivating you this is a fact take any attempt for that matter any paper one or two question will always be a little out of the box so because of that out of the box question don't freak out everything is not out of the books 70 to 80 marks is well within your study material RTP MTP out of that 70 80 try to score if they've given you like 70 marks try to score 60 in that because these are papers where if you write properly you should get full marks so there if you score even 55 60 in other bouncer question I'm saying bouncer question with choice because you will get one choice question also no so around 30 40 marks if it comes as a bouncer question even if you score three marks in that two marks in that five marks in that extra bonus Wy free we will take it happy 60 here plus 56 there 70 crossed C inter ped we are in CA final goodbye C intermediate like that okay so don't freak out that's how everyone has cleared you will also clear like this one okay some paper will go in your favor some paper you may get a little stuck but one will compensate the other so do not ever give up and do not ever value after you write the paper that paper is dead for you move on to the next paper AR Say it'll happen don't worry CA is not as difficult as people project it to be it is very very very very not very very easy also but yeah it is decent enough that's what I would say okay next is your Mutual Owings so mutual Owings means inter company transactions if purchasing company and selling company if they're doing some transactions that interc company transaction only we call it as Mutual points now let's take an example here so a limited is there b limited is there a limited has sold some Goods to B limited and a limited has not yet collected the money so how much money 1 lakh a limited has sold Goods to be limited goods worth 1 lakh and collected or not yet collected not yet collected so obviously a will show this as what data B will show this as what credit yes sir so as long as a limited is a separate company B limited is a separate company one company can pay the other or one company can receive from the other now oh you know what happened due to was two these two company merged and became C these two company merged meaning they shut down and they became C limited correct so under merger method what do you do now all the assets of a limited you'll transfer it to C limited all the assets of B limited you'll transfer it all the assets and liabilities and reserves and surplus of B limited you'll transfer it to C limited that means this datar and credit are also got transferred to C limited sir as long as a was a separate company B was a separate company one could pay the other now there are two companies or only one only one so who will pay whom are there two or only one company one company who will pay whom nobody hence what we have to do such Mutual Owings you should be cancelled where it will get cancelled in a books B books or C books C books because as long as there are two companies one can pay the other only when they became one then only you need to cancel because nobody will pay the other or in other way if you have to explain all assets and liabilities will be added no sir this datar has a debit balance if you add it with credit r a credit balance it balance will become zero nobody will pay the other you're showing asset also one lakh you're showing liability also one lakh so it'll get sashed off so no need to show if you show this asset and show this liability unnecessarily asset side will get boosted hence what do we do for such transaction we need to cancel mind you cancellation will not happen in A and B limited C books it'll only cancel in or it it will only get canceled in C limited books or new company books so in selling company books you don't have to do anything for Mutual o cancellation will only come in the books of new company understood on to the next so this Mutual Owings no usually it will come in three formats datar creditor one is datar creditor another form is Bill receivable bills payable another one could be loan taken loan given oh not return here okay loan taken loan give usually these are the three forms in which you you get some mutual Owings now those Mutual Owings can be show in CED books or cancel so cancel only asset or also liability this asset also you need to cancel this liability also you need to cancel in whose company books C limited first C limited will take over first C limited will take over this asset will take over this liability and then you pass a separate journal entry for cancellation because to cancel something C limited should first account it correct no hence this one lakh C limited will show first as a datar this one lakh C limited will show it as a creditor then both of this star and credit R will be cancelled how do you cancel what is a cancellation journal entry liability and assets both you need to cancel liability has credit balance to cancel we will debit asset has debit balance to cancel we will credit so the entry is basically all liabilities you debit liabilities could be what sir dear bills or credit are bills payable loan taken account will be diverted so if there are three Mutual Owings don't pass the entry like this this is just sample entry if there are three Mutual Owings pass three separate cancellation entries this is just a sample I've given basically all liabilities will be debited all assets will be credited assets could be or de are Bill receivable and Loan given so this is your cancellation journal entry mind you in the books of new company only that's about Mutual o I'll move on to the next one great uh next is stock Reserve stock Reserve stock Reserve means some profit the very word of stock Reserve means some profit element included in closing stock some profit included in closing stock only we call it a stock Reserve so how can it come let's look at this example sir a limited had sold Goods to or let's say a limited acquired B limited a limited purchased of B limited business and a limited has sold some Goods also to be limited possible no they can have some transaction also with themselves okay sir cost price if first to sell the goods a limited should have purchased these Goods first a limited purchased this goods for 10,000 first they have purchased it for 10,000 later they sold it for B limited for 15,000 they purchased it for 10 and they sold it later on to B limited for 15 so did a limited make any profit in this transaction yes how much profit 5,000 okay so now who has the goods the other company Company B limited how much did they buy it for 15,000 selling price of one company becomes cost price to another company if a sold for 15,000 means B purchased it for 15,000 suppose B purchased and the Year got ended after purchasing B wanted to sell these Goods but before uh sale the Year got closed so in year end May does B limited have this stock in their Factory yes that means B limited will show the stock as what closing stock so now a liit has acquired B limited a limited has acquired B limited that means whatever B limited cets now again we'll come back to which company a limited first a limited had sold some Goods after this transaction a limited acquired B limited business so if a has acquired B limited business means all baa assets and outside liabilities will be coming back to a limited so this closing stock also will come back to a limited now people tou your heart in tell is the value of closing stock from a limited perspective 15,000 or lesser from a limited because this is whose stock is this a new stock or belonging to a only first a only has sold this to beo now it has come back to a only look at the circle of life it went like this again came back to you only so first you sold it for 15 again it came back to you now from a limited perspective is the cost of the goods really 15 or only 10 only 10 but currently B limited is showing this stock closing stock at what value1 15 so when a limited prepares their balance sheet can they show the stock at 15,000 would that be right no because really the cost of this Goods is not 15 it is only 10,000 rupees okay sir how much is the extra worth of this Goods is 10 but currently it is shown at 15 so how much extra 5,000 that 5,000 is nothing but the profit element included in closing stock that only we call it as unrealized profit can we show this unrealized profit or eliminate eliminate or if you want to go back to another one you have done as2 accounting standard two what does accounting standard two says inventory to be valued at cost or NRV whichever is lower forget about NRV information missing usually NRV will be higher than the cost in absence of information so inventory should be valued at cost is a cost to now we are treating a and b as separate companies or one companies after purchase they become one company so from that one company perspective is the cost of these stock really 15 or only 10 only 10 that means this closing stock should be shown in the new balance sheet only at 10 but currently it is shown at 50 so hence some 5,000 extra profit element is included in B limited cost stock can you show that or eliminate it eliminate that elimination only we call it as unrealized profit okay nasaro so keep in mind unrealized profit unrealized profit means profit included in closing stock okay now this is Tre treatment is Right provided 100% of this Goods is there with the B limited yes no first be limited purchased and if they sell this Goods or 100% is remaining if 100% is remaining means 100% of profit you eliminate do you think every case may be limited will have 100% of this Goods or some they would have already sold also some have sold also like let's say let's reconstruct this example and say B limited sold 80% of these Goods B limited or maybe let's take simple example 50% they sold B limited sold off how much sir 50% that means is entire closing stock there at 15,000 no this closing stock of 15,000 is for 100% is entire Goods remaining or only 50% that means B limited will show closing stock at what value not 50,000 but only 50% of 50,000 which is 7,500 agreed on okay s now who is showing this closing stock B limited who acquired B limited now a limited that means this closing stock again will come back to which company a limited okay now the problem is is the cost of this Goods really 7,500 no so this cost 7,500 is for 100% or 50% 50% how much did a limited purchase it for 10,000 this 10,000 is only for 50% or 100% I means what is the cost of this Goods really 10,000 is the cost of the goods for 100% for 50% how much it will be 5,000 so the cost of this Goods really from a limited perspective is not 7,500 it is only 5,000 but currently B limited is showing it at 7,500 that means have they included some profit in closing stock yes how much profit is included 2005 or in limit terms how much was the total profit 5 5,000 is for 100% is 100% of the goods remaining or only 50% that means you simply take 5,000 and multiply 50% how much are you going to get same 2,000 F either you can arrive cost separately closing stock value separately compare and then get unrealized profit or straight away take do this pration that way also you will get it so this basically 2,500 can you show or you need to eliminate you need to eliminate from what this profit element is included where in a closing stock so that means closing stock is shown less or shown more some profit is included in closing stock so closing stock of value is shown more what we have to do reduce it so closing stock is an asset has debit balance how do you reduce it credit it yes so you will credit either you can credit stock Reserve or you can directly credit closing stock the choice is yours even if you credit stock Reserve stock Reserve will be finally reduced from closing stock itself in balance sheet the choice is yours so but the fun is closing stock has to be reduced means you will credit closing stock what will you debit what will you debit so that depends on the method and that depends on the case meaning whether it's a profit scenario or whether it is a loss scenario understood the meaning so if there is unrealized profit we need to eliminate so closing stock of value we need to reduce so closing stock you will credit the only question is what you will debit that depends on the method that's what I summarized over here first you need to check whether it is a purchase Method or merger method so if it is a purchase Method you could have one of the two scenarios either profit or loss so under purchase Method if you make profit what do you call that as purchase Method under purchase Method if purchasing company makes a profit it's Revenue profit or Capital profit Capital profit all capital profit will be shown under capital reserve so what will you debit for this stock Reserve you will use capital reserve so the journal entry will be capital reserve account debit to closing stock or you can write stock Reserve even if you use stock reserve the stock Reserve will be finally reduced from balance sheet under closing stock itself the choice is yours fine sir this is about profit scenario it could also be a loss scenario so if it is a purchase Method and if you get a loss what do we call that loss as in purchase Method Goodwill so the entry for stock Reserve will be Goodwill account debit to stock Reserve or Goodwill account debit to closing stock that is the entry this is for purchase Method you could also have another method called merger and merger method profit scenario ideally it should have been capital reserve but our mother body says P our mother body is always right so what will be the entry for profit scenario it will be capital reserve to stock Reserve no no no it will be pnl account debit to stockers okay this is one recent change that's the reason our study material is showing I mean chart book is showing the old entry so correct this so P account debit to stock RIS that is one however if it's a loss scenario loss if it's a merger method and if it's a loss we we call that loss as Goodwill now if you show it as Goodwill it becomes self-generated Goodwill so what do we do for loss adjusted in reserve so the entry will be here Reserve account debit to stock Reserve so which Reserve either General Reserve or PN General Reserve or P account debit to closing stock or stock Reserve will be the entry for this particular scenario can I move on okay so how many more one or two more and then we'll dive into the Problems chapter not over only concept over yeah big ticket topic now we have to spend a little time on this okay hope it's helping out online also everybody there I know part of time not so much also I think 1250 that's fine yeah uh you're also okay everyone next ISO amalgamation expense so when you do some amalgamation you will have some expenses like you may have to hire some Auditors to do the due diligence audit because if you're buying one company of business means you can't buy it left right center no what if that that company has done a lot of gppa fraud you want to someone to check that no so in normally in these sort of transaction we do something called due Del Ence audit where we check whether the transactions are in the right manner not like a normal audit we little Deep dive we'll do because we are doing this for business purchase perspective now so we'll go a little Deep dive and check the things so this auditor for due diligence and all he will charge it he will do it at free of cost or company has to pay money company has to pay money and one company is merging the other company means it is not a small affair right two companies are shutting down so so many people will be involved some Roc filings has to be done so you may have to appoint a lot of Consultants could be company secretary could be investment bankers lot of people all those people will not obviously work it at free of cost they will charge some money all that we call it as what sir amalgamation expense so if amalgamation expense if it is incurred by purchasing company not selling company selling company what to do we'll see it later if amalgamation expense is if it is incurred by purchasing company we need to pass one entry what entry should be passed so easy sir you credit bank account sir yeah you paid money so you will credit bank account the question is what will you debit so that depends on the method that depends on the scenario okay so if you have amalgamation expense first check whether it is a purchase Method if it is purchase Method and if you get cap profit scenario and purchase Method what do we call profit as we call capital reserve so the entry for amalgamation expense will be capital reserve account debit to bank account okay instead of payn to bank it will become capital reserve to bank account however if if it's a purchase Method and if you got a loss scenario then the entry will become Goodwill account debit to bank account that is entry this is under purchase Method you could also have some merger method so if it is merger method and if you encounter a profit will you write capital reserve to bank no you'll right P andl account debit to bank account okay that's for the merger method and profit scenario next will be for you got a you have a merger method and you encountered a loss in that case loss Will adjusted in reserves so the journal entry will be Reserve account debit to bank usually for this we use P itself expense no so usually study material under merger method for this entry they will write p and to Bank in my opinion even if you use General Reserve to bank it should be fine done this is for amalgam expense the last but one concept is statutory reserves the adjustment so all this will come in your adjustments we will not have time to cover all the questions in every question all the adjustments will not be there because amalgamation as a topic is little ly so what study material does is one one adjustment they'll put it in one11 problem but if I do one11 problem then s part time will go off okay I'll have to get here so hence what I'm doing is all the concepts I'm discussing all this will come as an adjustment in your problem so all this one11 entry you have to go on passing so if you understood this means the adjustment also indirectly already no we don't have to do that adjustment at all so that means you'll skip question answer I will do but few not so many as we used to do it in regular class that's that's what I told in the first the beginning also same fine all right so statory Reserve what is the adjustment they will give in the question is they will say Sir statutory reserves of the selling company has to be taken over by the purchasing company statutory reserves of the selling company has to be taken over by the purchasing company sir visualize normally reserves and surplus of the selling company will purchasing company take over under purchase Method so purchase Method is a normal business purchase when you do a normal business purchase you only thing if you buy someone's business are you interested in their reserves or only assets and liability assets and liability reserves of them you are not interested correct but one Reserve statutory means it's a law requirement requirement of a law so as per law other reserves you are not interested you are not taking over it is fine but one Reserve specifically you need to take over and show that we call it as statutory Reserve usually it'll be investment allowance Reserve or export profit Reserve they clearly call out what a statutory Reserve usually it'll be export profit Reserve or investment allowance Reserve all this is created as per Income Tax Act they'll call it out so if this you have to account it can you get away with this or you have to account you have to take over an account you have to take over an account that means you have to pass an entry for this so if it is purchase Method what is the entry you will pass some Reserve you need to take over sir Reserve has what balance credit balance you have to take over and account it now that means you have to show this Reserve purchase new company has to take over this reserve and show it in their books so that means they will debit Reserve or credit Reserve so if they debit Reserve this Reserve will have a debit balance and you have to show it on the asset side of balance sheet will you show reserves on the asset side of balance sheet or liability under shareholders funds you show the reserves yes no so what is the journal entry to take over the reserves in case of purchase Method Reserve account will be credited whichever Reserve you are taking over suppose you're taking over export profit Reserve you will credit export profit Reserve you have to debit something the debit will be given to some dummy called amalgamation adjustment Reserve amalgamation adjustment Reserve account so the entry for statutary Reserve taken over under purchase Method is amalgamation adjustment Reserve account debit to respective statutary Reserve statutary Reserve need not be one it could be more than one also if there are two statutary Reserve credit the statutary Reserve given in the question debit will be given to amalgamation adjustment Reserve like that okay sir so amalgamation adjustment Reserve you have debited it so this particular amalgamation adjustment Reserve will have a credit balance or debit balance debit balance so it has debit balance means don't show it on the asset side it is still what a reserve Reserve you never show it on the asset side but it has what balance debit balance hence you show this as a negative in balance sheet in your balance sheet you you'll show amalgamation adjustment Reserve in balance sheet itself under the heading reserves in Surplus itself but as a negative why because it has debit balance that's a reason so indirectly if you think about it let's say statutary reserve is 1 lakh let's say statutary reserve is 1 lakh so under the reserves in Surplus what will happen is statutory Reserve will be shown for one L okay then that's all one more is there amalgamation adjustment Reserve is also there so you'll write here amalgamation adjustment Reserve as negative 1 lakh so effectively Reserve balance became nil so this way you took over also you're not showing also both are taken care of that's all it is effectively okay this is for which method purchase sir statutary Reserve you have to take over under merger method sir what entry sir super duper entry sir which is what sir no entry sir why sir under merger method Any Which Way all the reserves and surplus of selling company are already taken over so all the reserves is taken over means general Reserve PN Security Premium statutory Reserve everything is already taken over again for statutory Reserve we have to pass one more entry not required because Any Which Way all are taken over for specifically for this no extra entry is required for merger method that is the reason on to the next yeah okay so till now we discussed what to do in the books of purchasing company for various method various adjustment the last drama is what to do in the books of selling company okay any normally combo questions comes in examination few treatments in the books of selling company few treatments in the books of purchasing company like that they merge and they ask it so if you know everything then it's easy for us to take up the questions and solve so that way we'll be taking up I mean those sort of questions you can expect an exam so first sir selling company there or shut Downer selling company there or shut down shut down so whenever a company shut down you have done this whenever a partnership firm shut down you used to prepare something called realization account same here also if selling companies no more means they have to prepare something called real realization so basically the whole drama of selling companies every single damn Ledger has to be closed because selling companies no more so every single Ledger has to be closed one easy way to close many many many many many Ledger is by preparing realization account in realization account the first step is transfer all the assets to realization account at book Val so why Book value sir sir what is the intention of selling company to shut down their assets should shut down all the ledgers assets Ledger is shown at agreed value or Book value book value so the intention of selling company is to shut down the ledgers if ledger balance is shown at Book value means cancellation also will be done at Book value only so all the assets will be transferred to realization account at Book value itself so assets have what balance debit balance how do you cancel them credited where are you transferring them to realization so what is the journal entry realization account debit to assets account okay sometimes instead of Ledger account they'll ask you journal entries so always whenever you're doing ledgers don't mug up I've seen many people saying this comes on debit side that comes on credit side just that like that they'll do yeah if you do it three four times like that your mind will register it you even sometimes even I also automatically with practice now I know I don't even think on journal entry automatically I put on debit and credit side because so much of practice is there but you don't learn it like that the reason for you is I can get away I know it I'm just saying all right you can't the reason is sometimes they may also ask you journal entry so if you say this comes on debit side then you'll have to [Music] visualize you have to draw your diagram so we know how good you are at creativity of your drawings and all so don't get into all that stuff whenever there is a ledger always practice The Ledger or insert the components in Ledger through journals only so that way they whether ask they ask you journal or Ledger you'll be able to solve it easily so simple logic asset has debit balance to cancel we have to credit so the journal entry will be realization account debit to assets account all the assets are shown at Book value so cancellation also will happen at Book value so this is the ENT only assets will be canceled or also liabilities liabilities liability have credit balance how do you cancel debit where will you transfer this to realization so the entry will be all the liabilities account debit to realization since liabilities are shown in our books at Book value cancellation also will happen at Book value itself so hence all the liabilities will come on the credit side that's one thing okay the next me in your golden days what we used to do whenever a partnership firm used to shut down all assets one by one we used to sell all liabilities one by one we used to settle but here it's individual peace meal settlement or whole business sold selling company is not not selling one of their assets they sold their whole business so this asset realization one by one liability settlement one by one will not come here rather whole business you sold did the selling Company sell this business at free of cost or they will charge money charge have they already received this money or yet to receive yet to receive from which company purchasing company that means from selling company's perspective they have to receive money from purchasing company so purchasing company is our datar datar we'll have credit or debit balance debit balance so that's the reason PC you have to show on the credit side because the journal entry is normally when you sell an asset individually used to pass the journal entry as bank account what is the journal entry for sale of asset planted missionary sold one lakh planted missionary sold one lakh what is the entry we usually we write bank account debit to planted missionary one lakh but in your golden days 11th we used never used to write Bank to planted missionary we used to write Bank to realization account 1 lakh why so planted missionary is already transferred to realization account so that's Ledger is already closed so that's the reason when you sell the asset you can't write Bank to planted Machinery we write Bank to realization because planted missionary Ledger is already closed so for sale of assets we do like this when you sell the assets individually you pass the entry like this but are you selling the assets one by one here or whole business whole business so did you receive the money no you will receive it yet so instead of bank account debit to realization we will write the purchasing company account debit to realization account okay this whatever value let's say we have to receive PC worth 50 lakh rupees so we will make our purchasing company as datar s the entry so when you post this in realization account where will the posting come on the credit side so we'll write here by purchasing company to the extent of purchase consideration is that okay s fine now later on when you receive money from purchasing company you'll pass the entry bank account debit to purchasing company if they give us Equity shares means Equity shares account debit to purchasing company if they give debentures means debentures account debit to purchasing company like that go on pass first make them our dat and then show the recovery portion like that yesu okay so this is about asset transfer liability transfer and PC recoverable three over yes sir is it necessary all the assets of selling company has to be taken over or some may not be taken over some may not be taken over so let let's say our mic so nice mic okay purchasing company did not take over so our company shut down so will we keep this mic as it is or what will we do will sell it now this mic was it taken over by new company or not taken over not taken over so we will sell it but this mic already mic already transferred to realization account so mic Ledger is already closed now when I sell this mic I will not pass the journal entry bank account debit to planted missionary what entry I will pass bank account debit to realization account because Myer is already closed so the journal entry with this bank account debit to realization account this is for the assets not taken over understood okay for assets not taken over you'll get your golden days entry this entry will come only for those assets which are not taken over similarly you may have some liabilities which new company has not taken over some credit tower of selling company purchasing company told we will not take over it's a negotiation anything could be taken over anything could not be taken over also credit ours of selling company taken over or not taken over not taken over I told I'm the selling company I told the Creditor hey Macha purchasing company no did not take over UDA I will not pay see you Tata bye-bye and you went what will he do he'll pull you by the caller and and say pay yes or no correct so if purchasing company does not take over any liability then selling company has to settle this liability individually what is the journal entry for credit ours paid 50,000 in check credit ours to bank but can you pass the journal entry credits to bank here no credit our Ledger is already closed because you transferred it to realization account so instead of credit ARS to bank the entry will be realization account debit to bank account this will be for what sir for any liabilities not taken over by the purchasing okay this one and uh you could have some amalgamation expense is it necessary amalgamation expense has to be incurred only by purchasing company or it could also be incurred by selling company again that's a negotiation sometimes maybe purchasing company will incur sometimes maybe selling will incur or sometimes maybe both will incur depends on what it is so if selling company incurs any amalgamation expense what is the journal entry for any expense expense to bank and pnl to expense so if you add both the entries effective entry for any expenses pnl account debit to bank correct for one expense you want to prepare whole P not required so for any expense the journal entry here will be realization account debit to bank account instead of pendl account debit to bank root it through realization itself because for one expense it doesn't make sense to prepare the whole P like that okay so if you have any liquidation expense liquidation expense is nothing but your amalgamation expense or sometimes they may also call it as dissolution expense whatever the name they call it if it is there pass the entry as realization account debit to bank account how much it is fine sir so let's say selling company spent 10,000 for amalgamation expense so the entry will be realization account debit to bank account purchasing company reimbursed 7,000 how much did selling company incur 7,000 uh how much did selling company incur 10,000 so the entry is realization to bank 10,000 after send after spending is selling company keeping qu or they're recovering part of this they're recovering from whom selling purchasing company how much are they recovering full 10,000 or only 7,000 let's say they recovered 7,000 fully that means what when you incur the expense what is the journal entry realization account debit to bank account later on you you'll incur expense or you'll get it back get it back when you get it back what will be the entry when you spend it is realization to bank when it is reimbursed Ulta entry it will be Bank to realization account so if you have any liquidation expense reimbursement so the entry will be Bank to realization account that way okay nasar fine uh one more thing is before you close normally you close this Ledger any balancing figure in realization account represents realization profit or realization loss in case of dissolution of partnership firm realization profit used to transfer it to owners and owners in Partnership firm was the partners so whatever profit you used to get you used to transfer it to Partners Capital account or current account depending on scenarios yes no sir here who is the real owner of the company there are two owners preference shareholders and Equity shareholders but preference shareholders of money is fixed no who are the guys who take the real risk in the company equity share holders so realization profit or loss will be transferred to equity share holders account okay whe whether it is profit or whether it is a loss both will be transferred to equity share holders account but before that check does the company does a selling company have any preference share Capital some problems may they will have selling company will have some preference share Capital let's say selling company has a preference share capital of one lakh okay so whom you have to pay this preference share Capital to preference share holders okay so let's say preference share capital is 1 lakh so this preference share Capital ledger balance can you show or you need to close every single Ledger you need to close not even one single Ledger should have a balance in selling company books preference share Capital how much balance one LH share Capital will have credit debit what balance credit balance whom you have to pay this Capital to preferen share holders so share Capital as credit balance to cancel we will debit so what is the entry preference share Capital account debit 1 lakh whom we have to pay this to preference share holders so in preference share holders account you'll write byy preference share Capital One agreed I'm preparing preference share holders account same will come in one of the question but quickly saying yes sir sir but purchasing company paid to preference shareholders 1 lak 120,000 it's a negotiation right they may pay 1 lakh lesser than one lakh or high more than one lakh let's say preference shareholders they got some new preference shes preference shareholders got some new preference shes they did not get cash they got some new preference shares but the preference shares worth is how much 1 lak 20,000 possible Ledger matching are no how much difference 20,000 correct so that means this is a loss this is a loss no sir this is a gain yeah this is the gains for preference share holders but for Equity shareholders fulls correct or no so this balance 20,000 you will transfer it off to realization account because for preference shareholders it's a gain but for Equity shareholder it becomes a loss because if preference shareholders takes more money means for Equity shareholders it'll be less money so from their perspective it'll be a loss so any balancing figure in preference shareholders account you transfer it to realization account what will be the posting of this can you tell me this inria posting realization account debit to preference share holders account that's whatever this entry will only come if you pay more money to preferen share holders that's what I've written here if amount paid is an excess of preferential Capital then only this entry will come otherwise it will not come okay so if you paid less means instead of posting it on the debit side post it on the credit side basically balancing figure in this account you transfer it to realization account like that okay s check every problem it may not be there some problems may this adjustments also have been tested after doing all this drama any balancing figure in real realization account represents realization profit or realization loss transfer to the true owner and true owner here is equity share holders account balancing figure your transfer share holders account so with this all the assets all the liability Ledger is closed off okay but few ledgers still have balance reserves and surplus equity share Capital equity share holders all these are there so next account you prepare is something called equity share holder account you prepare as a checkpoint I had given you six components in class do you remember Equity shareholders get six components or six components will be transfer to equity shareholders account one is equity share Capital all the reserves and surplus in preliminary expense deferred revenue expenditure or miscellaneous expenditure if any realization profit or loss if any PC if any surplus cash if any I told you you can keep it as checkpoint if you are big on memory some people are big on memory they want to remember like this and test if you are like that i' given you six point or if you want to approach logically simple where will you show equity share Capital under visualize balance sheet where will you show equity share Capital under shareholders funds so equity share Capital belongs to whom equity share holders equity share Capital has what balance credit balance you have to transfer it to whom equity share holders account equity share Capital has credit balance to transfer we will debit so the entry will be equity share Capital account debit to equity share holders so that's the first thing equity share Holder will get share Capital where do you show reserves in Surplus in balance sheet under again under shareholders funds prefering shareholders already settled so this reserves and surplus still has a balance reserves and surplus also is a shareholders funds meaning reserves and surplus is also an entitlement or is something which is belonging to whom equity share holder itself so all the reserves and surplus whatever you have General Reserve pnl crr drr BL blah blah whatever every reserves and surplus will be transferred to equity share holders account all the reserves usually will have what balance credit balance to cancel what we have to do debit so all the reserves will be debited one by one by one by one credit will be given to equity share holders account so this way these two Ledger account will get closed done now sometimes in the problem there's an outdated adjustment check old questions where this used to come if at all they give you preliminary expense deferred revenue expenditure miscellaneous expenditure and all it will not appear on the liability side balance sheet it will come on the asset side of balance sheet most probably it will not come in the question just in case it comes out of the blue then these components have what balance expense no sir expense will have what does nominal account rule say if you're confused about balance obviously they will give you balance sheet this you will see it on the asset side of balance sheet only so that should be enough evidence for you still if you're a pokey person okay now what does nominal account rule say debit all expenses so obviously expense should have what balance debit balance now can we show this or cancel it every single Ledger you need to close it has debit balance to close what will we do credit it where will we transfer this to equity share holders account so the entry will be equity share holder account debit to preliminary expense to defer Revenue expenditure mellan expenditure if at all you have any so this also will get closed yes sir this is one and then you prepared realization account what did you get either you'll get realization profit or realization loss which will be transferred where to equity share holders that what here realization profit or loss so Equity shareholders will only get this or what is the main thing they're interested in they sold they agreed to sell the business of selling company with an intention of what recovering PC money yes or no so that means the next thing Equity shareholder will get is the PC in whatever format maybe in the form of cash maybe in the form of check maybe in the form of equity shares maybe in the form of new preference shares or deur doesn't matter whatever they receive they'll credit that or we will account it yes sir so selling company closed but selling Company still has a cash balance of one lakh because they receive PC in the form of cash for 1 lakh selling company received PC from purchasing company in the form of cash how much one lakh no expenditure everybody is already settled so how much cash balance selling Company still has one L will they keep this Idol or what will they do they will give it to whom the real owners preference shareholders already settled who is the only one yet to be settled equity share holders so if selling Company by chance has any surplus cash if at all it is remaining that Surplus cash balance also will be given to equity share holders account so this is your checkpoint one more checkpoint you need to keep is equity share holders got debit side total and credit side total should match this side is one lakh means that side also should be one LH if it doesn't match go the go the go somewhere you have done some mistakes check again that's your final check point you should not have any balancing figure that is the overall Crux okay sir maybe one more is there sometimes they say PC is given in the form of based on intrinsic value per share intrinsic value do you know net assets yes sir you got net assets of 10 lakh let's assume okay now net asset is belonging to equity share holders net asset belongs to whom equity share holders sir this 10 lakh of net asset belongs to one shareholder or every shareholder every shareholder let's say the company has number of equity shares is 1 lakh total number of equity shares existing in this company is 1 lakh how much is net assets 10 LH so this 10 L belongs to one share or one lakh shares this 10 lakh belongs to on one lakh shares if you own one share how much will you get if you own one share how much will you get how will you calculate that 10 lak divided by 1 lakh which is 10 that to we call it as intrinsic value per sh share now construct your formula for me let's see how did you calculate this what is your 10 lakh net assets what is your 1 lakh number of that's your formula for your intrinsic value per share net assets divided by total number of equity shares Okay g yeah sometimes they say PC is exchanged in this format that's the reason we may need to take the help of this okay all right next is something called capitalized average profit that I will take it in the problem only if you want you can remember it one question I will do simply nothing but your profit after all adjustments divided by rate into 100 better understood with the help of numbers which I'll take it next sir net assets is nothing but your shareholders funds it is nothing but your Capital employe different different name okay like just to give you an example if you want quickly so balance sheet let's say we have property plan and Equipment 1 lakh we have current asset 50,000 we have current liability 20,000 okay so this is 150 this is this also should be 150 let's say equity share capital is 50,000 reserves and surpluses 80,000 simple balance sheet I've constructed in t format so can you tell me what is the net assets of this business let's say this is a balance sheet of X limited can you tell me net assets of this business how do you get net assets all assets minus outside liability what is the total of asset total assets 1 lakh 50,000 will you consider reserves and surplus or only outside liabilities only outside liability which is the only outside liability available here I means how much are you getting 130,000 okay now sir can you calculate shareholders funds for me here what in all will you show under shareholders funds equity share capital and reserves and surplus calculate 50 plus 80 how much is that 130,000 any different or same same so another name of net asset is in sometimes in the problem instead of net assets they may use the term shareholders funds or they may say Capital employed so Capital employed shareholders funds and net assets all are same different way of calculating net assets is calculated from asset liab angle Capital employed is calculated using Capital employed is nothing but shareholders funds angle so if you calculate net assets from liability angle we can call it as capital employ or you can also calculate it from asset minus liability angle doesn't matter how you calculate final answer will be same these are all different different namakarana that's all different different aliases they are all same okay with this chapter over or concepts over all concept revision we have completely done now it's time for us to Break N problems we'll do a little more we'll finish off this another 20 minutes this chapter will be over then we'll take a break and come back I know s part of time one by one slowly online people are going off they saying we'll watch it later on but uh Papa you guys Bas and some other guys they're saying it's okay we will adjust sometimes in life we have to adjust okay this is a not if it was a regular class more than you within one and a half hours 2 hours I would have only given break okay but now it's a case of Marathon class where you also have a shortage of time I also have shortage of time because after this so many people are asking ym Marathon ym Marathon have now see a final over now this over that over yeah so even time also time pressed so we'll try to finish so when when we do that sir I'll do first we'll finish this I'll do it but I'll tell you the time next week sometime in April yeah April after April 7th or something we'll schedule okay it'll be posted on YouTube you can have you can subscribe so that you get notification or something or you can call up the academy or better don't call up they're already bugged with the calls they're not picking people's calls only know not purposefully so many calls they're getting Papa they're not able to manage only someone saying books not received where is that this that some purchase exam time is little kind of difficult for everybody especially at coaching uh business every every business they say has a peak season no exam season is speak for us those students are writing exam no we have to complete the syllabus on time we have to re we have to do this it's looks like more like I only writing exam for my subject yeah it looks like that same how much of our effort you are putting I also need to put in the same efforts okay that being said can we quickly run over these questions some two or three questions I'll do simple ones F we'll run through anyway I've solved so that we'll not have to solve everything he'll run through so that it should not take so much time as we used to do it okay yeah financial position of two companies they've given hurry and W limited they've given so same question it's a study material question also same is there as your MTP question also this time okay same so they've given balance sheet we know balance sheet is W off okay just we'll be aware of the face value of each share that is good enough for us then we'll dve directly dive into adjustments sir har limited absorbs Wu so har is a purchasing company Wu is the selling company okay following terms 10% preference shareholders are to be paid at 10% premium by issuing 9% preference shares of harur limited so sir does a selling company have how many owners check this why is a selling company they have preference shares also they have equity share so can you give the PC only to equity shareholders or both the owners those so here preference share capital is how much 1 lakh now check this line once again 10% preference share holders that is this one lakh are to be paid at 10% premium so are you paying 1 lakh to them or 1 lakh plus 10% that means you are paying the 1 lakh 10,000 correct negotiation you could pay more or you could pay less here you're paying more by what you can pay this 1 lak 10,000 by paying cash new Equity shares new preference shares whatever what is given over here by 9% preferen of hurry limited so it B system old preferen is getting cancelled instead of that they want a new preferen so this 1 lakh 110,000 is not settled by cash but by new preferen that is one okay and one of the confusion which many students get is the premiums okay whether old preferen have been paid more or whether new preference sh are issued at premium that is one question sometimes it is little dicey because the structuring of sentence is little dicey in some of the questions so one trick to identify whether old guys are paid more or whether new preferen here no sir check here how much is a preference share Capital One lakh the question I'm trying to address is whether did you pay this one lakh by giving new shares at premium did you pay only one lakh by issuing new shares at premium or did you pay one lakh did you pay one lakh 10,000 itself did you take over the old one at higher value and issue new shares at par that is one did you take over the old shares at the premium and pay new one at par or did you pay new one only at premium that is a question some of them will face that so one trick to sort out that is always check the word premium where it is inserted this premium no check where have they inserted this word okay so based on this the treatment will vary always check if words premium no sir are used in the question next to Old chefs if this word premium if it is used next to Old chefs then what it means is old Shares are taken over at higher value and new Shares are issued at par so in this example check they said preference shareholders are to be paid at 10% premium so this is your old next to that only 10% premium came and then they are saying new preference shes are issue so what the sentence means is you are not paying the preference shareholders 1 lakh you are paying 10% more how much are you paying 1 lakh 10,000 and this 1 lakh 10,000 how are you giving by new preferen and that new preferen are issued at par only why the word premium is used here suppose they use this word premium after new preference shes suppose this word premium no if it is used after new preferen shes then that means is old old Shares are taken over at Power value but new Shares are issued at premium like that you can decode because the word when you read the sentence again and again know sometimes English can meaning can give slightly different way but that's how it is interpreted in our IC question so this if you kind of keep in mind you'll not go wrong in your adjustment again repeat it once for me what is it what did I say if there's any premium element check where is that word premium mention if it is mentioned before new preferen shes see here what is coming first premium or new preferen shes first premium word came right if the premium word comes before new preference sh what it means is old one are issued at premium meaning you have taken over old at not at same value but at a higher value and and you're issuing new shares at par like that what it means suppose this word premium comes after new preferential then it means new preferential are at premium like check this word Equity shareholders of Biol limited will be issued necessary Equity shares at 5% premium Now this word premium prum came where next to the old one or after new one after the new one so what does this mean now new Equity Shares are issued at like that so the word premium is the killer there that is the driving Point whether the new ones are issued at premium or not now is that Clarity have you got an understanding so keep this word and accordingly you'll not go wrong with yes sir okay now I'll go back to the question I just read the last adjustment to bring in little Clarity that's all Goodwill of value limited selling company is 50,000 building at 150 missionary at 160 so definitely it is Chase method why assets and liability for it to be merger method all assets and liability to be taken over at Book value are they taking over at Book value here no check here building value come back to I limited building value is how much 1 lakh but it's taken over at 1 lak 50,000 so definitely it is a purchase Method it can't be a merger method because assets have been revalued even a one asset got revalued definitely it will become purchase Method so purchase Method inventory to be taken over at 10% less provision for de at 7% you need to create Equity shareholders of Biol limited will be issued necessary Equity shares sir they said the word necessary how much given how many Equity has given how many Equity has been issued is mentioned or not mentioned not mentioned so what you give it to equity shareholders only is PC no so is this value of PC mentioned or not mentioned that means indirectly what sir PC is missing and if PC is missing what to do find out net assets and net asset itself becomes PC what you gave it to preference shareholders was clearly given but PC means what not just what you give it to preference shareholders preference shares mean PC means what you paid to preference shareholders plus what you give it to equity shareholders one component of PC was given but other component relating to equity shares was missing so hence the total PC also is missing so if PC is missing net asset is equal to PC that's all okay s so show necessary Ledger account to close the books off why a selling company ledger accounts you need to prepare and acquisition entry and also balance sheet of Hur after absorption correct so journal entry in the books of new company and balance sheet in the books of new company and selling company Ledger they asked combo offer maybe this will come for like 16 marks or something sir doesn't matter whether it is selling company or purchasing company one uh one component both are interested in which is what PC correct one will pay other one will receive so PC any which way you have to calculate so PC is missing how do you calculate PC here net assets find out net assets and net asset itself becomes PC so net asset means how tell me how do you get net assets assets take have to be very specific asset taken over at agreed value minus outside liabilities taken over at agreed value that constitutes your net assets okay here few assets are revalued I'll quickly run through them first check here adjustment they have taken Goodwill goodw is 50 building 150 machiner 160 taken off one by one we'll take off 50 150 and 160 that's all now what did they say next inventory taken over at 10% lesser come back to the balance sheet what is the inventory value this isika this is vuka what is inventory of V 170 Josh May don't take purchasing company inventry PC is given to owners of selling company so you need net assets of selling company Jo May don't takea everything you would have done right but PC wrong means all your ledger accounts are also wrong in the selling company books because PC will affect your realization account realization will affect Equity shareholders account everything gone based on PC only you will pass journal entry in the books of new company that is also wrong so be careful these are small small mistakes which you should not do net assets here stands for net assets of selling company correct no so how much is inventory of selling company 1 lakh 75 is it taken over at 175 or 10% lesser so 1 lakh 75,000 minus 10% you do which is this correct what about next datas provision for doubtful debts you have to make it at 7 and a half% means datar you're taking over at that value or lesser value lesser value what is datar value 1 lakh 1 lakh minus 7 and half% you do how much is that 9 to 500 that's what they've got okay sir that's all nothing they told about that that's all is asset or we have one more so we have one more which is cash so if they don't mention anything about the other assets take that over at Book value okay so if for assets if theyve given agreed value take it over at that value if they've not mentioned anything assume that it is taken over at Book value it so cash also will be taken over at 20,000 taken up yes this your what net assets or total assets toal total assets we want net assets so one what is one more we need to do deduct outside liabilities what is outside liabilities in your balance no check is long-term provision outside liability they prepared note number three what is note number three your gratuity fund yeah meaning gratuity payable that is also liability no so 20,000 gratuity means you pay to whom employees so outside liability only this is one anything else is there so this also we'll take over what about trade payable yes anything else is there no that's all so what is these two 20 and 80 considered H check in your PC working note 20 considered 80 considered so total PC is how much 5 lakh 30,000 this PC will be given to whom owners of selling company who are owners of selling company Equity shareholders and preference shareholders so how much you gave to preference shareholders clearly I know how they only told Equity shareholders of preference shareholders will be paid at 10% premium preference share capital in selling company was 1 LH did we take over and paying them 1 lakh or 10% more so how much we have to pay to the preference shareholders 1 lakh 10,000 so out of this 5 lakh 10,000 to preferent shareholders you will pay 1 lak1 so balance of 420,000 you'll be paid to equity share holders fin sir that's why they've given you 110 and 422 Equity shareholders yes but be careful Equity shareholders no sir what did you give Equity shareholders of w limited will be issued necessary Equity shares so this 420 of PC to equity shareholders are you settling by cash or new shares new shares but the new Shares are issued at 10% 5% premium so this is this premium is coming after new Equity shares so what does this mean new Equity Shares are issued at premium comfortable okay so what is the face value of equity shares of har limited sir 10 you can use whatever it's fine face value is 10 it is issued at a premium of how much 5% so calculate 5% of 10 sir 10 5% is 0.5 correct that means the issue price is how much 10.5 do you agree with me new company have have issued their uh new shares at an issue price of 10.5 face value is 10 given in the problem premium is 5% premium and all you'll always calculate on face value so 10 5% is 0.5 so the issue price is 10.5 you can take any value if you don't want to work with 0.5 number you can take it as 100 because these are what sir ratio apportionment even if you take 100 and finally work out also final answer will be safe okay but here just check better to be safe side now one second where is that number I think I've already calculated I think I've have taken 100 we'll just rework this okay sir this 420,000 is the total value paid sir so here like this face value issue price if the face value is 10 Rupees means issue price will be 10.5 that's what we got it last this 420,000 is is the face value or total value given total value given to equity share holders that means this 4 20,000 represents issue price if this is 420 means how much is that so Pro rate this how do you get x 4 lak 20,000 into 10 divided by 10.5 how much are you getting 4H so in this 420,000 4 lakh will be towards equity share Capital balance will be towards premium premium will be 0.5 divided 10.5 or simply take 420,000 minus 4 lakh you do you'll going to get 20,000 so why you have to do sir they asked you journal entry in the books of purchasing company if purchasing company have issued shares at premium means you need to know no how much premium has been issued and premium has to go to Security Premium so calculated now only so that it becomes easy for journal in D PC is received so what selling compan is interested is the total PC which is how much 5 lak 30,000 now close all the ledgers of selling company one by one first step is what run me through first first account which account you'll prepare realization account first step in realization account is to transfer all the assets at book qu assets have credit assets have debit balance to transfer we need to credit so the entry is realization account debit to all the assets study material is giving a Le approach ideally in my opinion each Ledger has a separate balance correct now so one one Ledger you need to close separately but you know what study materal is doing what is the total assets 57 you know what they did to sunry assets 570 if study material gives a shortcut no to we should grab it off okay in my opinion ideally you should you know show all the assets one by one by one that's what we have done in classes but study material is saying you do it total it's fine we will accept if they saying we will accept we will grab it okay now so instead of showing assets one by one you show off the total there is a total assets sunary assets is the total assets that they are talking about yes yes standards also will be taking over don't worry first I'll finish off this I have a specific Target in mind I'll cover leave the topics to me I'll take care of it yeah all right first is this yes this is asset trans word next is whats all the liabilities transferred I think we had only two outside liabilities no gratuity and trade payables have they have transferred off yeah yes what is the next step pc pc where you you will have to receive PC from the purchasing company have you received or not first you have to account the due entry if you have to receive PC means the purchasing company becomes your data so what will be the entry purchasing company account debit to realization account so how much PC 5 lakh 30,000 okay this is the entry okay fine but before you close here there is no is there any amalgamation expense no is there any reimbursement of amalgamation expense no any assets liability not taken over to be settled individually no if if it is there what to do we have discussed hope you're comfortable all that is not there that means ideally balancing figure is realization profit or realization loss but before doing that always check whether the selling company has preferential Capital does a selling company have preference share Capital yes 1 lakh did we pay them 1 lakh or did we pay them 1 lakh 110,000 that means how much more we paid 10,000 more if they paid 10,000 more means of our Equity shareholders it is profit or loss or loss so if you don't want the entry if you don't have time to prepare preference shareholders account you have time to prepare only realization account now we want to bring this adjustment you're not sure whether it will come on the debit side or credit side so realization account is like your trading P only realization account is like your trading P only sir loss mean means it will come on the credit side of trading pel or debit side debit side you paid more to preference shareholders means for Equity shareholder it is a loss how much more did you pay for one lakh of preference share Capital you paid 1 lak 10,000 how much more 10,000 more so where it should come obviously on the debit side okay now this is a Formula I wouldn't recommend formula but in case sometimes what happens we will not have time so like that you can quickly plug in these numbers because all this will carry one or two marks so if you bring in this no one Mark extra you'll get even though you don't prepare that lecture because there's an important adjustment because many student will forget this that is a reason so if you bring it in you will stand out and even though you have not done one other things you'll get one extra Mark for this itself that's a reason so quick assessment of that so any loss debit side any gains credit side like that fine so then any balancing figure in realization account represents realization profit or realization loss here balancing figure this is balancing figure okay it's coming on the debit side now visualize your pendl account okay if you're getting balancing figure on the debit side means it is realization loss or realization profit if you're preparing trading pendl and if you get you show on the debit side what sir you show here 2 GP no in trading account you show 2 GP in pnl account you show two net profit so if you're getting balancing figure on the debit side it means realization profit so this is the case of realization profit like this also they may give you McQ balancing figure and realization account is coming on the debit side whether it represents realization profit or realization loss so McQ know you can go literally crazy Any Which Way You Can structure okay so that's the reason it is not possible to prepare for every McQ because you can build thousands of McQ questions you'll have time to solve all thousands h no so you have to be conceptually clear if you're conceptually clear any mcqs you will tackle if you're a mugging up kind then it becomes a little difficult some you may get it some you may not get it but if you know what it is Aram say most of them you should be able to T so this is over uh next next is preference shareholders account we will close so preference shareholders account what will they get preference share Capital so preference share Capital has what balance credit balance how do you cancel it debit so the entry is preferen share capital account debit to preferen Holders account so will post it as by preferen Capital that is one what did you pay this preference shareholders cash if you had paid cash to preference shareholders the journal entry would have been preference shareholders to cash but what did you give the preference shareholders some new preference shares so the entry will be preference shareholders account debit don't write preference share Capital sir this is selling company books did selling company issue this preference shares or purchasing company purchasing company will account it as preferen share Capital so here they will just write it as the preference shares of har limited don't write preferen share Capital you lose marks because you will account it as capital that company which is issuing preference shares they will show it as capital here this is in the books of selling company did selling company issue preference shares or new company new company new company will show it as preference share Capital you don't show it okay so you'll just write it as to preference shares of the purchasing company which is harur limited how much 1 lakh 10,000 this side is 1 lak1 that side also should be 110 there is a balancing figure of 10,000 and balancing figure you'll transfer it off to realization account that's what we posted over here then now any balancing figure in realization account represents realiz ization profit or realization loss which you will transfer to equity share holders okay s that is one last account to be opened is equity share holders account equity share holders get six components if you B on formula that is equity share Capital reserves and surplus miscellaneous expenditure realization profit or loss PC Surplus cash if as a quick checkpoint so equity share capital and reserves and surplus have credit balance to close what we have to do debit so equity share Capital account debit reserves and surplus account debit what will you credit who will you transfer this to equity share holders account so equity share Capital debit reserves and surplus account debit to equity share holders account so what will be the posting in equity share holders account buy equity share Capital by reserves and surplus what are the reserves and surplus selling company has only one their equity share capital is 3 lakh the reserves is 70,000 so you'll write here by equity share Capital 3 lakh by General Reserve 70,000 okay now sir 2. done only one Reserve is there third one miscellaneous expenditure check do we have any miscellaneous expenditure we read through did we find anything no cut off that fourth one realization profit or loss you prepared realization account you wrote realization account debit to equity share holders account so in equity shareholders account what will you post it as byy realization profit 50,000 fourth one done fifth one Surplus cash does a selling company have Surplus cash or cash also was taken over selling company cash cash also was taken over by purchasing company you consider that in PC also know sir at Book value so selling company does not have any cash because cash also is taken over by purchasing company okay that is rolled out last one is what PC what did you give to equity shareholders you already found out how much did you give it to equity shareholders 4 lakh 20,000 how if you pay cash to equity shareholders the journal entry is equity shareholders to cash or Bank how did you settle this 420,000 what did they say in the adjustment equity sharehold of w limited will be given new Equity shares so the entry will be what Equity shareholders account debit to bank or no you'll write to equity share Capital you'll write no no no for the company issuing new Equity shares for them it is equity share Capital who who are issuing new shares purchasing company we are doing this in the books of purchasing company or selling company so in selling company don't write equity share Capital you simply write Equity shares of the new company which is har limited worth 4 lakh 20,000 so Ledger closed okay now in fact even hurry limited has a balance you can open Hur limited Ledger also they don't know whether they've done or not it's fine Hur limited also Ledger you open when you open Ledger what will be the posting in hurry if you write hurry over here here you have written hurry to realization account PC so first you'll write two realization account 5 lakh 30,000 what did all you receive from har limited you receive some new preference share some new Equity shares you receive cash from Hur means the entry is cash account debit to Hur if we have received Equity shares means don't write equity share Capital you write by Equity shares 4 lakh 20,000 then you write by preference shares how much did we receive 1 lakh 10,000 this Ledger also we get closed off okay sir this one Ledger they have not opened I say prepare that also we've done it in our regular class just say okay now sir I'm quickly revising hope that's okay with you the intention is not to do everything we don't have time to do everything I want to cover as much as possible and as little time okay I've taken a little extra time for amalgamation but it is still fine considering the weightage this topic has okay all right uh next so problem over no no sir selling company books we did next in the books of purchasing company what did purchasing company do they purchase the business whenever you purchase a business three common entries will always come sir what is what purchasing company purchase the business no so the first entry they'll pass is business purchase account debit to Liquidator of selling company business purchase account debit to Liquidator of selling company how much they purchase this business for 5 lakh 30,000 so the extent of PC pass this particular journal entry first Journal okay sir second when you buy somebody's business when purchasing company buys selling company business what and all they will get assets of selling company they will get liabilities of selling company they will get it is purchase Method so don't write reserves in Surplus only assets and liabilities all the assets will be debited at what value agreed value which is already there in your PC working note so pick it from PCA working note debit all the assets credit all the liabilities which is also there then you have debited business purchase account here it is a dummy account it's just a rooting entry that will get cancelled here you have debit it how do you cancel it credit it here to business purchase 530,000 okay so now sir so is purchase Method no so you have to compare net asset with PC and all yeah here no need to do any comparison because PC was missing PC is missing net assets and PC will be same so you will not get any Goodwill or Capital so here we already have Goodwill that is a goodwi given in the question this is the Goodwill given in the question other than the Goodwill given in the question no extra Goodwill or capital reserve will come to you if you have any extra Goodwill or capital reserve this journal entry will not match it'll have a balancing figure that balancing figure if it comes on the credit side capital reserve if it comes on the debit side Goodwill that's what I said so that working note of PC versus Net asset comparison need not be done if they ask you journal entry because the journal entry number two only will give you Goodwill or capital reserve as a balancing figure so don't waste your time is what I told you in the regular class remember but here anyway PC is net assets so extra Goodwill will or extra capital reserve will not arase okay third entry is what sir you have taken over a business can you keep quiet or you have to settle settle sir whenever you take over somebody's business what happened to Y limited now it is there or it shut shut down whenever a company shuts down you have to make a lot of payments so there'll be a lot of chaos to root the payment no we appoint somebody called Liquidator so that Liquidator will give the right payment to the right people in the right order so that there is no fights confusion etc etc so now this 530,000 we have to pay to the Liquidator what in all we give to the Liquidator we gave some Equity shares we gave some preferen so what is the journal entry for PC settled Liquidator of selling company account debit to equity share Capital don't write equity share Capital 420,000 no no no this new Equity Shares are issued at premium so we already calculated to equity share Capital how much 4 lakh to Security Premium how much 20,000 two what that's all you give or you also give preference shes now don't write preference shares right preference share Capital because this is issued by purchasing company and we are passing this journal entry in the books of purchasing company so right to preference share capital 1 lakh 10,000 that is your entry these are three basic entries which will come in every amalgamation problem whether it is purchase Method or merger method all this three entries will compulsorily come what are those three entries again business purchase account debit to Liquidator of the selling company here selling company is W then when you purchase somebody's business you will get assets and you'll get liability so all the assets will come in with debit balance so debit all of them all Li abilities will come in with credit balance so credit all of them business purchase you have debited that's a dummy account just a rooting entry so to can you have debited here and to cancel what we have to do credit it so in the second journal entry credit it so journal entry ideally should match if the second journal entry does not match the balancing figure is nothing but Goodwill or capital L if you're getting balancing figure on the debit side or on the debit side it is Goodwill if you're getting balancing figure on the credit side it is capital reserve here we are not getting balancing figure because PC was equal to net asset that's a reason if PC is greater than net assets or lesser than net assets this journal entry will not match you will get a balancing ble that is one third is your settlement settlement entry is Liquidator or selling company account debit to cash if you settled in cash if you settled in preference shes you'll write not preference shes you right to preference share Capital if you have settled in equity shares to equity share Capital if there is any premium on preference shares or Equity Shar doesn't matter a premium will be transferred off to Securities premium so these are three basic entries along with with this amalgamation expense Mutual Owings stock Reserve all that can get added so we have already discussed that if it comes go and do it that's okay sir these are basic things then the balance sheet sir balance sheet is very very straightforward simply take Whata balance sheet to that you add a w balance sheet dat 2 minutes you have is it okay I can run through I may take another 20 minutes if it's okay I'll run through the balance sheet with you or if you've got it I'll move on that's fine I can interfere 20 minutes minutes more with your Saro time okay so check sir if you want balance sheet now for the heading you'll give us balance sheet after absorption now check we'll refer the question card data it's easy maybe I'll bring this data closer okay check in the balance sheet what was the preference uh first here okay what was equity share capital of limited 11 okay so now will wuka equity share Capital come no wuka only assets will come liabilities will come reserves and surplus and share Capital will not come so these we can knock off yes we'll cut off this but did we give 11 lakh already they had did new company issue any Equity shares yeah they issued Equity shares worth 4 L they issued preference shares worth 1 lak 10,000 so add these to how much is it 16 lakh 10,000 so that 16 lak 10,000 should be the new Equity shares new share capital in the balance sheet that's all so take purchasing company equity share cap Capital what and all you gave us PC add it done now any problem everybody getting it balance sheet is the easiest according to me hope you're getting it there no issues okay reserves in Surplus now s will reserves in surplus of why limited the selling company come no but will Hara come yes only this much or extra extra to this if you have any capital reserve add is there any capital reserve in this problem zero but do we have any Securities premium yeah Equity shares was issued at a premium of 20,000 so add this how much it will be 90,000 check have they shown 90,000 yeah that's all so the best way to prepare balance sheet is journal entries journal entry will give you whether share Capital assets and liability have increased or whether it is reduced what has happened accordingly take call that F sir and long-term Provisions for other assets and liability check sir in this problem all other assets and liability straightforward long-term provision May was there any adjustment or it was taken over at Book value so 50 plus 7 20 you do which is 70 credit are was there any Mutual Owings no add these two how much is it 2 lak1 if there is any Mutual Owings you need to deduct in this problem there or not there not there so this is 2 lakh 10,000 so 70 and 2 lak 10,000 they've taken off yeah total of liability side matched now asset side asset side PP uh here sir what is uh one second what is PP of harur limited 8 l so why you limited PP can we take over Book value or there was agreed value so come back to the adjustment building was taken over at 150 uh machinary taken over at 160 so to this 8 lakh add 150 add 160 so that will be 310 so this will be what 111,000 11 lakh 10,000 so check have they shown PP at 11 lak 10,000 all right ah here 11 lakh 10,000 that's it to take purchasing company PP value and take the agreed value of pp of the selling company go on adding so Goodwill they only given what is purchasing company Goodwill already there check in intangible assets they would have prepared a working note how much is Hara Goodwill 50,000 why what is vaa Goodwill 25,000 given but this is Book value we want Book value of selling company or agreed value what is agreed value of I 50,000 to this 50 add 50,000 cut off this it's not taken over at 25 it is taken over at 50 so how much is that 50 plus 50 is how much obviously one like that okay inventory also same thing theyve given all you can get this value from PC also because in PC know you will only show what agreed value so take Hur limited purchasing company asset value to that you add selling company agreed value agreed value you'll get it from PC working that's all if there is any Mutual Owings one more I'll tell you if there is mutual Owings you have to reduce it from trade receivables as well as you have to reduce it from Trad payables that is one if there is any stock Reserve you need to reduce it from inventory is not there in this problem it may come in your examination question that's all it can get added that's all is a comp lexity of amalgamation two or three more adjustments like this can come which we have already discussed as Theory it may get adapted as a question for you in your exam so will you be able to manage that if it comes just in balance sheet you need to do this yes sir so this is about purchase Method I want to do one question we did now what to do in the books of selling company what to do in the books of purchasing company for purchase Method one problem we will do it for merger method one problem for PC we will do another 20 25 minutes we'll B up is that fine sorry I estimated too much I should have probably give a break at 12:30 only this took a lot of time than I expected apologies from my end I'll get it corrected next batch not next batch tomorrow yeah tomorrow I will give you right break on the right time first now since I've started I don't want to leave it Midway I'll finish off this so two companies are given P limited and V limited okay balance sheet I know is not important for us directly let's dive into adjustment all Bill receivable of V limited where P limited car acceptance Bill receivable of V what is Bill receivable of V they have given a break up here which is what sir 80,000 it is p limited acceptance that means for V limited it is Bill receivable for p limited it is Bill payable what do we call such transaction as Mutual Owings or inter company transaction should we show this inter company transaction or eliminate eliminate where in the new company books first take over and then cancel like that yes P took over V limited so p is a purchase company V is the selling company they only told it amalgamation in the nature of merger when they say don't test the condition just start doing merger method application it was agreed that the discharge consideration obviously if you're purchasing someone's business you have to give PC how is PC given to allot three fully paid up Equity shares of 10 each at par for every two shares so if you are taking over if you take over two shares means you'll issue three SPC for every two shares acquired you're giving three shares is PC that's what is the share exchange transaction that they' have done correct sir all right it was also agreed that uh 12% debentures in V limited come back to the balance sheet are you able to see any long-term borrowing yeah they prepared note number three come to note number three here 12% debentures so selling company has 12% debentures how much th000 all these numbers are in LHS what are they saying for that would be converted into 13% debentures in P limit it's quite obvious no sir what is happening to selling company there or shut down shut down so what will the debenture holders of selling company say either give me my money back or give me new company debentures that is what is happening over here 12% debentures in V limited that is selling company is converted into 133% Dees of P limited of same denomination just a barter system old one will get cancelled and new one will have to issue okay trade payable Trad breakup they have given expense of amalgamation is one L you are required to pass journal entries in the books of P the purchasing company and P limited balance sheet immediately after Merchant balance sheet I'll leave I think you're comfortable with that I'll quickly run through the journal entry before we do the journal entries we need a PG correct PC missing or given so clearly they told no three Equity shares we will allot for every two shares for two shares we will allot three shares of PC so ratio is clearly given if you have two old shares we will issue three new PR three new new Equity shares that's what they told so check the balance sheet of V limited sir what is a share capital of V limited selling company 6,000 they've not given break up I'm assuming that share Capital each share face value is 10 you can assume whatever it's fine final answer will not change total share capital is 6,000 each share face value of assumed at as 10 means the number of shares will be how much 600 correct if you have two you'll get three SPC if you have 600 how 600 I've assumed the face value to be this given number or assume I assume the face value of each Equity shares to be 10 you can assume even 100 also final answer will not change total share Capital 6,000 each share face value 10 so number of shares will become 600 so if you have two you will get three if you have 600 how much if you Pro rate it will be what sir 900 what is this 900 in fact what is the 600 value or number number so this now 900 is the number of new Equity shares we need the value each Equity shares I've assumed it as how much 10 so that means the value of new Equity shares will be given is 9,000 is your PC okay merger method okay so merger method f is in merger method sir visualize we first find out PC steps remind your steps what did we write first we have to write we have to calculate PC done then find out paid up Capital did I use the word paid up equity share capital or only paid up Capital paid up Capital because under merger method it's a reorganization visualize what is the only thing not taken over Capital paid up equity share Capital we can't take purchasing company can't take over and preference share Capital also cannot be taken over rest all the things assets liability and even the reserve will be taken over only and only at book okay so you need to find out paid up share Capital paid up share Capital here means paid up equity share capital and preference share Capital come back to hia balance sheet what is paid up share Capital only one which is 6,000 they have not given the breakup so most probably it is equity share Capital so PC is 9,000 paid up share Capital given in the question is 6,000 so paid up share capital is like your worth because that is the only thing not taken over no 6,000 is not taken over that means you should have issued new preference sh or new pc worth 6,000 only 6,000 was not taken over so new instrument should have been given only for 6,000 but new company give it for 9,000 or if you want to even decode further think of paid Capital as net worth under merger method think of paid up Capital as net worth it is not but just for doing the things correctly you can assume like this so worth is how much 6,000 but how much PC was given 9,000 so purchasing company paid more or they paid less they paid more instead of paying 6,000 they paid 9,000 so purchasing company paid more if purchasing company made more means they suffered loss purchasing company suffered a loss that loss will be accounted as Goodwill if you show it as Goodwill it will become self generated Goodwill which you cannot show hence this loss is adjusted in reserves usually which Reserve General Reserve so the amount to be adjusted in reserve is 3,000 rup that's a work keep this in mind and then start your journal entries so three journal entries tell me some basic journal entries what is that basic journal entries first business purchase account debit to Liquidator or selling company you will pass this journal entry to the extent of PC when you buy business what will the purchasing company get selling company all assets all liability is not just that all the reserves and surplus also because it is what method mer method so all the assets will be debited because all assets will come in with debit balance all liabilities will be credited at Book value that's all or even reserves and surplus reserves and surplus what is the reserves and surplus of selling company foreign project Reserve 310 General Reserve 3,200 pnl account 8 to5 one by one you need to show but but but but but but General Reserve you will not show it at 3,200 why sir we have to adjust something in general Reserve now how much you have to adjust in general Reserve 3,000 so though you are taking over 3,200 you have to adjust since we made a loss of 3,000 this will be adjusted with General Reserve so how much balance will be there 200 rupe okay n any problem or if you feel no sir I'm not comfortable with this adjustment sir if purchasing company suffers a loss loss we have to adjust it in reserves which Reserve I told General res so when you're passing the journal entry now don't don't write General Reserve don't write General Reserve rest all assets all liability all Reserve you put it at Book value your general entry will not match there will be a exact difference of 200 that difference itself is generalism so that means you don't have to break your head down or if you want logic General Reserve balance was 3,200 we adjusted 3,000 so it has to be 200 either calculate like this or get this as a balancing figure choice is yours but do it correctly whichever way you do it okay in exams know everything they won't ask whether you know it logically or not that's a drawback of our exam whether you have done correctly or not is a fund whether you have understood and done it properly and all is a secondary okay whichever way you have because in last moment no you should not worry too much about Logics also sometimes ideally you should prepare logically from day one but now you are probably one week before exam two weeks before exam now you say I will study everything logically logic will not help you okay logic will become tragic for you yeah like that yeah so let's not get that good to know it but there is a right time for it okay so some if you are not getting an examination time you should not waste too much time because time is very very limited so s short and shortcuts like this also will help you to a the exam that's what we say ca is more about smart work than hard work so sometimes even if you don't know also you can pass like this see if you logically know balancing figure generalism good enough you don't have to know how you got it also answer match like that that was also mean those are also sometimes pH off okay two entries are done third one is settlement to Liquidator what is the journal entry Liquidator account debit to equity share Capital this your three common entries other than this in this problem you may get some mutual Owings here we have mutual Owings yeah Bill receivable for one company bills payable for another company so you did not show only so I showed already here I've accounted datar and all no I've taken total datar how much is total datar given in the balance sheet there harika now where is it where where where where where where here huh total tradeable is how much, 00 this includes your Mutual this breakup only they have given it here how you got 1,100 is a breakup of this okay 1080 is dat this is a total receivable sir in this, 1080 is datar and 80 is Bill receivable put together datar and Bill receivable put together we show it as trade receivables in balance sheet so I've taken over full 1,100 check here so that means I've already taken over datas first take over and then cancel the mutual Owings same thing for credit R also what does total credit bills payable was Zero credit was 463 total is how much 463 how much did we take over where is that break up not return maybe mistake I think Jo I forgot I think okay so this should be here sir I think they don't have or maybe they don't have oh they do have I missed out I think okay no problem I think this is just typing I only wrote it in the morning so maybe Jo Jos it got missed out it should come okay fine it somehow got missed out over here it should come here as what's a trade payable how much is a trade payable total of V limited 463 that should also come okay first take over and then cancel it's I've just done hurb so it is missed out don't say it is mistake okay quickly I've done so that's the reason okay so first take over and then cancel so what is the cancellation journal entry for Mutual o liability also you need to cancel asset also you need to cancel liability has credit balance to cancel we will debit asset have debit balance to cancel we will credit so the entry will be bills reable account debit to billable account that is one okay then they told 12% debentures of V limited will be converted into 133% so we took over 12% debentures here in journal entry number two are we issuing 12% debentures to these debenture holders or new debentures so so you this is barter system you have credited here no so debit 12% debentures of B limited and credit 133% Dees don't write 13% dentes of P Limited in P limited books will we use P limited name or not required so if you write de 13% debentures that automatically means that this de debentures belongs to P limited only same value no change in value okay sir all right the last one is amalgamation expense it's a merger method yes and we are doing an adjustment in reserve means it's a case of a loss for amalgamation expense what is the journal entry sir for merger method amalgamation expens not res statutory Reserve you're telling me the entry for statutory Reserve I'm asking the journal entry for amalgamation expense born by P limited for merger method that depends on the scenarios uh so basically the entry is General Reserve account debit to bank account or usually I told we study material passes this entry through pnl so the entry for amalgamation expense will be pnl account debit to bank account in my opinion even if you write General Reserve to bank it should be okay okay so that's your entry based on this entry you need to prepare new balance sheet balance sheet can you manage to merger method so that means will will you have even one asset revalued no line by line balance sheet you need to add take selling company balance sheet value take purchasing company balance sheet value go on adding one by one by one don't add share Capital that's why okay because you can't take over selling company share Capital you will issue new shares as PC that's the only drama can you manage that okay one problem around PC I would like to manage that's okay I believe there's one different kind of PC problem which quickly we'll run through sun limited and Neptune limited have been carrying on the business independently they agreed to amalgamate and form a new company Jupiter limited share capital of Jupiter is rupees 4 lakh divided into 880,000 shares of five each keep this in mind new share Capital face value is not 10 normally we assume face value of new face value of equity shares to be 10 don't assume 10 here because they will not give the adjustment again because they G the first line only new new company new Equity shares face value is only P keep that in mind all right now they have given chin to assets and liabilities of sun and Neptune they also told revalued amount so the moment they say revalued amount merger method or purchase Method obviously it is a case of purchase meod will we take over Book value or only revalued amount because net asset means assets taken over at agreed value so this is value we have to take over yes or sir datas and creditas includes 45,000 owed by son to Neptune so this only we call it as inter compan transaction or Mutual ownings where will we eliminate Sun books Neptune books or new company books only in the books of new company both datar and credit will be eliminated that's why okay all right pc pc will be satisfied by issuing shares and debenture so debenture is not PC sir if you give something to the debenture holders of selling company if you give something to the purchasing company give something to the debenture holders of selling company are debenture holders of selling company owners sir PC means what you give it to the owners is debenture holders selling company owners no to them if you give anything it is not PC to the equity shareholders and preference shareholders whatever you give you can give cash you can give debentures you can give Equity shares you can give preference CH doesn't matter whatever you give everything will be considered as PC itself so here clearly they only told PC is satisfied both by issuing shares and debentures the shares and debentures are given to equity shareholders and preference shareholders no information about preference shareholders so I'm thinking it's given only to equity shareh holders okay 60,000 Equity shares to Neptune and star in proportion of profitability of respective business so totally how many Equity shares will be given new by new company 60,000 okay there is one selling company here or two two two selling companies because who is the new company Jupiter sen is a selling company or in fact both are what sir selling selling company here that means owners of selling company will get PC how much PC is given in the form of equity shares 60,000 the 60,000 you have to distribute to Sun Also to Neptune also based on what they told in proportion or in the ratio of profitability but they also told based on average net profit for last three years so you have to find out average net profit in that average net profit ratio 60,000 will be distributed first let's find out average profit take your calculator find out the average of this for me in fact they only done here if you want can also confirm these three average how do you find out average if they give you three years profit add all the three years profit divided by three if there's any loss in between means what do you do profit means you'll add if any ear in between has a loss you need to subtract so average if you do for sun it is 275 for Neptune 325 correct yes sir 275 and 325 IS average net profit so in this average net profit ratio you have to distribute 60,000 shares me telling or problem telling problem telling so so what is the ratio of this 275 is to 325 so 60,000 basically of portion in 275 is to 325 ratio how much will sun get if you calculate this 60,000 in doing this ratio 300 300 600 so 27 500 yes sir yeah so sun will get 27500 shares because 60,000 is not the value it is the number of shares Neptune will get same 60,000 into 32500 or 325 divided by 600 that is if you do that r you'll get 32500 shares and each share we want PC means number of shares or value of shares value of shares don't multiply 10 value is only five they gave in the first line only mistakes there okay common small mistakes can kind of bring you down big time so keep it track of that so 25,000 shares each value five so how much is the value 137 500 30 to 500 into 5 will give you 162 find this is equity shares given as PC is PC given only in the form of equity shares or also debentures also debentures check what are they saying for debentures 15% debentures in Jupiter limited new company at par to provide income equivalent to 8% return on Capital employe stop there sir do we know this Capital employed yeah Capital employed is nothing but shareholders funds which is nothing but net assets okay so we may not understand whole thing but at least little bit we understood which is what sir 8% return on Capital employed that means first we need to calculate net assets multiply 8% on that that much we have got it so first let's calculate that net assets means Book value or agreed value agreed value sir for PP and current assets we can't take over this is a book value this is a revalued amount so what should we take revalued am so take your calculator 710,000 plus two only two assets are there one liability is there that's all 710,000 is a revalued amount of pp revalued amount of current assets is $ 299 500 and current liability value is 5 lak 97,000 dedu current liability value how much are you getting 42,000 that's what they've done here assets they've added liability they've deducted but agreed value you're going to get 12 42,500 this is for sun same thing if you do it for Neptune you're going to get 3675 agreed sir there's net assets sir you want net assets or what did they say 8% return on Capital employed you got your Capital employed which is nothing but net assets calculate 8% this 33,000 for 42,500 into 8% if you do you're going to get 33,000 3675 into 8% if you do you're going to get 29 correct that's what we said now let's come back to the adjustment and read it again 15% debentures in Jupiter limited are issued at par to provide an income equivalent to 8% return on Capital employment you have to give debentures in such a way that the income to the de benture holders the income to the debenture holders should be equal to 8% on Capital employed how much is 8% on Capital employed 33 and 29 for let's concentrate on sun for the time being what is 8% of net assets or Capital employed 33,000 you have to give debentures in such a way that the return that the debenture holders will get should be equal to 33,000 is my statement right I'll repeat it once again you have to give debentures to that extent where the return return to the debenture holders should be equal to 33,000 okay now think sir what is the return for the debenture holders if you buy some other company debentures if you invest in some other company debentures what is the return for you interest yes or no excuse me so what indirectly they're telling is issue that many debentures where interest on new debentures will be equal to 33,000 because the return for the debenture holder is nothing but interest so you have to issue that value of debentures where the interest amounts to 33,000 so how do you calculate interest on debentures can you give me in Formula debenture interest is nothing but debenture value multiplied by the interest rate correct we take debenture value multiplied by rate so if I give you debenture interest if I give you interest rate can you find out debenture value for me yes sir how do you find out debenture value debenture interest divided by interest rate that is what is given over here do you know the interest amount 33,000 do you know interest rate yes what perc debentures are these 15% that means these are these debentures carry an interest rate of 15% interest amount is 33,000 interest rate is 15% so basically to get debenture value we simply have to do debenture interest divided by debenture interest rate so 33,000 divided by 15% 15% if you have to express in full number it will be 0.15 do that how much you going to get 220,000 similarly same thing here also interest amount is 29400 interest rate is 15% so what will be the debenture value 1 lak 96,000 that's your PC if you add these two you're going to get PC okay so directly they ask you to prepare balance sheet directly they ask you to prepare balance sheet this is which method asset got revalued so which method purchase Method in purchase Method you have to compare PC with net assets and you'll get Goodwill or capital reserve but is that working oute compulsory no when you pass journal entry number two you'll get Goodwill or capital reserve as a balancing so journal entry number two is a substitute for that working but in this problem did they ask you journal entry or no journal entry so I will prepare journal entry God help you you can but wastage of time yes they've not asked journal entry so why do you waste time that means in this problem we have to prepare Goodwill or Capital Reser as a working so compare pc pc is given in two format Equity shares and debentures for Sun Also for Neptune compare it with net assets net assets also we have already calculated for this working note Capital employed is what which is nothing but net assets all things are already there just compare you'll get Goodwill or capital L here P net asset was 42,500 but PC was 357 so net asset means net worth of a business worth of a business is 4 lak2 but PC paid was only 357 so you paid more than the Worth or less than the worth less so purchasing company made a loss or profit profit so capital so in both the case you'll get capital reserve use this capital reserve and prepare balance sheet that's balance sheet also now don't say Book value this is merger method or purchase Method purchase Method so take what sir what value you need to take agreed value okay fine one is equity share Capital you're preparing amalgamation or balance sheet in whose books Jupiter books what will you write as equity share Capital what will you write as equity share Capital sir Jupiter limited issued how many shares 60,000 shares don't write into 10 each face value is five so you'll write 60,000 into 5 3 lakh is your equity share Capital then you'll show non-current liability then you'll check the balance sheet you will not find any debenture here and you will miss but denture is still there it may not be there here but was PC given as debenture yes so that means PC is given in the form of debentures here it is there no this 220 and 196 this debenture is issued by new company that will be there so that is what I've written working note number two here okay where here yeah this only 220 and 196 if you add this you're going to get 4 lakh 16,000 sir in fact this is your reserves and surplus reserves and surplus we have capital reserve here what is the capital reserve 64,000 so that I've written it over rest all the assets you copy from question balance sheet but don't take Book value because it is not merger method it is purchase Method for merger method we only take book qu of assets liability and reserves and surplus but for purchase Method we take over all the agreed value if agreed value is not given we assume that agreed value and Book value are same in that case you can take Book value in all other case for purchase Method compulsorily you have to take over agreed value purchase Method okay so these are some of the types of problems which I saw okay so with this we have completed amalgamation full revision thank you so let's do a thing let's take about 45 minutes break and come back it's about 220 now can we catch up at 3 yes sir I have around two more topics to be covered so by four is a deadline so by three can we all assemble here people yes okay yes thank you for your wonderful patience and sorry for delaying it a little later today I'll get it corrected tomorrow bye I'll just plug out the things online people so you may see the screen as blurry it's fine I'll reconnect back in about 40 minutes yeah or anyway I think it's charging so it's fine I think I'll leave the screen open there that's should be okay oh sir where will I get this PDF if I told no Daran garu at the beginning you can purchase it from our website learn. aru pro.com watch the video at the beginning I've showed you where to purchase it from I've showed you that website okay thank you yes people welcome back so now we'll be revising cash flow statement cash flow statement is a treatment accounting treatment is given in accounting standard three so Cash Flow State m is simply a statement which captures cash coming in and cash going out of the organization simply an inflow and outflow of cash is tracked and that tracking is done by a statement called cash flow statement so don't be misled by the term cash cash here refers to both cash in hand as well as cash at bank and we don't track just cash coming in and cash going out we track cash and cash equivalents coming in cash and cash equivalents going out cash for this purpose both includes cash in hand as well as cash in Bank next we need to know what is Cash equivalent so name itself saying cash equivalent cash equivalent means it is not cash but it is as equal to cash or it is as good as cash so what does cash equivalent mean is simply so it's investment short-term Investments we usually call it as cash equivalents so but this s every short-term investment is Cash equivalent no if you want to call it as cash equivalent ENT it has ideally three features one the majority the total holding period of this investment should not exceed 3 months from the day you buy within three months you should sell it off total period of holding should not be more than three months that is one of that investment car and two it should be readily convertable into known amounts of cash meaning by sell the investment how much money you'll get you should be able to tell it with reasonable certainty and it should have insignificant value change risk meaning that investment value should not fluctuate too much there should be only a moderate or limited amount of fluctuation if it is significantly varying like in in case of equity shares if you buy any company Equity shares its value may increase by 20% tomorrow it may reduce also correct so that means value change risk is low or high high so Equity shares if you purchase some other company Equity shares is an investment that is not considered usually as a cash equivalent because it has high value change risk for you to call it as cash equivalent one its maturity should be less than three months it should have insignificant value change risk and two it should be readily convertible into known amounts of cash so if all of them are satisfied you can call it as cash equivalent and what does cash flow statement basically track sir inflows and outflows of both cash as well as cash equivalent this particular inflow and outflow no we put it under three buckets or three categories those three categories are operating cash flow investing cash flow financing well cash flow some of the examp examples of operating cash flow will be name it is saying operating cash flow something which is related to our day-to-day operations like cash purchases cash paid to creditor cash sales cash received from dear some employee cost paid some rent paid some electricity paid all these are part of your operations so any cash paid towards this will come under operating cash flower okay so these are the common examples of operating cash flow next is investing cash flow inves in cash flow means think where and all can you invest first within the organization where and all can you invest purchasing the property plant and equipment so if you purchase any PP it's an investing activity cash flow if you can purchase it you can also sell it so sale of pp also is an investing activity purchase of intangible asset sale of intangible asset is an example of investing cash flow next you can invest elsewhere outside the organization where you can invest you can buy some other company Equity shares or some company debentures so investment purchased is an investing activity if you can purchase investment you can also sell those investment so sale of investment also is an investing activity so if you purchase some other company investment what will you get in return dividend so dividend is received because you made an investment if investment purchased is investing activity the dividend received on those investment is also investing activity so dividend received on investment is an investing activity then if you purchase some other company debentures then what will you get interest so interest received also is an investing activity so these are some of the examples then financing activity some of the examples is think where and all can you raise the finance or how and all can a company raise Finance one by issuing Equity shares so if you can issue Equity shares you can also buy back Equity shares both are financing activity then issue of preference shares if you can issue preference shares you can also redeem or cancel preference shares that is also financing activity you can is debentures and also you can cancel or redeem debentures that is also financing activity or you can take a bank loan normal bank loan taken and bank loan repay also financing activity on loan debentures and all what do you pay interest so since loan is a financing activity interest paid on that loan is also financing activity on Equity shares preference shares what does the company pay dividend so div since Equity shares and preference Shares are a source of Finance dividend paid on those Shares are also are a dividend activity so these are some of the common examples that you find in the problem with respect to those components yes sir okay next sir your operating cash flow operating cash flow can be found out under two methods one is the direct method and another one is the indirect method only to find operating cash flow there are two methods for investing and finance there is no method direct method means like cash receed from datar cash sale those sort of information will be directly given to you in the question or they will give you some components through which you can find out these these things so if these sort of information if you can find out directly then we use direct method if cash received from datar cash pay to credit or cash sale employee expense paid all these information are missing then we use another method called or popular method called indirect method under indirect method what do you do is we use profit as a base and from profit we try to find operating cash flow we take profit as a base and try to find operating cash flow so are we getting this operating cash flow directly or through some jugar we're doing some all this heres or extra Affairs right from profit we are getting operating cash flow hence the method name is indirect method okay so the main thing that you have to know in cash flow statement is Sir which profit have they given to you in the question so profit order have spelled out over here some so from pbit if you deduct interest you're going to get PBT profit before tax from that if you deduct tax you're going to get profit after tax then starts all your Appropriations like transferred to reserve crr created etc etc or Equity Dividend preference dividend paid etc etc after doing all this appropriation whatever balance in pnl remains that only you will show it in balance sheet that only we used to refer in our class purpose as profit after all the adjustments okay so in some problems may they will give you profit after all the adjustments sometimes may they will give you profit after tax some problems may they will give you profit before tax so the first thing that you have to do in cash flow statement is find out what sort of profit is given to you in the question accordingly adjustments will vary if you try to mug up cash flow statement cash flow statement can be a real problem for you but if it you approach it logically question only has 90% of the solution hardly anything is there some information will be missing where you have to put up Ledger and figure it out so cash flow statement according to me is very easy provided your approach in a very logical way the moment you say I will mug up this this comes means plus that comes means minus if you start approaching like that cash flow statement can be a nightmare okay so don't go into that Zone over here this need not be moned up okay so first identify what sort of profit is given to you in the question we'll also do the question first I told you first we will revise everything through the chart book then we'll apply it in couple of problems based on the time we'll decide how many problems can we can take it out done so first is this then sir sir under indirect method how do you get operating Cash Flow by using profit as a base suppose they give you profit after all the adjustments suppose they give you profit after all adjustment so same thing let's say profit after all the adjustment is 10 lakh same thing can we make it as operating cash flow profit after all adjustment itself can we take it as operating cash flow no why sir sir this is profit profit means it include every expense whether it is Cash expense or non-cash expense you'll transfer it to pel whether it is operating expense or non-operating expense everything will be transferred to pel whether it is operating income or non-operating income everything will be transferred to P so profit after all adjustment itself you can't treat it as operating cash flow you need to do certain adjustments and adjustments have called out over here so suppose they give you profit after all the adjustments don't do this adjustment blindly don't do this plus minus blindly you can do this plus minus only if you give they give you what profit in the problem profit after all the adjustments if they give you some other profit then means all whatever you're doing here addition no maybe ignored so I'm just taping so that's a reason in cash flow statement finding what sort of profit is given the question is very very important suppose they give you profit after all the adjustment so first adjustment that you need to do is if there is any noncash expenditure you need to add there is a non-cash expenditure you need to add now think one of the examples of non-cash expenditure is depreciation or amortization depreciation is on property plan and Equipment amortization is on intangible asset now is depreciation an expense yes due to that expense what will happen to your profit profit will reduce so under indirect method we want profit or we want operating cash flow we want operating cash flow but how are we getting operating cash flow from profit so due to depreciation your pnl balance has reduced from pnl only we getting operating cash flow no so if pnl balance is reduced means operating cash flow also indirectly has reduced correct due to what depreciation but did any cash go out because of depreciation I am depreciated by asset by 10 lakh rup or 1 lakh rupees did my cash go out of lakh rupees or it's a non-cash expenditure depreciation amortization and all is just a bookish expenditure it's a non-cash in nature there'll be no cash outflow or cash inflow due to depreciation but due to depreciation pnl has reduced so because of this operating cash flow has also reduced but cash did not go out hence what do we do to restore we add back so if there is any non-cash expenditures we need to add back that's the first adjustment we shall do so some of the examples of non-cash all this I've seen the problems and brought in the adjustments so some of the common example of non-cash expenditure is depreciation amortization transfer to reserve preliminary expense written off miscellaneous expenditure written off discount on issue of debentures shares cannot be issued at discount but debentures can be issued at discount so all this if it is there means it's a non-cash expenditure due to this your pnl has reduced so due to pnl reduction operating cash flow has also has reduced but cash is not gone out but cash flow is reduced hence what do we do add that's a first adjustment for this okay all right next is non-operating expense if you have sir you don't have to call out the category I've called out the category that non-cash expense only for your reference in examination simply do plus minus you don't have to tell whether it is non-cash expense non-operating expense and all you don't have to identify simply do plus minus that is good enough so next is if you have any non-operating expenditure we need to add that some of the examples of non-operating expenditure could be interest so now interest paid so interest paid interest you will pay on what loan taken or debenture issue yes on loan taken or debenture issued you will pay interest interest paid is what activity fin financing activity but interest is an expense will expense be transferred to pendl yes so this interest expense has gone to pendl due to this interest expense what has happened to pendl pendl balance has reduced any expense will reduce the profit correct so profit is reduced means from profit only we're getting operating cash flow so since pnl is reduced your operating cash flow is also reduced okay due to interest paid your operating cash flow has got reduced but interest paid is operating activity or financing activity it's a financing activity but operating cash flow is reduced hence what to do add since pnl got reduced operating cash flow also is reduced but it's a non-operating expenditure hence we add same goes for your loss on sale of asset so you have sold an asset at a loss so sale of asset is what activity investing activity so if you have sold an asset at a loss means loss where will you transfer it to P so loss if you transfer to pendl what will happen to your pendl balance pel balance will reduce so if pnl balance is reduced means from pnl only we are getting operating cash flow so pnl balance is reduced means operating cash flow is also reduced but sale of asset is operate is operating activity or investing activity investing activity but due to this transaction operating cash flow has unnecessarily got reduced hence what do we need to do add so like that okay same thing goals for proposed dividend also profit after after all the adjustment means dividend is also adjusted but but but but just to give you a context suppose you take if they given profit before taxing the problem suppose they give you profit before taxing the problem then should we have to do anything for dividend sir no because profit after tax means what sir here profit before tax means is dividend already deducted or yet to be deducted so profit before tax means dividend is not yet deducted if it is not yet deducted means has profit reduced no so in that case will you add it or ignore ignore so only if they give you profit after all adjustment then dividend is already deducted dividend is already deducted okay so so due to this dividend adjustment pnl balance is reduced if pnl balance is reduced means operating cash flow is also reduced but dividend paid is operating activity or financing activity it's financing activity but unnecessarily your operating cash flow is reduced hence what do we do add so here we'll add back only because it is profit after all the adjustments suppose if you had chosen profit before tax or profit after tax dividend adjustment simply we will ignore because it is not yet deducted like that so that's a logical way fine enough okay next non-operating income if you have any non-operating income means you need to reduce one of the example of non-operating income isans interest received or dividend received so interest received is an income so where will you transfer this income to P account where will you usually transfer income and expense to P so interest received is an income income will be transferred to pnl what is the impact fact this interest will have on your P interest received due to interest received what will happen to your pnl balance due to this interest income pendl balance will increase because it's an income an income if you transfer it to pendl means pendl balance will increase if pendl balance increases means indirectly your operating cash flow also will increase because from P only we getting operating cash flow so due to this adjustment your operating cash flow has increased but interest received is what activity you'll receive interest on your investment you'll receive dividend on your investment so this is your operating activity or investing activity interest received or dividend received is an investing activity but your operating cash flow is unnecessarily increasing hence to restore what do we do minus so if you have any non-operating income like interest receive dividend receive profit on sale of assets and all you need to reduce it okay this is one then we also give the effect to working capital changes working capital changes means uh we just check what sir current assets and current liability some of the examples of current assets could be your datar bill receivable etc etc so compare current opening balance with the closing balance compare opening balance and closing balance you compare and you'll find out whether the current assets have increased or whether it has reduced by comparing opening and closing balance we get the increase amount or decrease amount increase in current assets means minus decrease in current assets means Plus increas in current liability means a plus decreas in current liability means minus sometimes they'll directly give you working capital instead of current assets and current liability directly they'll give you working capital increase in working capital means sir how do you get working capital working capital is nothing but current assets minus current liability if working capital is increased means indirectly they're telling current assets are also has increased because this increase in working capital can only happen if current asset has increased there's another scenario also leave that out so if current asset has increased means what do you do minus so increase in working capital we will minus decrease in working capital we will plus the logic of each plus minus I've given you with illustration okay now we'll not waste the time in going into that logic not the right time to discuss that okay sir all right sir I getting confused between this plus minus sir what to do sir I did not attend your regular class sir now tell me the logic sir I'll not tell you the logic but I'll tell you a shortcut one is we'll take this datar let's say datar opening balance is 1 lakh closing balances become 70,000 opening balance of datar 1 lakh closing balance has become 70,000 so compared to opening balance closing balance is reduced no that means what is this now datar balance has reduced so decrease in current assets means plus decrease in current assets means plus logically you think sir how one lakh became 70,000 how 1 lakh became 70,000 30,000 rupees the cash has been received from datar so when you're preparing cash flow statement cash flow statement is not an account it is a statement cash coming in we show it as a positive number cash going out we show it as a negative number here from one lakh it has become 70,000 means 30,000 cash we have received from data cash received means it's an outflow or inflow inflow inflow means you'll show it as a positive number like that you can remember one if you remember this is a current asset no one if you remember automatically other you can construct this is not the actual logic I've told you the actual logic with The Ledger but I don't have time to go into that all that now so easy way to remember the equation is just compare one you remember like dataa decrease you try to remember automatically you construct the other ones like that okay great so after doing all this working capital changes then deduct the tax tax paid is a separate category you have to show tax paid at the end as per accounting standard three so if you have any tax paay deduct that then finally you will get operating cash flow if this operating cash flow is positive we say cash flow from operating activity if this cash flow suppose is negative we say cash flow used in operating activity that's the naming given okay this is about operating cash flow for investing and financing cash flow we don't have all this drama there a normal method only for operating cash flow all this we have to do the drama okay fine sir this is about the method then some extra components we will discuss that will come as an adjustment usually in your cash flow statement problem one such adjustment is provision for depreciation sometimes one another name for provision for depreciation is accumulated depreciation either you can call it as accumulated depreciation or provision for depreciation so as I've discussed with you in regular classer there are two ways in which you can account a depreciation not charge depreciation I'm not talking about straight line method wdv method and all there are two ways in which you can account depreciation one method we call it as charge method another one we call it as provision method or accumulated depreciation method and what is the normal entry for depreciation sir depreciation account debit to PP account and depreciation is an expense you'll transfer that to P correct no that's what you've been doing since your 11th grade that we say we are following charge method if you're passing this then we say company is following charge method another method is there which is provision for depreciation method if company is following provision for depreciation then the entry for depreciation is depreciation is an expense so you'll write depreciation account debit but you'll not credit property plan and Equipment instead of crediting BP account you'll credit Prov for depreciation account all depreciation will be accumulated in an account called provision for depreciation depreciation is still an expense that will be transferred off to P that no entry the only difference is instead of crediting pp we will credit provision for depreciation okay sir so makes a world of difference how sir you bought an asset for 1 lakh rupees let's say you bought an asset for 1 lakh rupees first year you charge depreciation of 10,000 let's say you're following provision for depreciation method what is the journal interent will pass depreciation account debit to asset account or provision account depreciation account debit to provision for depreciation 10,000 and that that depreciation you transfer to P that means what sir did you even touch a PP Ledger here no did you debit PP or credit PP no that means whenever provision for depreciation account is maintained fixed asset Ledger will always be shown at highest value which is original cost because all depreciation is parked in which account provision account that means fixed asset ledger balance will never come down if you bought an asset for 1 lakh means it'll be at fixed asset Ledger every year will be shown at 1 lakh all depreciation account will get accumulated in provision for depreciation account that's a difference in first method asset ledger balance directly will reduce if you charge depreciation it will be PP account depreciation account debit to PP 10,000 that means PP Ledger if you bought it for 1 lakh means you would have credited by 10 that means PP ledger balance here will become how much 9,000 in charge method but however in provision method PP ledger balance will be still shown at 1 lakh only that's the difference okay so it has a significance in problems I'll tell you but quickly I'll just run through the significance now then we'll apply it in one of the questions H okay the next thing is Sir how long will you maintain this provision account sir sir as long as you have the asset provision for depreciation account also will be maintained as long as you have the pp provision for depreciation account also will be correspondingly maintained yes sir so the moment is asset is derecognized meaning the moment asset is cancelled how will you cancel sir if you sell the pp or if your write off PP or if you have given it on finance lease if you remember as9 if not I will take you through that okay so if you have sold the asset or if you have written off the asset or if you have given it on finance lease in these cases you will cancel the asset if asset is no more there means provision for depreciation also will be no more there only provision relating to that asset if if you have 10 assets one asset if you sold means provision for depreciation relating to one asset will be cancelled like that so so when you sell an asset PP ledger balance also will come down provision ledger balance also will come down okay sir PP has what balance debit balance when you sell an asset so PPA balance you need to reduce it has debit balance how do you reduce it credited now since asset is not there should we maintain provision for depreciation for that asset not required provision has what balance look at the journal entry whenever you're accounting depreciation provision for depreciation you are crediting so provision for depreciation Ledger has what balance credit bance bance now we have to maintain that provision for asset sold or not required not required something which has credit balance how do you cancel debit so that means the journal entry when you sell the asset you will passes provision for depreciation account debit to PP account like this relating only to the asset sold not entire provision you will not close only that asset which is sold only that their provision you will close yes that is one that's what I've written over here done okay so in provision for pro provision for depreciation I've given so check sir provision for depreciation just know we discussed it has what balance any provision for that matter has what balance credit balance that means it like liability liability opening balance visualize where it will come when you prepare a ledger liability opening balance where it will come credit side so you'll write by balance brought down opening balance comes on the credit side means closing balance on the debit side correct now if an asset is sold means is provision for depreciation required for that asset sold or not required not required what is the journal entry to cancel the provision provision for depreciation account debit to PP so this entry if you post it in The Ledger it will come on the debit side this is one balancing figure is current year depreciation balancing figure that you get is nothing but your current year depreciation because what is the journal entry for depreciation sir what is the journal entry for depreciation here under provision method what is the journal entry depreciation account debit to provision for depreciation so when you post this entry in provision for Ledger what will be the entry you'll write by depreciation and where will that depreciation get transferred to P either you can write depreciation or directly you can write by pendl why because if you compare these two entries depreciation debit depreciation credit effectively it will be nullified so what is the two entries pendl account debit to Prov so if you don't want to write pnl you can also write instead of P you can write by depreciation it is fine so why do we prepare provision account sir so usually in some problems depreciation for current year no will not be given depreciation for current asset will not current year will not be given so when you open provision for depreciation account there will be a balancing figure that balancing figure is nothing but current year car depreciation usually to get current year depreciation we prepare this leer account that means if they have given current year depreciation we need not prepare this account sir yeah because even if you prepare all the components is Any Which Way given you can prepare it but no useful thing will come out of that ledger I'll prepare it in one of the problem and I'll show you so usually again we prepare this Ledger only to get current year depreciation sir asset is sold sir why will depreciation come sir all assets will be sold or only some asset will be sold only some asset will be sold only for those assets which is sold only for those assets provision will be closed yeah remaining assets will be there no on remaining assets you have to charge depreciation so this entry will come they will tell all this in the problems yes okay this is about provision for depreciation so do keep in mind so how to find out whether they've done charge method or provision for depreciation method in question sir check the balance sheet in balance sheet may they will use something called gross block then they will say reduce accumulate depreciation and then they will say net block the moment you see the word accumulated depreciation it simply means company is following provision for depreciation or instead of accumulated depreciation sometimes they will say deduct provision for depreciation that way you will get to know whether the company is following provision method or charge method they will specify this word provision for depreciation or accumulated depreciation in the question so it will not be a mystery once you read the question you should be able to figure it out that is one all right so next is with respect to Dividend okay so in dividend some problems what they will do is they will give you dividend payable or they will also call it as proposed dividend they can use whatever name proposed dividend dividend payable dividend outstanding whatever they will give you balance sheet usually in cash flow statement problem they will give you two years balance sheet last year closing balance will become current year opening balance that's the reason they will give you two years of balance sheet so that you'll be able to figure out the movements so in that balance sheet no Pro proposed dividend or dividend payable will be there they'll just give opening balance of dividend payable is 1 lakh closing balance let's say it is 150,000 like that they will give you the value nothing they will tell in the adjustment that's all in balance sheet you are able to see proposed a dividend or dividend payable in the adjustment nothing is given so what to do sir opening balance means opening balance means that dividend relates to current year or last year last year your company lost students once the dividend is declared can you keep it out understanding or it has to be settled within 30 days once you declare the dividend within 30 days you have to pay yes or no now opening balance of dividend means it relates to last year last year already passed current year also already passed can you keep last year entire dividend outstanding sir so what is the rational assumption whatever is a dividend relating to last year will be assumed to be paid in the current year that is the Assumption you'll make okay so that's what I've written over here so if they only give you dividend opening and closing balance assume what sir last year dividend is paid in the current the rational assumption because you can't keep last year dividend and on outstanding like that so proposed dividend format is also same proposed dividend is also a liability where will liability opening balance come credit side so buy balance brought down on the credit side then closing balance on the debit side so if this is one lakh let's say this is 150,000 if they give you no other information that's all they give they give two years balance sheet opening balance is one lakh closing balance is one and a half lakh so what will you do now tell me this one lakh relates to last year so what will you assume this is paid in the current year what's the journal entry for credit are paid credit are to bank what's the journal entry for dividend payable paid same confidence dividend payable account deit to bank so when you pay this the amount is dividend proposed dividend or dividend payable to bank how much one L this one lakh relates to last year we'll assume that it is paid in the current year that means this side total will be two and a half lakh in my example here also it should be two and a half lakh is it matching or you're getting balancing figure of one and a half lakh you're getting a balancing figure of one and a half lakh what is that so dividend only you declare it in last year or every year you may declare every year you may declare that means this is what sir one and a half lakh Rupees is a current year C dividend think logically when you declare the dividend pnl balance will be same or it will reduce reduce what's the journal entry for dividend payable pnl account debit to proposed dividend yes or no because due to Dividend pnl balance will reduce so pnl account debit to proposed dividend or dividend payable whatever name you get so when you post this entry in proposed dividend Ledger the posting will be what by P that is nothing but current year C dividend arrived as a balancing figure okay so this is assumption what is assumption last year dividend we assumed to be paid in the current year when will you make this assumption in every problem no only if they give you opening balance and closing balance and no other information is given only in that case we assume last year balance is paid off and you make the same assumption for provision for taxation also same assumption you'll hold will hold good for provision for taxation also same logic provision for taxation means tax you have to pay pay to the government opening balance means it that provision for tax that tax relates to current year or last year last year last year has already passed current year also has already passed last year tax entire thing will be outstanding or it will be paid to the government it'll be paid to the government so same adjustment if they just give provision for taxation opening balance and closing balance and nothing else only opening and closing if it is given whatever is opening balance we assume that it is paid in the current just substitute the word instead of proposed dividend substitute with provision for tax that format also I've called out here provision for taxation also is a liability opening balance this is closing balance when you pay the journal entry is provision for taxation account debit to bank so you pay the tax only once or every year every year that means every year you have to make the provision and every year you have to settle what's the journal entry to make provision when you make provision for tax pnl balance will reduce so what will be the journal entry pendl account debit to provision for tax so when you post this entry in provision for tax the posting will be by P there's nothing but your current year provision correct so like this done okay this is one thing and another some highlights you need to keep in mind is Sir under indirect method no we are only bothered about opening balance of current assets and closing balance of current assets only that you do it accordingly if current asset balance is increased means you minus decrease in current assets you'll do it as plus sometimes in the adjustment they will give you bad debts relating to debt RS 10,000 discount allowed 5,000 all that Chum you ignore you don't have to do anything because under indirect method we only compare opening balance with closing balance rest of the components I've told you the logic it has already gone to Pendle so that means that adjustment is already done because bad debts means bad debts is already transferred to pendl again if you give it adjustment no the cash flow statement will not match so as per as current assets I'll not go into details of all this we have done problems also based on this in question okay so if you refer the notes those of you are saying my students you'll be able to get this for others you can just remember like this okay as far as current assets and current liability is concerned we only take into account opening balance and closing balance and find out whether the current asset is increased or decreased other adjustments if they give you like bad debts discount allowed discount received from creditors whatever they give Chum put one line me no need to actually put a line simply think that it is not there and move okay like that then do not forget one hidden adjustment called interest in the balance sheet they will say 10% Loan in the adjustment they will not say anything that means what sir interest on debenture has to be accounted do not forget that okay they will not give you sometimes interest adjustment will be given as adjustment but sometimes in the balance sheet only if they say 10% loan 9% interest and all do not forget to consider the interest both under operating cash flow and under investing cash flow so why under operating cash flow sir interest expenses already transferred to PN due to interest expense pnl balance has reduced under indirect method from pnl only we are getting operating cash flow so if pnl balance is reduced means operating cash flow is also reduced but interest expense is not an operating activity it's a financing activity but operating cash flow is reduced hence what do we need to do in operating cash flow you need to add and later on you'll pay this interest expense no interest payment is what what activity financing and a financing activity you need to minus okay so do not forget this this will be a hidden adjustment in majority of the questions that is one so with there all the concepts we have done now can we quickly run through some of the questions first is your RTP question RTP made 24 questions so the moment they say retained earnings name is saying retained earnings retained earnings simply means after doing all the adjustments how much of profit remains whatever is profit remaining after all the adjustments only we call it as retained earnings that means in this problem what have they given they have given you profit after all the adjustments that means everything dividend dividend transfer to reserve everything is already considered so that means that whole format what I've given will hold good in this Pro so that theyve given a 17,000 so simply you need to check this adjustment accordingly tell me plus minus first depreciation due to depreciation pnl balance has reduced so pnl balance is reduced means operating cash flow also has reduced but it's a non-cash expenditure H what to do add back so depreciation you need to add back loss on sale of Machinery due to this loss pnl balance has reduced so operating cash flow also has reduced but loss on sale is not operating activity it's an investing activity hence what to do but operating cash flow is already red hence what to do add that next provision for tax sir tax nothing no sir tax paid you have to show it as a separate category at the end okay so when you make provision for tax what is the journal entry for provision for tax the journal entry for any provision is what pnl account debit to provision respective provision here it will be provision for tax how much have you made 7,000 correct so if you debited pnl means pnl balance will increase or reduce P visualize pnl you will show it in your reserves and surplus that means it has credit balance so due to this provision pnl you have debited means pnl balance has reduced okay what do we need to do add because tax paid you show it separately so we don't want provision for tax we want tax paid so sometimes whatever you make provision that much only you will pay provision for tax is estimated tax provision for tax means estimated tax will you do the estimate so nicely that that only you will pay to the government or your estimates can go wrong sometimes you may make a lesser estimate or you may make a higher estimate so whatever provision you have made this much profit has reduced so add back so first you will add back this tax paid probably they will give it at the end we will consider it later for now add back provation for tax correct interim dividend paid so what is the journal entry for interim dividend paid interim dividend account debit to bank account that interim dividend you'll transist it from you'll pay dividend out of profits only only if company pays makes profit only such companies will pay dividend so due to Dividend pnl balance will be same or it'll reduce due due to Dividend your pnl balance will decrease yes or no so what profit have they given you in the problem profit before tax or profit after all adjustment they have given profit after all adjustment that means has been has this dividend already deducted from pendl yes but dividend paid if dividend is already reducted from pendl means your pnl balance has reduced from pnl only you're getting operating cash flow if your P balance is reduced means your operating cash flow is also reduced but dividend paid operating activity or financing acity it's a financing activity but operating cash flow is reduced what to do add that why the key point there is this is profit after all adjustment suppose this was profit before tax or if it was profit after tax this adjustment I would have ignored I would have not added also I would have not subtracted also why so when you say profit before tax when you say profit before tax or profit after tax is dividend already deducted or yet to be deducted if you take profit before tax or profit after tax dividend is not yet deducted that means profit is not yet reduced then why are you adding back is said okay only if you take profit after all adjustment then only there apportionments and all you'll add back otherwise you will ignore like this okay sir since in this problem it was profit after all the adjustment dividend is already deducted so we add that that's one next dividend paid sir dividend paid again this is Sir they only told before no sir sir interm dividend means dividend declare between two annual General meetings it's like like shareholders are continue ask continuously asking dividend dividend dividend company told take and keep Qui some amount you give for the time being and say take it and shut your mouth after the year closes then we will give you the final dividend so this is your interim dividend meaning it's a CH dividend time being dividend okay this dividend paid is your final dividend that they're talking about okay sir all right so what do we do for this this is your proposed dividend or final dividend fine sir that means here two dividends company has given interim divid also final dividend also so when you pay the dividend what sort of profit is this profit after all adjustments so that means this due to this dividend your pnl balance again has reduced but dividend paid is operating activity or financing activity financing activity but your operating cash flow has reduced hence what to do add back this premium payable on Redemption of preferen shes premium payable on Redemption of preferen shes sir premium payable and Redemption of preferen is a loss sir I will transfer it to Securities premium sir yes sir you're right sir but have they told company has Security Premium anywhere here sir no sir that means what sir here premium payable on Redemption of preference is not transferred to Securities premium it is transferred to P because you can transfer premium to Securities premium only if Security Premium has a balance if it doesn't have balance then this premium which is a loss will be transferred to p& itself okay so I want to assume secure company has Security Premium in those these sort of problem don't assume that you'll lose marks okay so in this problems premium and all will be transferred to pel itself so premium is a loss this loss has been transferred to pel means P due to this loss pnl balance has reduced if pnl balance is reduced means operating cash flow also has reduced but premium payable on Redemption Redemption of preferen is what activity operating activity or financing activity financing activity but due to this your operating cash flow is reduced hence what to do add like that okay next profit on sale of investment do you have sold some investment at profit so there's an income due to this income your pnl balance has increased so your operating cash flow has also increased but sale of investment is operating activity or investing activity investing activity but your operating cash flow has increased hence what to do minus 10,000 you have to minus last refund of tax sir what is the journal entry for refund of tax when you make what is the journal entry for provision for tax D to provision for tax now you have received a refund so the journal entry will be bank account debit how much is a refund you have received 1,000 so bank account debit 1,000 you have to credit something no you'll credit PN account bank account debit to P account how much 1,000 rupees normally you set it off with provision and all leave that that's all right so in this you can take it as bank account debit to provision for tax even if you write provision for tax that means this provision for tax will not be 7,000 it will be 6,000 I've already given the effect of this 7,000 no so don't have to touch provision again directly we'll write Bank to P okay sir everybody so tell me sir what happened due to this adjustment because of this adjustment pnl got credited pendl already has credit balance again if you credit means its balance will increase so due to this adjustment your pnl balance has increased pnl balance is increased means your operating cash flow also has increased but tax speit we show it a separate category now for the time being reduce it for the time being you reduce it later on we will see as a separate category may we will show so this 1,000 has to be deducted so if you do all this plus minus or in fact some more are there okay this is one next is what sir additional information they've given 31st March 2022 that is your previous year current year is 31st March 2023 so they have given some components they've given components of current assets and current liability this only is what sir your working capital changes check trade receivable trade receivable means your dats and Bill receivable put together generally many companies will not have Bill receivable that's the reason we say datar itself is trade receivable actually datar and Bill receivable put together we call it as trade receivable most of the case this will not be there hence we say datar okay how much is the opening balance of dears previous year closing balance will become current year opening balance so this is your basically opening balance this this is your closing balance opening balance is 10 closing has become 12 so current asset has reduced datar has increased or reduced n has increased so how much it has increased by 2,000 so increase in current assets means what you have to do minus so reduce this trade payable 7,000 has become 15,000 from 7 it has become 15 so it has increased increase in current liab ility means what do you do plus provision for tax for provision for taxation we do a separate Ledger I've showed you the format can we do off the separate Ledger how much is opening balance seven how much is closing balance 4,000 oh rather 4,000 and 7,000 okay sir they've given opening and closing balance sir opening balance will assume it is paid sir no no no no what did I say only if they give you opening balance of provision of a tax and a closing balance for provision of tax and no other information sir here no other information or you know provision for tax also provision made in the current year information is also given in this problem so in this problem I don't assume the thing which we just now discussed what we discussed will only hold good they've given only opening balance and closing balance and no other information your information is given yes so first write opening balance how much is the opening balance of provision 4,000 then how much is the closing balance of provision 7,000 opening balance liability opening balance credit side closing balance debit side okay no current year did you make any provision for tax yeah how much 7,000 what is the journal entry to make provision for tax pendl account debit to provision for tax so what is the posting of this entry in provision Ledger it'll post it as by pnl 7,000 any other information or that's all that's all so this side total is 11 that side also should be 11 but you're getting a balancing figure of 4,000 that is what sir tax paid okay sir ionically here opening balance itself is paid but it need not be in every case here it is working out but don't make that assumption in every every case hope everyone is good any doubt here okay one minute I'll come to that sir tax paid sir where will you show as a separate category at the end so the end May don't show 4,000 show only 3,000 why don't show 4,000 show only 3,000 why sir you paid 4,000 to the government government was so nice they gave you 1,000 back that means effectively how much have you paid 3,000 rupees so in the end when you prepare cash flow statement here no you will not show tax paid as 4,000 you'll show it as 3,000 rest of the adjustment same thing we discussed plus minus you do you'll get operating cash flow net operating cash flow okay sir okay and in fact maybe this also we'll discuss of prepaid expenses opening is 2,000 closing is 1,000 so prepaid expense is also a current asset no opening balance is two closing balance is one so current asset has reduced decreasing current assets means what do we do add add of 1,000 so they must have done it over here one I'll just quickly show you incre where is that decrease in prepaid expense 1,000 they plused like this plus minus you have to put it in this format and figure it out that's why okay the question solution starts from here some adjustments they've done it here done now okay next you check sir outstanding expense outstanding expense is a current liability opening balance is 1,400 closing balance is 1,000 from 1,400 it has become th means it has reduced decrease in current liability means plus or minus or minus so minus 400 they would have done it here check decrease where is that here decrease in outstanding expense that plus minus you do and you'll finally get your operating cash in that format me you put no need to write in this what is non-cash what is non-operating expense non-operating income like that category name and all not required simply take profit and go on doing the adjustment like here they've done add depreciation add loss like that you go on adding subtracting whatever it is finally you'll get the number okay sirg okay there's one this good problem with respect to refund of tax that's the only thing good thing out this rest everything is pretty much straightforward okay all right so this is about RTP question can we move on to the next excuse me this is your MTP question MTP March 24 W question from the following information calculate operating cash flow not whole thing only operating cash flow in the previous problem also it was same thing you don't have to prepare whole cash flow statement only operating cash flow sir theyve given you cash account such nice problem directly they've given you cash cash account itself s they give you cash account means in cash may you will have cash received from dears cash pay to credit cash purchase every cache data will be available no I mean should we use indirect method or we can use direct method here you can use direct method only because all the informations are straight away available okay now sir okay so first opening balance of cash and all not required they only ask cash flow from operating activity so First Cash sale cash sale is what activity cash sale have to erase this H better no you would tell or else answer better we'll check it later okay cash s is what activity sir it's an operating activity and what will you show in cash flow statement when there is an inflow you show it as positive number outflow you show it as negative number this you'll write it as o plus meaning under operating activity you will add this okay online also go on responding trade receivables this is Cash received from datas is it part of operation yes inflow or outflow inflow so plus yes okay next Trade Commission Trade Commission receed commission is also part of your operating activity only so that means this is also o plus okay sale of investment sir sale of investment is what activity investing activity under investing activity you will show it as plus loan from Bank you have taken a loan from bank so a loan taken from bank is a financing activity and a financing activity you'll write it as plus so all these are debit side in debit side of cash flow statement is all for receipts credit side of your cash account is for all your payments okay so this is interest and dividend they did not say whether it is received or paid so it's coming on the deit side so obviously the entry is cash account debit to interest your crediting interest means this is interest is an expense or an income so that means what is this this is obviously interest and dividend received so interest and dividend received is what activity investing activity under that you will show it as plus okay cash purchase cash purchase trade payable both are what activities in fact this also office expense all the three are what activity operating activity all these are payment so you'll show it as minus income tax income income tax also will come under operating activity only as a minus sir this is provision for tax this is cash account in cash account if they show income tax means this is provision for tax or this is tax paid tax paid tax paid also will come under operating activity so tax can come under other category also know sir yeah tax can come under operating investing or Finance anywhere suppose you have paid a long-term capital gain tax ltcg you will pay on sale of assets sale of asset is what activity investing activity so if you paid any long-term capital gain tax that should be shown under investing activity if you have paid any dividend distribution tax since the company has paid some dividend they pay dividend distribution tax then that dividend distribution tax is a financing activity cash DD those is established leave it but if they just give you income tax in the problem no other information is there you pay maximum tax related to your operation no hence tax no if they give no other information we'll show it under operating activity if no other information is available if they give further information the tax could come under investing and finance activity also no information put it under operating activity here any information is given or no info no info so you'll put it under operating cash what about investment sir this is investment purchase because it's coming on the payment side so this will be under investing activity it'll come as a minus repayment of loan is what activity financing activity you will show it as minus interest on loan you have paid interest on loan again it's a financing activity they asked only operating cash flow so take your calculator where ever I written o plus add this whereever written o minus reduce this this also so these box item you plus these box item you minus how much are you getting finally f f f calculator I also so don't have you you have you can calculate minus 70 17,000 so that's what they have given the answers okay now that is what sir net cash flow from operating activity or used in operating activity net cash flow used in operating activity sense H yes sir so today's last topic is yes three sir no okay I got a little extra classroom time I have got it so I'll stretch a little bit maybe two more topics or one more topic Depending on time we will see okay all right as I told you ending time you leave it to me be prepared for half an hour 1 hour extra stretching okay if someone bangs on our door that means it is time for us to wake it then we will vake it till then we will do it yeah so one question we will do for fledged question RTP MTP question was pretty straightforward I'll run you through one full-fledged question so to have a little more clarity ran or Ryan limited provides you the following information for the year ended 31st March 20x one this is a study material question only sir sales Cog and all they've given basically this they have given you is a pnl information check at the end they've deducted income tax so this is profit before tax this is profit after tax okay sir sir if you have a choice what will we take you always take profit before tax because if you take profit after tax you have to adjust tax also because we don't want this is what sir this is not income tax paid this is provision for tax correct no we don't want provision for tax we want tax paid so if you take 16,000 any which way you have to add back 7,000 that is the reason when when you have a choice always choose PBT sir I will directly select this one sir no no don't do that cash flow statement is backed by accounting standard three so as3 usually says it start with profit before tax so always profit before tax okay that's a starting point sir how did you arrive profit before tax few things they already added subtracted okay check sir uh this is the total this 8,000 is total leave that loss on sale they've already deducted hence what do we need to do loss on sale of plant is an operating activity or investing activity investing activity but it is already transferred to PN so p is already reduced if p is already reduced means operating cash flow also indirectly already reduced and what do we do add that then gain on sale of investment so this is also what sir investing activity there's a gain so pnl balance has increased so operating cash flow is also increased but there's an investing activity hence what we have to do minus this interest income received when income they have transferred to pnl so income has increased but again this is an investing activity but operating cash flow has increased so what to do minus interest expense paid interest expense have transferred to pnl means pendl balance has reduced so operating cash flow is also reduced but interest is a financing activity hence what do we need to do add that check have they done all this H they've taken 23,000 and what and all they've chosen 312 623 312 26 23 all that they've added subtracted according okay sir check if there's anything more yeah ago above operating expense they're saying operating expense is 147 in this operating expenditure there is a depreciation of 37,000 depreciation is already deducted it is part of this 147 and what to do non-cash expenditure has reduced your P hence what do you have to do add back check have they added back 37,000 P yeah so so what about Cog Cog is related to your operation activity only it has gone to pnl and it has gone it has to go to pendl only I mean should we have to worry about all this operating items cash flow don't have to worry only investing financing activity cash flow if it's gone to pnl reverse it okay these are all part of operations sales cogs selling of a Goods is part of your operation so it should go to pend and it has gone to p no har cogs also is part of your oper uh operate uh operating activity itself even operating expenditure operating expenditure here includes your employee benefit employee salary paid to employees rent electricity all this is reduced pendl it has gone to pnl means it has reduced pendl operating cash flow is also reduced and it should be reduced because because of this items pnl balance or cash flow balance will reduce so nothing to be done for these for operating activities don't worry only for investing and financing activity if it has gone to pnl reverse that is one okay let's go to the other table now they've given you information for 31st March 20 X1 and 31st March 20 x0 so this is for current year and previous year sometimes they interchange this table always watch out first they will give you current year data or previous year data changes from problem to problem okay plant sir check here below plant they have written accumulated depreciation which method charge method or provision method method so whenever you see sir in cash flow statement no how to do it quickly is before you start reading the question balance sheet and all this data now straight away come to adjustments have a quick glance through no need to read just quick glance I saw some investment PL to some Bond some dividend that means one Ledger I have to put it up for investment plant bond for those I will not directly bring the effect into cash flow statement first I'll prepare a ledger because some components will be missing you have to prepare a ledger and then figure out the missing components so rest other things you can do it so again here what what are investment to plan to some Bond they have given and some dividend dividend I think we just paid so it's not a problem so these three have to put up a ledger okay so first we let's prepare plant also some things were there so let's prepare plant Ledger and provision for depreciation Ledger actually here provision for depreciation Ledger is waste why so they already gave depreciation in the problem normally we prepare provision for depreciation to get current year depreciation as balancing figure have we already got it so even if you prepare provision for depreciation no extra information you'll get for Simplicity I prepared it I'll show it to you okay now how much is PL opening balance five lakh previous year closing balance will become current year opening balance so this is opening balance and this is closing balance so opening balance of plan I've already done it here to balance brought down 5 lak 5,000 closing balance is 75,000 as in when we see we'll go on ticking okay now this way we'll be able to solve it faster okay next they have given provision for depreciation opening and closing so provision Ledger will have a debit balance or credit balance provision means it's a liability kind of liability liability opening balance where it will come on the credit side so provision for depreciation you'll write opening balance here closing balance that's it yes sir whatever is given in the question I post it into the ler okay all right now let's see the other one this is your net block so leave that that we don't have to worry investment was there any adjustment relating to investment that we read yes so we'll prepare investment Coler also opening balance 127 closing balance 11 F investment is an asset no sir asset opening balance on the debit side closing balance on the credit side posted whatever we identify that only we'll take later on we'll check what is the unticked items most probably it should not be any everything we should have ideally ticked by the end of the reading the problem inventory so inventory open Ledger ah inventory is a part of your current assets for current assets you simply have to compare opening with closing and see whether they increased or whether they reduced what is opening inventory here do this comparison this is your opening balance opening balance was 110 closing balance balance closing balance has become 144 so it has increased by how much 34,000 so increase in current assets means minus so have they reduced 34,000 check in your cash flow statement increase in inventory 34,000 theyve reduced okay this is your cash flow statement all right next is our trade receivables opening is 55 closing is 47 so tradeable is reduced by 8,000 reduction in tradeable means plus check if they added 8,000 yeah decrease in trade receivables they've added 8,000 next cash this is your opening cash this is your closing cash for opening cash in cash equivalent there is a separate category at the end which is how much 15,000 closing is how much 46,000 check at the end have they taken a opening cash and cash equivalent is 15 closing cash equivalent is 46 okay so that is your last me you have to plug in this next is what prepaid expense again it is part of current assets opening is five closing is one so it has reduced it is reduced by how much 4,000 so decrease in current asset means Plus Check have they added 4,000 in cash flow statement yes decrease in prepaid expense they're added all right next share Capital four 315 has become 465 I mean share capital is increased by 150,000 share capital is increased because company has issued some extra shares that's what they told over here also we have issued 15,000 shares of 10 each so total value is how much 1 lakh 50,000 when you calculate opening and closing cut difference how much are you getting 1 lakh 50,000 company has issued additional shares means it is what it's a source of Finance so when will this 150 come ocf investing cash flow or financing cash flow and financing cash flow check you should add it or subtract IT company has issued Equity shares so company will pay the money or receive the money receive so you have to show it as an inflow so 150 they have added under financing activity okay pace is okay now sir everybody comfortable now yeah I know that I'm doing a little faster but in the interest of time I have to kind of manage it because I want to cover majority of the adjustments but I know that I can go a little slow but the problem here is from 20 hours the revision will become 30 hours and last day may you may not have such that much amount of time so we also have to do it a little faster those of you who are doing it for the first time so some of you have done it may understand it it's not going to be a problem some of them who have entirely skipped the cash flow statement then you may feel what the hell is this guy telling I thought we will learn something you doing if you feel that is the feeling no problem it's available anywhere Which Way on YouTube you can replay the video because I'm I want to make sure that it is kind of it suits everyone's purpose so I have to maintain the little extra Pace here to catch up and cover the topics we have close to 30 topics have to cover so we are in the fifth topic now so another 25 topics more to cover in 4 days so you can imagine the target but at the same time I don't want to just revise it at concept level if I only revise concept then account will become a theory subject which you may not understand because only when you apply it we will get it better so Pro Concepts we can go a little slow problems we have to be a little faster I'll try to maintain that yeah apologies for someone who feels that it is going a little faster interest of time I have to maintain this yeah okay come back to this now reserves and surplus relevant or irrelevant irrelevant because I already got my profit profit before tax so this becomes irrelevant Bond opening 245 closing 295 there was some adjustment Bond means your debentures debenture is an asset or a liability so that depend sir if you have invested it'll be an asset if you have issued it's a liability have they told sir they've given Bond below share capital and reserves and surplus that means what this is invested or it is issued these bonds are issued meaning it is not an asset it's a liability liability opening balance 245 closing is 2905 brought it in the bond account okay Bond also there was an adjustment no hence I prepared Bond Leger next what is that trade payable opening is 43 closing is 50 so trade payable has increased how much 7,000 so increase in current liability means Plus Check have they added 7,000 in operating cash flow yes they have added okay next is what sir outstanding liability again current liability opening 9 closing 12 again it has increased by three check have they added three yes it is done next income tax payable income tax payable we have to prepare a separate ledger so can we assume opening balance is paid in the current year no why because they've given p andl and pnl may we have provision for taxation that means Pro income tax we have to prepare a separate Ledger you can call it as provision for tax income tax payable whatever name it's fine so let's prepare that ledger provision for tax opening balance is five closing balance is three you also got provision for tax from pel how much is provision for tax in pendl 7,000 what is the journal entry for provision for tax pendl account debit to provision for tax how much 7,000 when you post this entry in provision for tax The Ledger will be by pnl 7,000 that means this Ledger we can close off this side total is 12 that side also should be 12 but we only got three you're getting a balancing figure how much 9,000 what is our balancing figure tax paid so tax paid is how much 9,000 tax provision we added back tax paid you need to deduct at the end yes no huh oh yeah if we took PBT correct if you're taking PBT means 7,000 need not be added correct so in this problem we ignored that correct okay how about tax paid 9,000 should be deducted in operating cash at the end that they've done it here yes sir awesome sir next is what sir anything else sir that's all I think now we we'll go into the adjustment purchased investment for 78,000 what's the journal entry for investment purchased investment account debit to bank account so investment Ledger May you'll write two bank account 78,000 okay so what about cash flow statement first I'll prepare The Ledger all the Ledger impact in one shot may we will push it to cash flow statement for now don't worry sold investment for 1 lak 2,000 what the journal entry for investment sold bank account debit to investment account so investment account you'll write by bank 1 lakh 2,000 okay but the cost of that investment was only 90 cost is 90 you sold it for 1 lakh two that means you made a loss or profit how much profit 12,000 profit means it will come on the debit side credit side which side investment Ledger debit side profit you'll write to P account 12,000 so why it will come on the debit side sir sir investment is shown at Cost correct so when you sold an investment what was the cost of that investment cost of the investment was 90,000 so ideally the journal entry should have been bank account debit n how much did you sell it for 1 lakh 2,000 to investment account investment is shown at Cost value so you should reduce it by cost and the balance figure is profit which should have been transferred to p and Del this is ideally the way you need to pass your journal entry but you know how our study material passes and how we also need to account it like what first entry what they'll pass is bank account debit 1 l2000 to investment account 1 l2000 firstent but investment is shown at cost price so when you sell an investment investment should be reduced at cost price but you reduce by how much selling price that means you reduce more hence next entry you will passes investment account debited to pendl account 12,000 this way what happens Credit 1 lak2 debit 12,000 so net effect is what net effect of this is 90,000 credit so this is what the approach our study material follows that's the reason we'll stick to the same okay sir both approach will give you the same answer finally but this is what they will do so we stick is that okay fine with you people so hence we say profit means it comes from the debit side loss means it comes on the credit side you mean you might have heard me telling that I explain all this in class but just for the new audience telling so what is the posting of this entry in investment ledger to pnl account how much 12,000 rupees which I have ticked off here okay sir all right next what sir purchased plant asset for 1ak 120,000 what's the journal entry for plant asset purchased plant account debit to bank account 1 lakh 120,000 which I have posted here okay next is what sir uh where is the next adjustment uh this one uh sold plant at a cost of 10,000 cost when they use the word cost it means original cost what is the original cost of the plant sold 10,000 it's accumulated depreciation is how much 2,000 so so far you have depreciated this asset by 2,000 initially you bought it for 10 so far you have depreciated by two so what is the carrying amount of that investment 8,000 but you sold it for five 8,000 worth of asset you sold it for five means you made a loss on sale 3,000 that's what they passed in your P account as loss on sale 3,000 okay sometime in the problem loss on sale they will not give it to you hence better prepare working note in this problem it is given yeah but if they don't give you need to assertain like this original cost is 10 so far you have depreciated this asset by two so carrying amount is 8 you sold it for five hence there is a loss of 3,000 rupees done aaru now think the journal entry that is more important to us sir which method of depreciation is followed charge method or provision method charge method or provision method provision method correct because we saw provision for depreciation here in The Ledger only correct so we know the importance whenever provision for depreciation account is maintained fixed asset Ledger will always be shown at original cost correct no till the asset is sold asset Ledger will be maintained at original cost once the asset is sold you have to reduce the asset cost by what value original because asset is shown at original cost when the asset is sold you need to also Reduce by original cost okay so that means that is one asset fixed ass Ledger should get reduced by original cost that means you'll credit PP by 10,000 is my statement right yeah you sold an asset how much did you sell it for 5,000 that means you'll write bank account debit 5,000 comfortable now sir if an asset is sold means provision for depreciation relating to that asset is required to be maintained or not required as long as you have the asset you'll maintain the provision the moment you derecognize the asset or sell the asset or write off the asset provision also should be closed entire provision or relating to this asset only relating to this asset sold relating to this asset how much Pro uh how much accumulated depreciation you have 2,000 that much you need to reverse provision for depreciation has what balance credit balance how do you reduce it debited so you pass the entry accumulated depreciation or provision for depreciation account debit to PP account how much 2,000 so you have credited by 10 here you're getting by only seven what is the balancing figure 3,000 that is nothing but your loss on C so basically I used to tell you in the problem whenever this provision for depreciation account is maintained add three components and when you add the three components you should get original cost if you don't get it somewhere you have not done wrong as a checkpoint this is the logic for that this is entry basically okay Naru this entry we have to posted in PP ledger so the posting will be buy Bank byy accumulated depreciation by loss on sale profit on sale will come on the debit side loss on sale will come on the credit set like that yes sir okay next what else is there this over issued bonds of face value one lakh in exchange for plant assets so you purchased a plant for 1 lakh instead of paying cash you give your company debentures okay so what's the journal entry for plant purchased and cash paid plant account debit to cash account or plant account debit to bank account here did you give cash or bank or you give away bonds so what's the journal entry plant account debit to bond account plant account debit to bond account so in plant account the posting will be two Bond one L so in bond colleger you'll post it as by planted missionary one L like this okay so this is about that entry car posting okay next is what sir repaid 50,000 bonds at face value on maturity some debentures or bonds have got redeemed so what is the journal entry sir if you redeemed the debenture means liability value will be same or it'll reduce reduce so what's the journal entry for liability paid off what's a journal entry for credit our paid credit to bank what's the journal entry for debentures paid off debenture account debit to bank debenture only here referring to as Bond so the entry for this is one sir Bond account debit to bank account how much in bond account you'll post it as two bank 50,000 that's a posting all right okay uh next what is the next one where is the next one p here uh issued 15,000 shares that I think we already captured in financing activity we already shown that paid cash dividend of 8,000 dividend paid is what activity financing activity check under financing activity they've deducted $8,000 off because when you pay the dividend it's a cash outflow so you'll reduce that okay all right this is one anything else we captured or that's all everything we have captured now just go on closing The Ledges one by one so anything is remaining unticked or everything captured everything cap so after plugging all the numbers also if you're getting a balancing figure that means additional if you're getting balancing figure on the debit side it means additional plant has been purchased if you're getting balancing figure on the credit side it means additional plant has been sold sometimes you'll get it sometimes you may not get it here we have it or don't have it don't have it okay this is one accumulated depreciation so I think one entry we posted we forgot to do it here I think this journal entry we here we pass in PP account we posted this entry correct but in accumulated depreciation did we pass the entry what is the journal entry for this accumulated depreciation to PP so in accumulated depreciation right you write PP correct so this side total is how much 105 that side also should be 105 one more entry you can get it as balancing figure or it is given also in the problem current year depreciation is how much 37,000 what is the journal entry for depreciation under this method depreciation account debit to provision for depreciation either you can write by depreciation or directly you can write PM so you can get as balancing figure or in fact it is given to us in the problem so that means this preparing this Ledger was really not required for this problem but if they don't give you current year depreciation you can get current year depreciation by preparing this particular car Legend okay now these two impact will quickly push it into cash flow statement look at the debit side of planted missionary here you have two bank that means planted missionary purchased where should it come sir investing activity they have directed 120 okay Bond sir you purchased a plant and gave Bond cash coming in or cash going out or nothing plant and missionary came in bond went out cash came in and cash went out no we preparing only cash flow statement that means we are only concerned with cash coming in and cash going out because of this transaction there is no inflow of cash nor there is any outflow of cash so it is ignored correct check the credit side buy Bank 5,000 so this is sale of asset sale of asset means outflow or inflow inflow under investing activity have they taken plus 5,000 yes that is also pushed okay loss on sale has already gone to pnl which we have added also here we have already added correct n sir that all adjustment already done now check the investment account it is also matching that means there is no balancing figure push the impact you right you have two bank here two bank means it is an investment purchased so investment purchase where it will come under investing activity minus 78 have they done yes check on the credit side you have buy Bank buy Bank means it's a sale of investment sale of investment where it will come investing activity as a plus have they taken plus one2 yes so you sold this investment at profit profit has gone to pendl due to this pnl balance has increased so operating cash flow also has increased that means what we have to do reduce it because it is investing activity that reduction is already done here minus 12,000 we already did so no need to do it again okay next legislates this is also closed next is Bond account so everything ticked off here also all right check The Ledger two bank account is there two bank means bond has been repaid because Bond account debit to bank account is a entry so bank is being credited means cash is going out so bond is being redeemed means what sort of an activity financing activity as an outflow check 50,000 is shown under financing activity as an outflow yes correct okay check on the credit side and is there anything Bank no provision for taxation I think we already captured 9,000 we have already captured correct sir okay one hidden adjustment I told is don't forget the interest interest received and interest paid that will they will not give it an adjustment but we still need to know but in this problem they are good they only given interest expense paid okay interest paid is what activity sir financing activity so on 23,000 you should also deduct under financing activity which we will take it off here yes sir and also interest received I think interest received we already captured here or it's not captured always interest received interest paid watch out do we have any interest received in pendl yeah interest income received there have shown 6,000 interest income received is what activity interest income received is what activity investing activity under investing activity you show you should show this as Plus have they added yes if you just check anything is remaining so this is a total all these are totals anything is remaining to be ticked off or everything ticked off I means finally cash flow statement should balance cash you check here anything we did or every data was there in the question nothing missing missing just you have to take that and prepare some ledgers put it into if directly inform is given put it into cash flow statement format otherwise put it into ledgers that's all is cash flow statement it may be lengthy but it is very easy okay so if you don't have time in cash flow statement always prepare The Ledger first then prepare the final cash flow statement because you will get some step marks so if you get all this right you will get a substantial amount of marks like that okay now all right so this is done [Music] next okay this is also one popular question we'll quickly run through this question simple question but has come quite a few times in the previous examination Joy star oils has collected following information net profit they've given sir whenever you you see the word net profit in the question it is always profit after tax how much is profit after tax 25,000 so we want profit after tax or we want profit before tax we want profit before tax here provision for taxation is there for 5,000 so profit after tax means tax is already deducted we want provision for tax or we want tax paid you want tax paid so whatever is a provision for tax you add back so 25,000 plus 5,000 you do you'll get how much 30,000 start with that or stay profit after tax and then you add back provision for tax 5,000 like that you present that is also okay fine all right next one by one we need to take off dividend paid where it'll come sir financing activity as a minus check have they deducted 8353 and financing activity yes is your financing activity okay no calculations here just taking and dumping the data into format income tax paid income taxx paid where it will come operating activity as a last category 4248 have they deducted under operating activity there are operating activity income tax paid 4248 has been deducted all right next loss on sale of asset 40 Book value of asset sold is 185 so Book value means carrying amount carrying amount of the asset sold is 185 you made a loss of 40 that means you have sold it at a higher than carrying amount or or lower than carrying so if you sell higher than carrying amount obviously you'll have a happy scenario meaning you'll end up making some profit you made loss year that means you have not sold it at Book value you have sold it at lesser value so you have not sold it at 185 you have sold it at 185 minus 40 which is 145 okay so sale of has had what activity investing activity under investing activity check have they taken 145 plus yes but you made a loss on sale no loss on sale will be transferred where to pnl account due to loss what happens to your pnl pnl balance will reduce if pnl balance is reduced means your operating cash flow also is indirectly reduced but sale of asset is not operating activity it's an investing activity hence what we need to do add back loss on sale have they added back 45 somewh 40 theyve added back okay yes guys okay next uh this two are over depreciation charge to PN depreciation is an non-cash expenditure what should we do add back 20,000 have they done yes okay next profit on sale of investment 100 carrying amount of investment sold is 27765 you sold investment and you made profit means you have sold at carrying amount or higher than carrying amount Higher by how much 100 so 278 765 plus 100 so sale value will be 27 865 sale of asset what activity investing activity check 27 865 they've taken under investing activity AS Plus yes but you sold this investment at profit profit is transferred where pendl account due to this pendl balance has reduced so your operating cash flow is also reduced but sale of investment is not operating activity but it is a investing activity but operating cash flow has reduced so what to do in fact operating cash flow has reduced or increased I think I told Ulta for me that time of the day for me yeah so you sold investment at profit means Fel balance has increased so your operating cash flow has also increased okay but it is not an operating activity and what do we need to do minus so check minus have they done 100 yes next interest income received on investment interest income received is what activ investing activi so 2506 they should consider AS Plus under investing activity but interest income would have gone where to P account so there's an income so due to this income pnl balance has increased so operating cash flow is also increased but interest received is not an operating activity but investing activity hence what do we need to do under operating activity you need to minus 2506 have they done yes next what is next interest expense and interest expense paid check sir usually interest expense and interest paid amount will be same but it need not be interest expense is how much here 10,000 what will you transfer to Pendle interest paid or interest expense what will you transfer to pnl interest expense or interest paid interest expense because we prepare pendl account accounts and all not on cash basis but on acral basis so how much ever is a expense that expense will be transferred to P how much is the interest expens 10,000 so interest expense is transferred to p so due to this pnl balance has reduced so operating cash flow is also reduced but interest is interest expense is not an operating activity but financing activity and what do we need to do add back check have they added back 10,000 in operating activity yes so same thing will be paid off usually yes but very next line what have they told interest paid 10,000 520 sir how sir expense is only 10,000 how did you pay 10,000 520 sir it's possible maybe last year interest was outstanding just paid in the current year maybe last year there was some outstanding interest which is paid in the current year hence interest paid is how how much sir 10,520 since last year expense will be transferred to this year pendl or last year itself last year itself but are we preparing pnl or cash flow statement cash flow statement we are not bothered whether it relates to next year last year or current year cash flow statement simply considers cash coming in cash going out did Cash go out because of this yes how much 10,520 interest paid no which activity financing activity 10 520 have they reduced under financing activity yes okay next tomorrow's agenda also very much simple five or six topics which topic I'll decide I'll let you know okay all right because I it may change based on the time that's a reason so you come with an open mind it's fine okay next is increase in working capital I told you they've not given current Assets in current liability directly they've given increase in working capital so increase in working capital means that is possible only when current asset is greater than current liability so that means IND directly it is increase in current assets increase in current assets means what do you do minus so increase in working capital also you should minus where under working capital changes under operating cash flow under operating cash flow have they deducted increasing working capital yes okay next is what sir purchase of fixed asset investment in joint venture expenditure on construction working progress all these are what all these are investment activity so all if you have purchased all this means cash will come in or go out go out so all this should be shown as min check have they done that 14560 3860 34720 expenditure on construction work in progress means you are constructing some building but building is not fully constructed it is in progress that's what they mean by construction work in progress what is joint venture you should not be asking you already have done as27 okay so investment in joint venture means we have 50% control we have joint control over another entity we'll also cover that in ag 27 in case you have any uh doubts there so these are considered yes proceed from calls and Aur so calls and aers is related to share Capital so if you have received any money rewarding share Capital means what sort of activity is it it's a financing activity have they taken plus two yeah because you have received money so it's a financing activity and inflow receip from of receip of Grant from for capital projects so capital projects means your investment or your assets being constructed etc etc that they are referring it to as a capital project so this is basically your PP etc etc that they're talking about you have received some Grant related to PP PP is what activity financing activity or investing activity investing activity so any grant that you have received for these sort of capital Grant will also be considered and under investing cash flow you have paid the grant or you have received the Grant from the government you have received the grant so this where it should show under investing activity you show it as Plus have they done yes next to long-term borrowings proceeds from short-term borrowings both are financing activity have they reduced both you check and the financing activity both has been proceeds no that means you have to reduce or plus plus because you have taken a loan you have taken a short-term loan and you have taken a long-term loan when you take a loan you'll have to pay the money or you'll receive the money you'll receive the money hence both are inflows not outflows okay all right next is opening cash balance and closing BH balance that they have given away these two take off these are all totals that's all no calculations simply taking the data and dumping it into format but this is popular has come quite a few times hence I thought I'll run you through this particular questions okay so with this three car all the questions we have done D done thank you that's over sir no we'll do one more I'll take by 430 no I'll take a little smaller one maybe uh 20 25 minutes okay for everyone if 20 25 minutes is okay I'll take up as29 only 5 10 minutes means I'll take as4 your wish sir you do whatever you want okay I'll take a 29 sir accounting standard 29 talks only about three things provision contingent liability contingent assets that's all okay that's all is the scope of this particular standard once executory contract you need to know because if it is executory contract as29 does not apply for executory contract as29 will not apply okay so that means we need to know what is executory contract so execut contract means those contract where neither party have performed their obligation neither party have performed their obligation or both party have performed their obligation to equal extent like to give you an example let's say Reliance No Sir Mr X no sir has got a job offer from Reliance same example I used to give it in class okay Mr X has got a job offer from Reliance so if he's joining means he will get salary other than salary Reliance is giving him 3 lakh rupees joining bonus just because he's joining the company he's getting a joining bonus of 3 LH sir they made this contract they made this agreement on 31st March 2025 employment agreement is already signed but a joining date is 1st May employee will join Reliance only on 1 may this is executory contract how sir both the parties have not performed their obligation what is reliance obligation to pay joining bones has Reliance paid this obligation on 31st March or not yet not yet why because employee has not joined what is employee obligation to join the company has that happened or not happened not that means both parties have performed their obligation or not performed obligation so if neither party have performed their obligation we call such a contract as executory contract that is or both the parties have performed their obligation to equal extent Reliance also has signed employees also signed so both parties have perform their obligation only to equal extent such a contract we call it as executory contract and if you have executory contract 29 will not apply to such contracts that is one the next one is obligation so only if obligation is there you'll think about recording provision or contingent liability only if obligation is there either provision or contingent liability will come if there's no obligation no provision also no contingent liability also so what is obligation sir they defin obligating Event obligating Event means where the company has no realistic alternative but to settle the obligation or in layman terms I used to call it the class work as No Escape if company cannot escape from this then we call such scenario as obligation like to give you an example let's say a limited has filed a legal case against B limited because a feels B has stolen his patent a limited feels B limited has stolen their patent so a limited has filed a legal case demanding a compensation of 40 LH now where is this case going on in the court now think from be limited perspective can be limited escape from this or it has left his hands can be limited escape from this no who will decide this matter can B decide this or court so that means this matter is in B limited hands to be decided or court court that means B limited has an obligation if Court says pay 40 lakhs B limited has to compulsorily pay 40 can B limited escape from court order whatever it is no that means here we say B limited has an obligation so that means B limited basically has a No Escape scenario that No Escape scenario only we call it as obligation the moment obligation is there then only you will think whether to recognize provision or disclose contingent liability obligation is not there means no provision no contingent liability okay so there could be two types of obligation one could be a legal obligation another one is constructive obligation legal obligation means those obligation which arise as part of contract or law like companies have to pay gratuity to employees this is payable as per gratuity act law says it any company can escape from it or they have to pay they have to pay because this is arising as part of law such obligation we call it as legal obligation okay or it could be contractual obligation like let's say a limited sold Goods to B limited under a warranty we sold one product and on that product three years warrant is given now the seller can they escape from that warranty obligation or they have to fulfill it suppose if that product becomes defective means can the seller Escape or they have to repair that product they have to repair or replace that product can they escape from it or can't escape can't escape because this is arising as part of a contract so something which arises as part of law or as part of contract only we call it as legal obligation another obligation could be constructive obligation constructive obligation means those obligation which arises as part of previous Trade Practices or Customs something which arises as part of your trade practice or custom we call it as constructive obligation let's the same example I us to give it in class let's say aru Pro we have a policy what policy so any student who gets a rank gets 50,000 cash reward whichever student gets a rank we pay him we pay them a cash reward of 50,000 Rupees we have not sent any email to students that we will pay you cash we have not signed any contract with any student saying if you get a rank we will pay you 50,000 but let's say I forgot your name now sidar so sidhar checked with the seniors sidar checked with the senior he told do this company really pay cash to water I think no so Sid sidhar senior told yes Macha actually they pay even I was surprised I thought it was goalie they actually pay I got a rank and I also got 50,000 cash from aruru now you think sir one idea is set in your mind now saying what if I get a rank I will also get 50,000 did we make any contract with you saying I will pay you reward of 50,000 no but still that idea is already set in your mind why because of our previous practices because of our previous practices one idea is set in your mind an expectation is set in your mind yes or no such there also we have an obligation and such an obligation we call it as constructive obligation so for to account provision or contingent liability obligation could either be legal or constructive okay any obligation is there means we go ahead and do the accounting such May they're asking yeah yeah such whatever you say all right next one is so I told you here contingent liability provision are recognized only if obligation exist otherwise both are not reir so what is provision so provision is simply a liability provision is also a liability but with uncertain timing and amount meaning let's say here provision for warranty this provision for warranty you have already sold the product with a warranty period of 3 years now can you say with certainty whether this obligation will come no how much it will come can you say when it will come you'll you can you can you say with precession or only you can estimate you can only estimate that's the reason we say provision is a liability because if this Li if this warranty comes means the seller has to repair correct no so it is a liability but with uncertain timing or amount when this liability will arise how much we need to settle this liability you can't say with Precision you can only estimate hence the name okay s all right sir if you want to recognize provision four criteria should be compulsorily satisfied one is present obligation arising out of past event which results in probable outflow of economic IC resources and reliable estimate of the outflow can be made if all these four are satisfied then only you'll recognize provis let's take this example see a has filed a legal case against B limited demanding a compensation 10 lakh Rupees why a limited feels B limited has stolen their patent that's the reason a has filed a case okay now think from B limited perspective can B limited escape from this or B limited has obligation be limited has obligation so whenever case is going on court of law no the best person to answer all this is what lawyer so be limited checked with their lawyer what do you think lawyer told 70% chance go go go TOS we have to pay the money and how much chance sir 70% chance means there is a 70% chance that b limited has to pay correct no all right so now we'll go back to provision definition what is first definition of provision present obligation does B limited have an obligation yes arising of past event now why did a file a case against B because a feels B has stolen their patent has a stealing of patent stolen already happened or yet to happen already happened so past event is also there third is what probable outflow of economic resources probable means more than 50% chance of the outflow if there is outflow Chan is more than 50% we say it is probable here what is a lawyer telling 70% chance of the out out flow it is more than 50% that means what sort of obligation it is it is a probable obligation and last one is reliable estimate of the outflow provision is also liability how much you will pay you should be able to reliably estimate lawyer will tell suppose lawyer told over here I think we'll be able to settle for 8 lakh rupees or Court will order us to pay how much 8 lakh rupees so that means lawyer is estimating that 8 lakh is a settlement value that means you'll not make a provision for 10 lakh you'll make it for 8 lakh rupees all the four conditions of provision if it is satisfied recognize provision otherwise recognition is not necessary even if one fails provision is not approved like that okay saru all right that's about provision next is contingent liability contingent liability means we used to say may or may not happen blah blah blah blah blah but actually there is a proper definition contingent liability means it's a possible obligation arising out of past if you can remember definition because they may give you case study if you remember it great otherwise write it in your own words so at your level ideally you are expected to remember so contingent liability means it's a POS obligation maybe I'll write it down for your reference possible obligation arising out of past event same as provision instead of of probable it is here it's possible obligation arising out of past event the occurrence or the existence of this contingent liability is confirmed by happening or non-happening of an uncertain future event of an uncertain future event not within entity control not within entity's control this is the actual definition condition liability means it's a posible obligation arising out of past event the existence whether you have this contingent liability or not is confirmed by happening or non- happening of an uncertain future event not within entity's control fancy definition but pretty straightforward sir here same thing a has filed a case against b b limited check with lawyer Royal told 20% or say there is a 30% chance that we will lose the case in the previous example me how much it was 70% cut off this lawyer told there is only 30% chance that we will lose the case okay sir if the chance of outflow is more than 50% we call it as probable if it is less than 50% we call it as possible for possible obligation you disclose liability for probable obligation account provis that's all fancy definition but meaning is same only if the outflow chance is more than 50% recognize provision if outflow by chance is less than 50% means 50% or lesser then it is a possible obligation where you disclose only contingent liability contingent liability is not accounted we don't pass any journal entry or Ledger you just show it in notes to accounts just a disclosure that's all okay now now that is one okay this is about the definition here what what means is possible obligation arising out of past event I think now you got to know possible obligation meaning the Chan is 50% or lesser and this also should arise out of what event past event happening or non-happening of an uncertain future event what does that mean is Sir here whether B limited has to pay a limited or not who will decide Court correct so Court based on court judgment B will pay whether B will pay or he will not pay is dependent on Court verdict is Court verdict within B controller no that is a judicial system is it within anybody's control or nobody's control nobody's control that's what they say that uncertain future event and that uncertain future event is not within entity control what is the definition trying to say okay sir or another ways probable obligation sir probable obligation means contingent liability or provision probable obligation means provision no probable obligation not recognized as provision probable obligation not recognized as provision because provision means four condition should be satisfied if condition number three and condition number four if it fails then you can't account it as provision you disclose it as contingent liability what is third condition of uh provision sir probable outflow of economic resources economic resources here refers to asset because if no sir if Court tells be limited pay how will be limited pay he'll give some cash or he'll give some other assets yes no so that means be limited when they settle this obligation asset will come in or asset will go out go that what mean by outflow of economic resources the economic resource simply here means your cash or any other asset for that matter done now okay sir same case lawyer told there is a 70% chance of losing the case there is a 70% chance of losing the case 70% chance means it is possible or probable probable lawyer told yeah yeah we will lose the case we will lose the case but you but the court judge rather will say zero no need to pay any amount there is 70% chance that we will lose the case but judge will say no need to pay any amount we will lose the case but still there will not be any outflow because the judge will say first time you have commented the offense or committed the offense MAF for you first time offense MAF so we will lose the case that means it's what sir it's a probable but still is there any outflow or no outflow so for you to account it as provision there has to be an outflow so if there is no outflow of economic resources will you account it as provision or no in this case you will disclose it as contingent liability that is okay sir so that means this is what third condition failing what is fourth condition of provision is reliable estimate of the Outlook can be made so what if you cannot estimate so provision is recognized at best estimated amount if you cannot estimate the amount means disclose it as contingent liability so why can't we estimate lawyer will tell no because sometimes what happens sir like let's say I'm one company I'm running one Factory I'm producing one product somebody has filed a case against me saying in 1995 I have contaminated a water body we are in 2024 in 1995 somebody has not in 1995 now somebody has filed a case why have they filed a case because 20 years back they feel I have contaminated one land or river body now you tell me 20 years data I will maintainer so that means can you tell me can I reliably estimate the outflow no or little difficult little difficult so in rare circumstance in majority of the circumstance may outflow you can estimate but in some cases May if the case goes on for many years back it may be a little difficult to estimate so if you're not able to estimate the outflow means you cannot recognize provision in that case also you'll disclose contingent liability understood contingent liability is not accounted but it is only disclosed in notes to accounts yes sir contingent asset is W till now somebody else was filing a case against us this time we decided we will only file the case against somebody so that means in this example till now we were analyzing from whose perspective B limited perspective now we are analyzing from a limited C so from B Li if a has filed a legal case demanding compensation of 10 lakh means for B it is an outflow or B it may be an outflow but for a what it will be an inflow yes or no that means for a a you will record it as contingent asset provided certain conditions is satisfied condition asset means or contingent asset means it's a possible asset arising out of past event same two definition of conent liability only possible asset arising out of past event the existence of this is confirmed by happening or non- happening of an uncertain future event not within entity control okay so here you have written probable yeah actual definition if you just check they'll not use the word probable they'll use the word possible but what the standard Sayes only if the inflow chances more than 50% only if the inflow chances more than 50% then only you can disclose contingent asset otherwise you cannot show that means no you tell me now more than 50% means it is possible or probable for you to account or for you to disclose contingent asset inflow should be probable but definition uses the word possible because that is English definition that is not percentage definition it is a English definition that's what they're trying to say so that's the reason in my chartbook I'm not written the word possible I've written the word probable but if you check actual definition it is not POS probable it is possible okay sir got the meaning of possible here refers to not percentage it is just the word English definition possible means you may get it or you may not get it in that sense they've used this particular word but if you want to disclose contingent asset inflow of probability should be more than 50% meaning inflow should be probable only then you will disclose it as contingent asset same like contingent liability contingent assets are not recognized but only disclosed yeah sir this PDF yes I told no sir chart book you can purchase it from learn. ar.com I know that people start asking that's the reason first only I told you can visit our website learn. ar.com or online. arpr pro.com and buy this it's available it's called chartbook you can place the order from there or if you purchased our regular classes I do the revision video after every chapter I revise each chapter with the help of chart so you can use that your choice okay if you want hard copy buy it okay so yeah this is over next recognition so I've have given you just a summary table from liability side what you have to do asset side what you have to do so if it is virtually certain we say virtually certain if it is more than 95% chance if there's more than 95% chance we call it as virtually certain on the asset side you book it as asset on the liability side book liability if it is virtually C virtually certain asset side book asset liability side book liability however if it is probable probable means what sir more than 50% for more than 50% chance on liability side you will recognize provision on the asset side will you book it as an asset no it's a probable means you will disclose contingent asset okay next one possible obligation possible obligation means 5 to 50% we say less than 50% but there is one more so keep it as five to 50% if it is possible obligation means or if it is possible means on the liability side you'll disclose contingent liability on the asset side nothing you don't have to disclose anything think that it is not there in more this is for 5 to 50% meaning when the chance is possible what is one more called remote remote means less than 5% chance if there is less than 5% chance liability side also you ignore asset side also you ignore you don't have to do anything okay Naru this is a this is just summary on each liability and asset side how you need to do what you need to do next two more small Concepts then we'll take up one question and we'll finish up this particular standard small small ones next is owner's contract I don't see any problems on owner's contract I only see one liner but still we'll stick anyway in IND 37 any which way you have to learn in CA final better learn now I think I've taught it not learn we'll revise yeah yeah let me use that word yeah owner's contract means loss making contracts loss making contract we call it as owner's contracts so if you have owner's contract you still need to make a provision for it let's take a small example so X limited y limited X limited y limited I made an agreement saying X limited will purchase 1 lakh units from y Limited at 10 Rupees per unit 1 lakh units he'll purchase and for each unit how much he'll pay 10 Rupees this agreement is made on today but the goods could delivery no sir will happen on first May we'll purchase the goods not now we'll purchase the goods in future but you already made agreement so why did you make that because in future may do you think price of the goods will be same or it will increase if you expect that the price of the goods will increase that means what you can do now now only make an agreement so that you don't have to pay increased amount later on that's the reason they made an agreement but agreement also says if the agreement by chance by chance if x limited backs out if it cancels then there is a penalty of how much 80,000 rupees if x limited cancels the contract he has to pay a penalty of 80,000 rupees that's one all right now this is an owner's contract how or I'll give you one more component on 1st March sir purchase will happen at a later date after two months on 1 May on 1st March no sir our economy hit a recession our Eon economy hit a recession so we feel after purchasing what do you think X limited will do they will sell it correct that's their business to buy those units and to sell those units let's say x limited Fields now they'll be able to sell the units only for 8 rupees per unit sir they are purchasing at what price 10 Rupees per unit they feel they'll be able to sell it only for 8 rupees per unit because of recession that means you tell me now this is an executory contract whichever way you go it's a loss making contract only how so if you EX execute the contract you'll buy it at 10 Rupees you'll sell it at How much rupees 8 rupees how much loss you'll make two rupees on one unit how many units One lakh units so total loss how much you will make if you go ahead with the contract you will make a loss of 2 lakhs if you cancel the contract you have to pay 80,000 so whether you go ahead with a contract or whether you cancel the contract still you need to pay money so whichever Road you take still it is L L and L now you are a finance manager of this company what you would like to do you will go for two lak option or penalty option that depends sir if the if you are in a bad mood we will go for first option we in a good mood we'll go for it does it work like that what does finance manager like to do he would like to minimize the loss which option gives you the lowest loss exit penalty that's what the standard also says first of all you got it that this is a loss making contract such loss making contract only we call it as what sir owner's contract for owner's contract will we make provision yes at what amount lower of the two amounts just like finance manager will choose lower loss option standard also saying lower of the two may you make profis what are the lower of the two one is your exit penalty another one is we say excess cost simply write it as excess cost what is xcess cost here you'll 2 lakh rupees yes no you'll buy it for 10 lakh you'll sell it for 8 lakh so cost is 10 lakh selling price is 8 lakh what does excess cost 2 lakh rupees so you'll make the provision at these two come whichever is lower so in this case may you will make provision for how much value 80,000 rupees okay now people so for owner's contract you'll make the provision at this particular amount can I go for next okay next is reimbursement so what is this reimbursement let's understand through a small example so there is one company P limited they are raw material manufacturers their job is to manufacture one material that material no sir exclusively they will sell it to Q limited nobody else entire material whatever they have P manufactured they will sell it only to Q limited Q limited will use this material and produce a finished goods like that that's the business so B limited will manufacture one material that they will sell it to q that becomes raw material for Q limited using that raw material they'll produce finished goods that finished goods Q will sell it to their customers this is the arrangement okay sir all right now sir customer so one customer has filed a case against Q limited saying your product is party let's say it's cosmetic product he used this product and his face became so lovely lovely lovely I tell you okay so full red bubbles bubbles bubbles all of one face cream they applied and full bubbles so he became so happy that he filed a legal case against you demanding compensation of 10 L okay now Q has to pay Q check with his lawyer he told Paka Goa see his face you don't have to even come to me okay looking at his face only we'll say that we will Paka lose the case that means Q limited has to recognize provision that is okay we are not talking about provision there is another agreement between p and Q what it says is if Q limited has to pay the customer something 40% of that amount will be reimbursed by P limited if Q has to pay something to the customer means 40% of that P has to give it to Q why because P only supplied raw material no that means only Q is at fault here or even P also P also that's the reason p and Q have agreed that if any settlement amount comes for Q will settle full amount to the customer later recover 40% from p is that okay so for this 10 lakh we have to recognize provision I'm not talking about this 10 lakh okay what about this 40% for Q limited this 40% is an outflow or an inflow inflow okay so what as29 says is reimbursement should be recorded as a separate asset reimbursement should be recorded as separate asset because from Q limited perspective this's 40% out flow or inflow inflow that means this reimbursement is a liability or an asset asset so this reimbursement Q limited has to show it as separate asset provided it is virtually certain virtually certain means more than 95% chance if Q feels that there is more than 95% chance that he will receive this 40% from P he will record a separate asset sir this is an asset this is provision is what sir provision is an asset or liability provision is an asset or liability liability so Q limited no sir is a recording one provision also he's recording one asset also provision as a liability this asset and this liability should not be knocked off it should not be set off provision should be shown separately in balance sheet reimbursement asset should be shown separately in balance sheet both should not be knocked off that what is the next point of WR here okay do not net off reimbursement from provision both has to be shown separately in Balance agreed this is about reimbursement Okay g all right the last one is restructure in restructuring means closing down a division selling a particular product or setting closing down a particular product division closing down a particular geography all that we call it as restructuring or even change in the management structure if you're firing some directors and bringing in new board of directors that also we call it as restructuring for restructuring also you need to make a provision but provided only for only for committed cost of restructuring you make the provision only for committed cost of restructuring let me give you a small example which is reality also initially I didn't start CA coaching I started CA practice it my practice did not click so I came in to ca coaching reality also so I given my own example here okay sir I started my practice to start a practice means obviously I can't do it alone I would have had some employees also okay now my practice is not going good not going as per my expectation that means those employees I will keep now or I will say tata bye- bye I've decided to stop my practice means will those employees I will keep it or I will say Tata byby I will say Tata byby so can they send can they can I say them Tata byby empty-handed or I have to pay some money and then say Tata byebye usually when you fire an employee you'll not fire it just like that you will pay some money and then say okay thanks for your efforts see you in the next life or after life or whatever life correct yes people this is what is a normal thing so whenever an employee gets fired we don't send them KH we also give some money this we call it as termination benefits correct so now let's say I need to pay let's say I'm planning to pay 1 lakh rupees as termination benefits to those employees whichever employee I'm firing them total payments I'm expecting to make how much 1 lakh rupees for this one lakh you need to make a restructuring Prof so when will you make I called that employee and told I'm closing down CA practice I'm planning to start CA coaching okay like this I communicated to him and I told that I'll give you some payment I will give you some payment don't worry I will not send you empty-handed I will give you some payment now you tell me has constructive obligation already arised for me because I called that employee and told I will fire you and I will not send you empty-handed I will give you some money that means one expectation is already set I have not made any agreement but I already set some but he will get already some expectation in his mind saying what I'll be fired but I will also get some money that means constructive obligation is already arised okay so you need to record the provision so when this constructive obligation arises or when this obligation arises you need to recognize the provision D sir usually we say uh that obligation arises when binding sale agreement is entered normally when you're planning to sell a division you'll sell it to somebody no when you sell it to somebody will you sell it just like that or you'll make an agreement so when the sale agreement if it is entered means automatically we say this is done and dusted so you need to make the provision for it yes or sir soer will virtually it will become virtually certain yes correct someone saying s sir if you enter an agreement it will become virtually certain sir then you have to record it yeah agreement is virtually certain but how much amount I will give is may not be how much amount I will pay to my employee may not be I'm thinking I'll pay one lakh later on I looked at his face Pop I was feeling very sad I said him okay take 150,000 so that means this final amount could be more or could be less F that is in that people excuse me and one more thing is Sir what the word provision and liability are used interchangeably the word liability and provision are used interchangeably study material uses that because provision is also a liability so what's the difference between credit as a liability and provision sir sir if you have to pay the credit our one lakh means how much you need to pay one lakh I means is there any confusion there or total Clarity total Clarity so that is your liability for you where obligation is very certain how much you will pay clearly defined but in case of provision how much you will pay when you will pay don't not exactly sure you can only estimate that's but provision is also a liability so don't come back to me saying sir instead of provision study material is written recognize liability because they they use the word provision and liability interchangeably is that fine with you so that way you don't have to worry too much fine now all right this one so now coming back to this example sir I'm moving from what to what CA practice to ca coaching now I have an old laptop which I was using for CA practice now with old laptop can I do CA coaching sir if you want to do CA coaching that at online level everything you need to have gaming laptops below that the system will crash the softwares are pretty high fund that means it will not sustain like we are doing now 7 hours class and all it will definitely not survive the processor has to be i7 minimum we say I5 ideally i7 the processor level that mean my old laptop which I was using for CA practice will it be sufficient for CA coaching or I have to buy new Investments new investment sir can I make provision for new Investments no if I'm planning to make some future invest in the form of laptop iPad mic TV AC for that and all I should not make provision because provision is relating to past event the ca coaching is a past event or it's a future event it's a future event for future events we don't recognize the provision okay so only whatever is related to closure of CA practice only for that I can make the provision whatever is coming related to this new ca coaching business for that TR all don't recognize a provis suppose I moving from bangaluru to Bombay why I feel Bombay is much better has a much better for C scope is better there that means I have to relocate means I'll incur some relocation expenditure so can I make a provision for relocation expenditure no no because the relocation expenditure is related to ca practice or CA coaching CA coaching that means it is a past event or future event so for relocation cost for marketing cost for future expenditures and all no do not recognize the provision because it is not related to past event but rather related to Future event all for future operating losses and all we don't recognize the that's what I called out here yesu okay now we'll take one or two questions and we'll find up okay okay come to question number one at the end of financial year 31st December 2017 company finds that there are 20 lawsuits 20 cases are going on so super company okay that have not been settled till the date of approval of accounts so in respect of five cases each cases group of cases they've made first case into five next 10 next five data they they've grouped it into three categories first five case we have 100 % chance of winning so if you have 100% chance of winning means is there any outflow no that means should we have to recognize provision or disclose contingent liability or nothing nothing here no outflow that means no conent liability no provision so come to the next 10 case in the next 10 case winning percentag is 60 that means what is losing percentage 40 sir now we are thinking from outflow side outflow because we have not filed the case somebody has filed the case against us when somebody has filed a case against us is it contingent asset or provision or contingent liability when somebody has filed a case against us either we will record a provision or we will disclose contingent liability for contingent liability and provision we want outflow outflow arises with respect to chances of winning or losing losing so we have 60% chance of winning means how much is the chance of losing 40% so there'll be an outflow only if we lose the case no there is 40% chance that we will lose the case means this is a probable or possible this is possible agreed sir correct this obligation will become possible for POS we will record provision or we disclose contingent liability we disclose contingent liability understood of so for this we have to record conent liability that's what they asking also in fact they only told how much contingent liability you will record sometimes they may not say whether you have to disclose contingent liability or record provision so we need to figure it out so in this case definitely it is conent liability agreed up okay so there is a 60 they have given various probability for these cases there is 60% chance that we will win the case so if we win the case means will there be any outflow no so 60% chance that we will win the case if you win the case no outflow so zero they will give you outflow amount outflow of probability percentage go on multiplying that's all there is a 30% chance that we will lose the case and how much we will pay 1 lakh 30,000 so take 30% into 1 lakh 120,000 okay and there is a 10% chance that we will lose the case and we'll pay how much 2 L so 2 lak 10% is how much this amount sir all this data is with respect to one case all this data is with respect to one case how many such cases we have 10 Cas so ultim ultimately finally multiplied by 10 you'll get the total total amount of what provision or contingent liability coner liability which is 5 lakh 60,000 this is with respect to 10 cases that's all or one more drama is there one more is there this is with respect to how many cases five cases what is the win percentage 50% so win percentage is 50% means lose percentage is also 50 so you'll there will be an outflow only if you lose the case there is a 50% chance that we will lose the case means outflow chance is probable or possible so probable means more than 50% probable means more than 50% here it's exactly 50% that means obligation is what here probable or possible possible for possible obligation we record provision or contingent liability contingent liability okay now all right same they have given you three different amount and probability percentage so there is a 50% chance that we will win the case and the outflow is how much sir zero 50% into Z okay then there is a 30% chance that we will lose the case and we'll pay 1 lakh so take 30% multiply by one lakh then there is 20% chance we will lose the case and pay 2 lakh 10,000 take 20% and multiply 2 lak 10,000 all this data is with respect to how many cases one case how many such cases have we have five Cas so multiply by 5 total contingent liability will become 3 lakh 60 for this 560 for this 360 so total contingent liability is how much 920,000 so you'll disclose a total contingent liability of 920,000 in your notes to like this okay now next sir company has not made provision for warranty in respect of certain Goods considering that the company can claim warranty cost from the original supplier one company is there they have to pay warranty amount okay there they sure they'll pay the amount that means they have to recognize what provis why have they not made because they feel they will get this amount back or they will get this reimbursed from original supplier so on one hand may they will pay on another hand may they will recover okay like here x limited y limited customer y limited first will pay the customer and later X limited will pay y limited or Y limited will recover the money from X limited okay now think from y Limited if they pay 10 lakh means they will recover 10 lakh that's what they dream on one hand they y limited will pay 10 lakh on other hand they will recover how much from x 10 so that's the reason they're saying on one hand I'm paying one hand they're receiving no impact for me I will not record anything correct no sir this 10 lakh payment you have to recognize provision this 10 lakh receipt you have to recognize it as reimbursement asset both has to be shown separately it cannot be netted off that is what you need to write over here provision separately you need to record reimbursement Alo you need to record separately provided it is virtually certain that provision you need to write out or call out over here okay G okay one more question we will do for this an engineering goods company provides sales warranty of two years to its customer first we will sell and then we'll tell two years warranty so anything within happens happens within two years if product becomes faulty then we either have to repair or we have to replace based on the past experience company has been following a policy for making provision and warranties on the invoice amount so they they only told we will recognize provision probably you need to guide the company how much provision you need to make okay uh they make the provision for warranty on what on the basis of the remaining balance warranty period they will check how much warranty period is still remaining at each year end at every year end they will check how much balance warranty period is remaining and they are saying if the warranty period remaining is less than 1 year we will make 3% promiss if warranty period remaining is more than 1 year we'll make 2% Pro this is the policy company has adopted this is not one year two years what do this one year more than one year less than one year mean warranty period remaining that's what they said okay now check the question uh first I think they've asked for two years here calculate the provision to be made for warranty under a 29 as for 31st March 2012 this is your year 1 also on 31st March 2013 this is your year two for both the years you need to calculate first we'll calculate for 31st March 2012 so we have already sold the goods on 19th January 20 how much is the value of the goods 40,000 how much warranty are we giving 2 years so count to 2 years from this date sir how much it will be 18th January 2030 correct fine one date or if you want you can write 19th January 2023 also that or 2013 also fine now now we are on which date you are on 31st March 2012 now first year ending date check sir count from 31st March 2012 you count till 18th January 2013 I don't want the exact number I just want want to know whether it is more than one year or less than one year from here to here you count 31st March 2012 to 19 January 2013 how much period so from 31st March 2012 if you count one year it will be 31st March 2013 but this is only 18 January no that means this is what sir this 40,000 here is more than one year or less than one year less than one year for less than one year how much provision we make 3% so on this 40,000 we have to make provision at the rate of 3% agreed because how does company policy if warranty period is less than 1 year we make 3% if it is more than 1 year we make 2% now check 29 January 2012 may we have so made a sale add two years to this the expiry date warranty expiry period is what 20th January 2014 now we are on 31st March 2012 count from 31st March 2012 to 28th January 2014 less than one year or obviously more than one year from here 20 31st March 2012 to 28 janary 2014 if you count obviously it is more than one year so this 25,000 sale warranty period remaining is more than one year so for 25,000 more than one year how much provision we make 2% provision so first year we have to make a provision of 1,7 like Okay so this I think MTP question or past paper question this is okay sir this is for first year now we have to do the same drama for next year next year is ending on 31st March 2013 sir this first sale warranty period has already expired on 18th January 20 13 we are on 31st March 2013 so warranty period for this product has already expired now will I repair the product or replace the product or nothing warranty period is expired so nothing we have to do so for this 40,000 do I have to make any provision not required so that's the reason that's why they've written at the end okay now all right what about this 25,000 we are on 31st March 2013 now okay warranty period is expiring on 28th January 2014 so count from here you count till 28th January 2014 31st March 2013 to 28th January 2014 less than 1 year now this 25,000 warranty period remaining is less than one year less than one year how much provision you make 3% now next sale 90,000 you made on 19th October 2012 add two years to this warranty will expire on what day 14th October 2014 sir you are on 31st March 2013 count from here till here account 31st March 2013 to 14th October 2014 obviously it is more than one year so on this 90,000 warranty period is remaining is more than one year if it is more than one year you make provision at 2% so record this so why 90,000 was not considered previously so this 90,000 sale came in 15th October 2012 the first year ended on 31st March 2012 so was this 90,000 sale made in year one or it came only in year two it came in only in year two so 90,000 we did not consider for real understood okay so first year you already made how much provision first year you already made a provision of, 700 what is the provision balance required for year two 255 this is provision the closing balance okay sir we need 2550 last year we've already booked what sir 1,700 provision is a liability right last year closing balance will become current year opening balance So currently we already have 1,700 how much is needed 2550 so from 17 1,700 you need to increase the provision and bring it up to 2550 how much you need to increase the provision by$ 850 what is the journal entry to increase the provision any provision the journal entry is pnl account debit to provision for respective provision here the provision is for warranty so you'll write provision for warranty 850 that's what they asked okay that is the requirement of the question provision of closing balance you need to account and also how much is debited to P how much is debited to Pendle in the second pnl got debited by 850 okay that's what they asked all right people I think uh this is uh good enough for today so we'll catch up or we'll go ahead with the remaining topics in the tomorrow's session so some more we'll do it in the tomorrow session same time tomorrow we start at 10:00 so thank you for your wonderful patience and cooperation see you tomorrow same time take care see you bye-bye yes happy morning one and all so we'll be starting today with the new topic for revision that is Consolidated financial statement back by accounting standard 21 so what does consolidated financial statement mean adding two or more company financial statements so consolidation simply means adding two or more company financial statements any random company financial statements can you add like AR BR of financial statements with Reliance financial statement is it possible to add no if you want to prepare consolidated financial statements there has to be one key aspect called control only one company controls the other company then only we need to prepare Consolidated financial statement otherwise if this control is not there Consolidated financial statement is not necessary when I'm talking about Consolidated financial statement here I'm talking about as21 which talks only about parent and subsidiary consolidation or holding and subsidiary consolidation we are not talking about Associates or joint venture we'll cover that later after this this okay we have a separate standard for that so for you to consolidate holding and subsidiary company one company should have a control over the other company uh so let's say h limited has 90% shares in s limited so can we say h limited has control over H limited yes so when do you get control if one company owns more than 50% shares in another company then we say the person or the company holding shares we call it as holding company and other company we call it as subsidiary company so Consolidated financial statement is simply taking hka financial statement and adding up with s financial statements so it is not plainly uh adding up okay so there are certain pointers it's not just take two company of financial statements and randomly add up there has to be certain other factors we need to keep in mind so you remember the working node we used to prepare so before so all these are practical problems or problem specific pointers have written over here but before that first we'll summarize you remember seven working noes we us to prepare in Consolidated financial statement first working node normally we used to prepare to get the shareholding percentage how much shares holding company has in subsidiary company okay so in this particular example if holding company has 90% shares in s limited means there are somebody else who owns 10% not somebody else only we call it as minority interest okay all right so this is one so first working node in Consolidated financial statement problems is to know how much shares is held by holding company and how much Shares are held by minority interest that's the reason working note number one second step is to prepare the general reserve of the subsidiary company okay if at all they give you General reserve of subsidiary company prepare this working note next working note we used to prepare was pnl account of subsidiary company then fourth one is analysis of reserves and surplus of subsidiary company so all the subsidiary company reserves and surplus sir what where do you show reserves and surplus under in balance sheet under shareholders funds so all the reserves and surplus of subsidiary company should be allocated among the shareholders who are the shareholders of subsidiary company holding company and minority interest so that allocation of reserves and surplus happens in working note number four and in Consolidated balance sheet while problems working note number number four is the most important one because it'll have the maximum number of adjustments okay so in working not number four analysis of profits of subsidiary company first the all the reserves and surplus of subsidiary company will be distributed among holding company and minority interest but before we split the reserve has to be further segregated into what pre-acquisition profits and post-acquisition profits pre-acquisition reserves and surplus and postacquisition reserves and surplus pre-acquisition means what before holding company became shareholder what and all reserves and surplus subsidiary company had before holding company became shareholder what and all reserves and surplus subsidiary company already had that we call it as pre-acquisition reserves and surplus after holding company became shareholder what and all reserves and surplus came that we call it as post acquisition reserves and surplus so distribute reserves and surplus into pre and post and this pre and post will be distributed among holding and minority interest in their respective shareholding ratio okay that is one all right next working one number five is the minority interest like here in this particular example how much does minority interest own 10% so minority interest as a shareholder what and all shareholder or what and all will you show under shareholders funds visualize balance sheet what and all you will show under shareholders funds share capital and reserves and surplus minority interest is also a shareholder so what in all minority interest shareholders will ask for their share of capital their share of reserves and surplus now reserves and surplus of subsidiary companies already split into two parts what are those two parts pre-acquisition profit and postacquisition profit so when you prepare minority interest working note three things three components you need to bring it in one is minority interest their share of share Capital their share of pre-acquisition profit and their share of postacquisition profit okay then we prepare working note number six called Goodwill or capital reserve Goodwill instead of Goodwill here we call it as cost of control that's another terminology okay so how do you get Goodwill or cost of control first I'll run through then we'll apply all this in one question before I apply I want to give you the step car work around okay so how do we get Goodwill sir first take the cost of investment if there is any pre-acquisition profits or pre-acquisition dividend reduce it then reduce it from compare it with what sir total share capital or holding company share Capital holding company their share of share capital and subsidiary company you compare okay so if you get a positive number Goodwill negative number we call it as capital reserve that's where we used to get Goodwill or capital reserve in this particular working note yes last working note is to get consolidated reserves and surplus this Consolidated reserves and surplus will be directly shown in Consolidated balance sheet so what do you do over here first take holding company all the reserves and surplus to that you add what sir if there is any post acquisition profit of subsidiary company you add if there is any stock Reserve adjustment stock Reserve adjustment means what sir here so when will that come if holding company has sold Goods to subsidiary company if holding company has sold Goods to subsidiary company do you think sales would have happened at cost price or sales would have happened at selling price sales would would have happened at selling price that means holding company would have made some profit that profit is included in who car stock NOW subsidiary stock so holding company made profit now are you treating holding company and subsidiary company as two different companies or one company one company so that means this is realized profit or unrealized profit as long as there are two separate companies one profit can make the one company can make the profit from other company but for Consolidated financial statement you're treating them as one so hence if you have any un unrealized profit like this that we call it a stock Reserve needs to be eliminated because holding company made the sales to subsidiary company here so who made this profit holding company so holding company pnl balance is already increased hence we need to eliminate it okay then if you have any pre-acquisition dividend reduce it so this is just the format okay that we used to do all right we'll spend a little more time about all this in the problems once again but this is just an overview I wanted to give you okay fair enough all right uh now can we dive into one question before I read all through all the adjustments all these are problem specific pointers have written there but right now if we understand it it'll be glimps and pieces so what we will do is first we'll take one full-fledged question of consolidation solve it fully then we'll come back to these pointers and see whether these pointers are making sense to us can we do that now everybody yes online also keep typing so that uh I know that you have revised or I know that you also remember okay whatever whenever I ask a question you also type it's fine so that I'll also get the confidence that you remember things okay so let's take up question number 10 this is quite popular question has come a few times in the examination okay great all of you found the question it's there in the study material even if you don't find not a problem you can look at the screen from the following balance sheet of H limited and it subsidiary s limited drawn up on 31st March 20 X1 so that means year is ending on 31st March 20 X1 so what is the current year 1st April 20 x0 to 31st March 20 X1 correct all right prepare Consolidated balance sheet with respect to the following information reserves and reserves and pendel account of s limited so s limited is holding company or subsidiary company subsidiary company Reserve balance and pendl balance they've given at what value Reserve balance is 25 pnl balance is 15,000 respectively on the date of acquisition who acquired shares here sir holding company acquired shares in subsidiary company when holding company acquired shares in subsidiary company subsidiary company already had this Reserve already they had this Reserve so any reserves and surplus existing on the date of control on the day holding company got control over subsidiary company if subsidiary company already had any reserves and surplus means such reserves and surplus we call it as postacquisition profit or pre-acquisition profit pre-acquisition profit so that means these two are pre-acquisition profit correct okay and what is the date of control sir 1st April 20x zero on the first day of the current year only holding company has got the control over subsidiary company so that means these two are General reserve and PN Dela opening balance also can I say so okay so they have given gr and pnl account opening balance all right machinary whose Book value is 1 lakh Furniture whose Book value is 20,000 were revalued at 150 and 15,000 respectively so what is the book value of missionary 1 lakh but what is the revalued amount 150,000 so loss or Gainer gain now you think holding company has to get control over subsidiary company means will they get this control at free of cost or they have to pay money they have to pay money correct no how will they decide the money value how much to pay how will it will be decided based on net assets of subsidiary company because net asset means net worth of the company now you tell me if you want to buy if you want to get some control over another company will you take will you value that company Net assets at Book value or market value obviously what is the moover is the market value based on that only you will decide the price so now you tell me for consolidation purpose should I take Book value or should I take market value should take market value because the cost of the investment is on Book value terms or market value terms market value terms so I need here what sir I need Book value or I need market value market value check what is the book value of missionary 1 lakh but market value is 1 lakh 50,000 that means there is a revaluation gain on what Machinery worth how much 50,000 150 minus 1 lakh which is is 50,000 agreed on fine so this 50,000 should be considered for Consolidated financial statement yes has subsidiary company considered no sir is it a mistake no subsidiary company has a choice we have already studied as10 subsidiary company has a choice either to follow cost model or revaluation model they can either show their assets at Book value or they can show it at market value yes so subsidiary company showing it at Book value have they done any mistake no no no no that is their choice that's what they' have done but all this revaluation gain revaluation loss is what adjustment consolidation adjustment it'll only come in Consolidated financial statement subsidiary company has not done any mistake but still we need to consider this revaluation adjustment in CFS CFS here means Consolidated financial statement agreed okay similarly Furniture what is a book value 20,000 but revalued amount is only 15,000 so it's a revaluation gain or revaluation loss it's a revaluation loss so how much loss 5,000 so this revaluation gain also we need to consider this revaluation loss also we need to consider for what purpose CFS purpose okay all right uh on 1st April 20x for the purpose of fixing the price of its shares the rate of depreciation computed on the basis of useful life is machinary is 10% Furniture is 15% now sir subsidiary company would have depreciated their asset like let's say machinary they would have depreciated the missionary at 1 lakh rupees because that is the value of their books on the first day that means they have calculated depreciation on 1 lakh but for Consolidated financial statement May are we taking missionary value as 1 lakh or 150,000 they're taking 1 lakh 50,000 so subsidiary company has calculated depreciation on 1 lakh any mistake or they've done correctly they've done correctly but for sub Consolidated financial statement we have to consider 1 lakh 50,000 so that means on how much value of asset subsidiary has not depreciated on 50,000 of asset subsidiary company has not calculated depre any error or consolidation adjustment consolidation adjustment so that means we need to calculate depreciation on this additional 50,000 also 50,000 into 10% is how much 5,000 so on this machiner you'll get some extra depreciation of 5,000 correct people okay similarly what is Furniture Book value 20,000 so all this book value has on which date it has on 1 April 20x zero and here is ending on 31st March 2 x one so subsidiary company would have depreciated this furniture by keeping what as the value 20,000 as value they have depreciated on 20,000 but are we considering Book value for consolidation or revalued amount revalued what is the revalued amount of furniture 15,000 so subsidiary is depreciated on 20 but we need to calculate depreciation only on 15 I mean subsidiary company has calculated less depreciation or more depreciation more depreciation and how much value 5,000 huh how much is the furniture car rate depreciation rate 15% that means what is it 750 yeah or yeah correct no so 7 50 is the extra depreciation which subsidiary company has accounted Fair of people that means this we also we need to consider done now then they have given balance sheets of two companies holding company and subsidiary company okay great uh just I'll keep the face value in mind I know that do you think balance sheet is of much Essence over here no much because we already we got all the necessary information okay so now you have to give me a quick walk through again what is the first step in Consolidated financial statement now little slowly I want you to tell first I give you an overview now you will tell me in detailed my each step then I will we will detail we will go through all the steps once again first working note in Consolidated financial statement what is that shareholding percentage what are we trying to find out through working out number one how much percentage shares in subsidiary company is held by holding company and how much in minority interest should we have to calculate that or given given so here how much is that 80 percentage correct that means first working we already clear I think we I already Sol it here I'll just click it off so holding company owns 80% means minority interest will own how much percentage sir 20% clear this is the working note number one in every consolidation problem some problems may we may have to calculate shareholding percentage some problem they'll only directly give so working not number one over tell me what is working not number two preparation of preparation of General reserve of subsidiary company first of all check the questions sir do you know General Reserve does a subsidiary company have any general Reserve does the subsidiary company have any general Reserve check not stock do your subsidiary company do they have yes so that means we'll prepare next working notice General reserve of the subsidiary company sir this data is on what this data is from balance sheet no balance sheet you prepare it year beginning or year ending that means this data is As on 31st March 20x one okay so means whatever General reserve and pnl account that you see here this is opening balance are closing balancer the general reserve and pnl that you see in balance sheet is the closing balance do you know the opening balance of General Reserve current year begins on 1st April 20 x0 and ends on 31st March 20 X1 so do you know the opening balance of General Reserve yes given in the problem check the adjustment here the reserves stood at 25,000 on the date of acquisition and what is date of acquisition 1 April 2 x zero so what is this 25,000 General Reserve open imbalance so guide me sir in when you prepare General reserve of subsidary Ledger working note where will you show this 25,000 on the debit side or credit side credit side you'll write it as what bu balance brought down check have you written that so in general Reserve first we'll write buy balance BR 25,000 easy okay only opening balance is given or even closing balance is given closing balance come to the balance sheet what is a closing balance of generalis 75 ,000 where will closing balance of General Reserve come in your Ledger on the debit side two balance carry down 75,000 easy everybody good okay so now sir we read the whole problem any other adjustment we got it from General Reser or nothing nothing sir this side total is 75 but the side total is only 25 is The Ledger matching or you're getting balancing figure how much balancing figure 50,000 so 25,000 opening became 75,000 closing how how can General Reserve increase it has increased by 50,000 how some some 50,000 we have transferred from pnl to General Reserve so we'll write by pnl as balancing figure is that okay I'll tell you why we prepare this working note also first let's go ahead with whatever we need to do so this is your first second working note okay third working note is what sir pendal account of the subsidiary company sir have they given Pendle account of subsidiary company opening balance yes given as 15,000 where will you write this 15,000 on the debit side credit side which side credit side you'll write it as buy balance brought down how much sir 15,000 so in your p&l account first you'll write buy balance brought down 15,000 Okay g similarly check sir have they given balance sheet of subsidiary company yes balance sheet you prepare it here beginning or year ending year ending so do you know pnl closing balance yes how much is pnl of subsidiary company closing balance 25,000 where will that 25,000 come on the debit side as two balance carried down yes sir 25,000 agreed sir now did you transfer any money from pnl to General Reserve yes what is the transfer entry pendl account debit to General Reserve so same thing has to be posted in pendl also so in posting the in pendl will be to General Reserve 50,000 yes sir correct ah so any other adjustment is there in P account of subsidiary company or that's all that's all so what about depreciation so depreciation has subsidiary done any mistake or it is consolidation adjustment it is consolidation adjustment okay we are only taking the data which subsidiary company has done okay depreciation also we'll do in a bit not here okay so now just check sir what is this side total this side total is 75 this side also should be 75 is it 75 or are you getting balancing figure you're getting balancing figure how much balancing figure 60,000 you are getting as balancing figure what is that sir what is that what can come on the credit side check here opening balance of 15,000 became closing balance of 25,000 means how p and Del opening balance was 15 okay closing balance is 25 that means pnl has increased means how is how it will be possible current year may company has made some profit so that balancing figure is nothing but current year profit which we get it as balancing figure okay yes sir everybody so this is working note number three in Consolidated financial statement while problem till here any confusion anyone same working note we have done almost 10 to 12 problems in consolidation with the same working note yes so it should not be a problem ideally but I know that some of you might have not studied from me and directly watching this that's a reason I'm taking it a little slow okay the same format I'll follow for all the questions I suggest stick to the same thing so that all the consolidation adjustments you can tackle with this format okay I've explained the logic of each component but right now I not have time to go into each component few few things I whatever is important I'll go on spending time on that okay all right what is working on number four we do sir analysis of reserves and surplus of subsidiary company so subsidiary company reserves and surplus where do you show again in balance sheet shareholder funds that means reserves and surplus of subsidiary company belongs to whom shareholders of subsidiary company and who are the shareholders of subsidiary company holding company and minority interest so all the reserves and surplus of subsidiary company will be split among holding company and minority interest in their respective shareholding percentage H shareholding percentage is 80% minority of shareholding percentage is 20% in this ratio we go on splitting and do we do this allocation on a total basis or each component by component basis we do component each component of General Reserve pnl account Ledger we will take and go on Distributing among holding company and pnl holding company and minority interest okay check this first component in general Reserve so before you do the split no before you allocate you need to know whether the reserve is a pre-acquisition profit or postacquisition profit pre-acquisition profit means what sir those reserves and surplus which were already existing before share holding company got the control on the day holding company got the control reserves and surplus were already existing such reserves and surplus of subsidiary company we call it as pre-acquisition profits don't be misled with the word pre-acquisition profit profit year refers to pre-acquisition all the reserves and surplus agreed and this pre-acquisition profit sometimes we also call it as capital profit post acquisition profit another name is revenue profit so sometimes in our study material instead of pre and post you may also see the word Capital profit and revenue profit this is just an alas another name that's all okay now sir when did you get the date of control tell me that first what is the date of control date of control is 1st April 20 x0 holding company got the control or holding company bought 80% shares in subsidiary company only on 1st April 200x zero now first component of General Reserve is what opening balance this opening balance came after holding company became shareholder or it was already existing it was already existing so this is Sir this 25,000 should I put it under pre- column or post column I should put it under pre pre- column because this was already existing any reserve and surplus which is already existing on the date of control that only we call it as pre-acquisition profits yes so this 25,000 we will give this is a total yes no each component by component we'll go on Distributing so this 25,000 split in 8020 ratio what will be the split up 20,000 and 5,000 rupees this is your opening balance of generalism easy sir okay now this this over okay what is the next compony pnl account 50,000 sir this PN this 50,000 came from General Reserve or it came through pnl P came through P anyway pnl also we going to distribute I mean should I have to worry about this for the time being or not required not required when I do the P distribution this 50,000 will be taken care of correct so that means should I have to worry about that or take off take off so these two summation only is what closing balance no so if these two are already a portion means indirect closing balance is also a portion so General Reserve any more drama pending or fully over fully over can I move on to the next one like the same activity we have to repeat for all the reserves in Surplus other than General Reserve what are the other reserves we have here we have P so do you know pnl opening balance yes how much 15,000 opening balance means this came after holding company got control or was there before only before holding company got control in subsidiary company this opening balance of p and was already there so this 15,000 where I should put under pre- column post column which column under pre-acquisition profit under pre-acquisition profit you'll say opening balance of pnl 15,000 this 15,000 also you distribute among the parent and subsidiary company or yeah the holding company and minority interest in the ratio of 80 is to 20 that will be what sir 12,000 and 3,000 respectively done now okay now check here sir current year profit current year profit means it is one month profit two months profit or whole year profit this is whole year profit one minute when did the holding company get the control in subsidiary company first April on the first day only they got control that means entire current year profit was made by the subsidiary company after holding company became shareholder is my statement right or wrong entire profit of subsidiary company has been made only after holding company has got the control yes no that means this is this was there before hold company got control or it came later this 60,000 this 50,000 came later so where should I show this 50,000 under pre- column or post column post column and post column will show current year profit which is how much sir 60,000 the 60,000 also you distribute it in 8020 ratio so it will be 48,000 and 12,000 respectively Okay g yes this is one okay these two are done okay add these two sir how much is it add these two how much is it 75,000 yes correct out of this 75,000 only 50,000 you have transferred to General Reserve hence closing balance is how much 25 totally you had 75 opening balance of profit was 15 current year profit was 60 so total profit you had was how much 75 in this 75 25 you transfer to General Reserve so how much is profit remaining 25,000 sir did I distribute entire 75 have I distributed entire 75 yes hey no this 15,000 also have distributed the 60,000 also have distributed so entire 75 have any which way distributed so should I have to worry about this 50,000 transferred to General Reserve no because out of 75 only I've transferred to generalis no that means this 50,000 has come from this 75 only no and entire 75 already transferred okay sir no sir if you transfer to General res pnl balance will reduce no sir that means you should not transfer 60,000 sir you should do 60 minus 50 sir if you think on those lines yes you're right only out of 60 how much have you transferred to General Reserve 50,000 but how much have I distributed 60 that means what you have to do you have to minus how much you have to minus 50,000 correct this 50,000 went where General Reserve General Reserve also will be General Reserve is also a reserve what will that be reserved what will you do for that Reserve again distribute so required first you'll reduce then again you will distribute required or not required not required so don't worry about that now okay fine because anyway you would have transferred money from money from money to General only either from opening balance or current year profit so both opening balance and current year profit is fully Any Which Way distributed so transfer to General Reserve you need not worry or this will not come in your working note number four is my statement absolutely okay for everybody okay and what about closing balance should I have to worry or already taken care of already taken care of because in the 75 if you deduct 50 only you're going to get 25 since I've distributed entire 75 these two are automatically taken care of yes or saru okay so now that's all usually that's all will be there but in this problem two extra components are there can anyone remind me what is that revaluation adjustment was any asset revalued yes check here we already wrote that yes machiner Book value is how much sir I'll retrace your adjustment I once again here look at it Book value of the missionary was 1 lakh but was the revalued amount 1 lakh or 1 lakh 15,000 1 lakh 50,000 that means do you have revaluation loss or revaluation gain you have a revaluation gain how much sir 50,000 any problem sir asset came after holding company acquired the shares or it was there much before asset was there much before so this revaluation gain you will put it under post column or pre- column this revaluation gain this was there already when the asset was already there when holding company acquired the shares before holding company acquired the shares only there was there so this revaluation gain you should put it under post column or pre- column pre-acquisition profit site correct everybody so check have we shown re uh revaluation gain under pre-acquisition profit site this is your pre-acquisition profit revaluation adjustment on planted missionaries how much 50,000 understood us sir there's nothing but your revaluation Reserve what will you do for all the reserves and surplus distribute among whom shareholders who are the shareholders of subsidiary company H limited and minority interest in what ratio will you do the split up 80 % and 20% this 50,000 also you split between 80 and 20 ratio agreed sir this is a revaluation gain on planted missionary you have only revaluation gain or you have revaluation loss also revaluation loss also on what asset another different asset called furniture furniture Book value was 20,000 but revalued amount is only 50 so Book value is 20 market value is only 50 that means it's a revaluation loss correct so revaluation gain you added that means revaluation law you will subtract correct or no so where will this revaluation come sir asset came after holding company became shareholder or was already there already there that means this loss you will put it under post column or still pre- column only pre- column only so revaluation gain means you're giving us positive apportionment so revaluation loss will be negative apportionment easy answer sir same distribute in 8020 ratio so it will be 4,000 and 1,000 respectively done now is this the only adjustment that that comes or relating to this one more will come relating to this one more will come which is what sir sir subsidiary company has charged depreciation and planted missionary at 1 lakh and they have charged depreciation at the rate of 10% correct but for consolidation purpose should we considered 1 lakh or 1 lakh 15,000 we should consider 1 lakh 50,000 so on how much asset has subsidiary company not depreciated on how much ass said subsidiary company has not depreciated 50,000 so what is the rate of depreciation 10% so 50,000 into 10 is how much sir 5,000 rupees or if you want you can work it out like this also like subsidiary company has calculated depreciation at 1 lakh 1 lakh or 10% is how much 10,000 okay and after deducting uh depreciation how much is asset value 90,000 check has subsidiary company showing planted machinary at 90,000 check your working not number two planted Machinery they're showing it at 90,000 because from one lakh they' have depreciated 10% and then the book value has become 90,000 agreed now come back for consolidation purpose can we consider 1 lakh or should we consider 150,000 we should consider 1 lakh 50,000 because we have to take not the book value but the market value that means we have to depreciate not on one not on one lakh but we have to depreciate on 1 lakh 50,000 so 150,000 10% is how much 15,000 that means a subsidiary company should have depreciated 15 but they charged depreciation of only 10 so how much depreciation they've not charged 5,000 rupees that means now we need to charge the depreciation yes or no that means due to revaluation you are getting less depreciation or more depreciation due to revaluation gain you are getting more depreciation that more depreciation I'm calling it as excess depreciation is it okay so should we charge this or ignore it we should charge so depreciation you'll charge it on the date of control or at the end of the year depreciation comes on the date of control or end of the year end of the year yes that means this depreciation adjustment will come under pre-acquisition profit side or postacquisition profit side it'll come under the postacquisition profit side because normally charge depreciation only at the year end so on on missionary you will get extra depreciation you should put it under postacquisition profit okay sir how much is that extra depreciation 5,000 now you tell me when you're charging some extra depreciation P andl balance will be same or it will'll reduce if you have to charge more depreciation means P andl balance will be same or it'll reduce it'll reduce hence 5,000 should I distribute as positive apportionment or negative proportionate this is not Ledger this is a statement so if a component balance is increasing means I will show it as positive number if a component balance is reducing means we'll show it as a negative number so due to this depreciation machinary value will reduce in fact pnl balance also will reduce hence that's the reason we have to show this as what sir negative number okay sir so this 5,000 also will be distributed among whom and wh minority interest and holding company 8020 ratio 5,000 and 8020 ratio you do 4,000 and 1,000 respectively you will yes okay is this the only adjustment of depreciation or one more sir even Furniture you revalued correct Furniture also you revalued what was the book value of furniture sir 20,000 what is the rate of depreciation they've charged on furniture 15,000 I mean subsidiary company has charged how much 20,000 15% they have charged how much 3,000 but for consolidation purpose are we considering Book value or market value market value and what is the market value of the asset 15,000 that means on how much value we should have depreciated this asset for 15,000 at what rate 15% so how much depreciation you you should charge for consolidation purpose for consolidation purpose you should only charge 2250 but subsidiary has charged 3,000 that means now you have to charge more depreciation or reverse you have to charge more depreciation or reverse subsidiary company has already charged more you need to reduce that that only we call it as reversal of depreciation understood so how much is how much is the difference between these two 3,000 - 2 250 is how much 750 either like that you can do or simply you take on how much value of subsidiary company has charged ex depreciation 5,000 take 5,000 into 15% it will become 750 the choice is yours okay all right now this 750 reversal of depreciation will come under pre or post post because there's a depreciation depreciation will come on the date of control or at the end of the year end of the year so the 750 where it should come post acquisition profit now are you charging more depreciation or are you reversing sir if you you if you account more depreciation pnl balance will reduce because depreciation is an expense when you account more expense pnl balance will reduce here you are accounting more expense or you are reversing the expense reversing the expense means you are reducing the expense if you reduce the expense pel balance will increase so this 750 will cause what impact on Pendle it will increase the Pendle so I should show this as a negative apportionment or positive apportionment positive apportionment under post acquisition profit 7 50 will show it as positive apportionment the 750 also distribute between holding and minority in 8020 ratio the apportionment will be 6 150 everything ticked off rest is the total so this is the pre car total and this is post car total respectively yes sir sir why do we do this pre and post sir I'll tell you let meing some water okay orse you tell me why do we split between this pre-end post online respond why do we split the reserves and surplus pre-end post can we why can't we do it in one shot what is the intention of splitting subsidiary reserves and surplus into pre and post ah another way to put it across is so pre-acquisition reserves and surplus means it was already there when holding company became the shareholder it was already there when holding company became the shareholder so logically you think something which was already there is holding company put any effort to get that no so logically should holding company get any share in that some pnl balance some reserves and surplus holding subsidiary company already had that means now holding company controls has 80% in subsidiary company that means whatever subsidiary company has 80% of that belongs to holding company right but all the reserves and surplus were there much before holding company became the shareholder that means logically should holding company get it no but practically will they get it yes because company works on what approach all are nothing the day you became shareholder whatever company has everything belongs to you as a shareholder the day you leave the company nothing belongs to you it's like that it's like our life when you have everything yours when you're gone nothing is yours yeah like that so company works like that because it is very difficult to aate why we do this concept is let's say sir I bought the Reliance share at 10 now it's about 1040 I bought reliance a share at 1040 I sold it at 1045 I bought it at 1040 now I sold it within 5 minutes can I write a letter to infosis and say 5 minutes I was holding your share give me five minutes dividend give me five minutes dividend possible or no so hence the company works on what approach All or Nothing the day you are shareholder everything is yours the day you quit the day you sell the share nothing is yours like that so this pre-acquisition profit how much is H limited pre-acquisition profit are 68,000 this this 68,000 was there much before holding company became shareholder so logically should they get it no practically are they entitled to get yes hence what the standard says is this pre-acquisition profit no reduce it from cost of investment this pre-acquisition profit reduce it from cost of investment now think why what is the cost of investment how much did holding company pay to get control control in subsidiary company 1ak 160,000 that is given in balance sheet only check here and they've pred note number four come to note number four shares in s limited how much did a holding company pay to get shares in its limited 1 lakh 60,000 there is only your cost of investment now you think logically cost of investment is 1 lakh 60,000 on one hand holding compan is paying 160 on another hand they are entitled for pre-acquisition reserve of 68 so is your cost really 160 or lesser one hand you paying 168 on the other hand you are getting back 68,000 that means is your cost really 160 or less less hence pre-acquisition profit we need to reduce since this pre-acquisition profit you have to reduce no that's the reason all the reserves you need to split as pre and post otherwise splitting was not necessary not it only because of this adjustment you have to do every reserves and surplus you have to split it as pre and post n s sir what about post acquisition profit sir so post acquisition profit came after holding company became the shareholder so should logically should they get it yes practically will they get it yes so this is what sir abnormal item or normal normal this is your normal profit no normal profit you'll transfer it to normal pel so here we prepare Consolidated pendl so this 44600 will be transferred to Consolidated pel which we will transfer in a bit I'll get to that is that okay with you so did you get the adjustment for this okay so first maybe we'll finish off Goodwill cover keing not and then into minority interest so how do you get Goodwill I told sir we Revis this tell me once again what is the Goodwill C step first you take cost of investment then you reduce if you have any pre-acquisition profits I'm using the word profits does it mean profits only or it's all reserves and surplus all reserves and surplus this just for the sake of wordings we have used profit if it is confusing for you you can write pre-acquisition reserves and surplus it is fine okay then if you have any pre-acquisition dividend reduce it then compare it with face value of share capital okay now check that's what we will do over here what is the cost of investment 1 lakh 60,000 we have to reduce pre-acquisition profit yes if is there any pre-acquisition dividend there in this problem no so what does pre-acquisition dividend means sir any dividend given out of pre-acquisition profit any dividend paid out of I'll write it here for your reference any dividend it is there in your chartbook I again again take you through that any dividend paid out of pre-acquisition profits is what we call it as pre-acquisition dividend okay saru all right this is one it's there in your as13 also we'll apply this in the next I'm not taken this pre-acquisition dividend question here because after this topic I'll take in as13 investment accoun there also it will come so that's the reason I've kept this I've chosen this question because this this is a better question that's the reason pre-acquisition dividend will come in the next as13 question I've chosen there also it will come but quickly I'll tell you pre-acquisition dividend means any dividend paid out of pre-acquisition profits now think logically pre-acquisition profit means means should holding company logically get it pre-acquisition profit of subsidiary company means should holding company logically get it no why because these profits were made much before holding company became shareholders yes so pre-acquisition profit only they should not get now pre-acquisition dividend means what dividend paid out of pre-acquisition profit so logically you think if any dividend is given out of pre-acquisition profits such dividend should be given to holding company or no because it is paid out of what profits pre-acquisition profits and was a holding company there when that pre-acquisition profits were made or they were not there they were not there so logically should holding company get this pre-acquisition dividend no but practically will they get it yes okay now you tell me you paid 1H 160,000 to buy the investment one hand may you are getting pre-acquisition profits on another hand may you are also receiving pre-acquisition dividend so is your cost of in investment really same or it has reduced reduced so since you're receiving pre-acquisition dividend cost of investment will not be 160 it will be lesser is it okay sir and as 13 also says this actually pre-acquisition dividend is not a concept of consolidation it's a concept relating to accounting standard 13 relating to investment what as13 says is if you have received any pre-acquisition dividend what is the Jal entry for dividend received sir bank account debit to one second one minute yeah I think it's fine all right uh yes so bank account debit to what is the journal entry for normal dividend sir bank account debit to Dividend and dividend is an income and you'll transfer that to P account so first you'll write bank account debit to dividend income account and then second entry will be dividend dividend income account debit to Pendle account correct no sir this is the journal entry for what dividend this is the journal entry for normal dividend if you have received normal dividend then this is the journal entry not dividend paid this is a journal entry for dividend received normal dividend received sir are we talking about normal dividend here or pre-acquisition dividend pre-acquisition dividend if it is pre-acquisition dividend what the standard says is holding company has received because if subsidiary company has declared the dividend means dividend will be paid to whom shareholders who are the shareholders of subsidiary company holding company and minority interest so has holding company received any dividend yes what entry holding company will c bank account debit let's say dividend amount is 10,000 bank account debit 10,000 you can't credit dividend income account is this your normal dividend or pre-acquisition dividend if you have any pre-acquisition dividend what we have to do reduce the cost of investment same thing as3 also says any pre-acquisition dividend should be reduced from cost of investment sir investment is a liability or asset asset assets have what balance debit balance due to pre-acquisition Dividend that asset balance is same or is it reducing it is reducing something which has debit balance how do you reduce it credit so what is the journal entry for pre-acquisition dividend bank account debit to investment account now you you tell me because of pre-acquisition dividend what will happen to your cost of investment or what will happen to your investment value same or it'll reduce reduce so what have I written here if there is any pre-acquisition dividend reduce in this problem is there any pre-acquisition dividend no if it comes in the problem do you know what to do yes just bring it into this working mode because due to pre-acquisition Dividend your investment value will reduce understood okay so do this plus minus sir how much are you getting only do this 160 minus 68 to do how much you getting 90 92,000 is a net cost of investment agreed sir what is a share capital in subsidiary company what is a share capital of subsidiary company one lakh entire One lakh belongs to holding company or only 80% only 80% because 20% belongs to other guys other guys we call it as minority interest so what is a share Capital 1 lakh but holding company share is only 80,000 sir the worth of the investment is 80,000 but how much did holding company pay to get control 92,000 worth of the investment is only 80,000 but holding company paid 92,000 so that means did they pay less or more holding company paid less or they paid more for 80 they paid 92 cost cost of investment is 92 so they paid 92 but the worth is only 80 so holding company paid more right if you're paying more means holding company has made profit or they made loss loss that loss only is called as what sir Goodwill how much is that 12,000 rupees easy I'll show you another method to get the same answer as well but whenever they give you a full flesh I think I mentioned this also whenever they give you a full-fledged question of consolidation solve it in this format only there is another way to work it out also okay which I'll show you here also I've told you in regular class now also I'll tell you but follow this only for bigger problems for shorter problems I wanted to I'll take you through that also you can follow the other method so so far are we good so this is the thing so here what did we get sir good 12,000 that is nothing but your Goodwill suppose you got this as a negative figure that means holding company has made profit Revenue profit or Capital profit Capital profit that means you'll transfer that where to Capital risk that way yes SG okay this is about uh working note number six for cost of control before this we prepare one more working note for minority interest so minority interest are the shareholders ERS of subsidiary company what and all shareholder will ask sir if you are a shareholder in subsidiary company what and all will you'll ask your shareff share Capital your share of pre-acquisition profit your share of postacquisition profit so minority will only ask for three things what is a share capital of subsidiary company one lakh entire One lakh belongs to minority interest or only 20% 20% because minority interest owns only 20% so 1 lak or 20% is how much 20,000 okay pre-acquisition profit so do you know pre-acquisition profit yes yes what is minority interest their share of pre-acquisition profit 177,000 considered yes that's all or even postacquisition profit post acquisition profit minority interest their share of post acquisition profit is how much 11,150 so add all this how much you going to get 48150 are we good sir okay sir why we can't do the same working oute for holding company sir because holding compan is also shareholder sir so why can't we do it sir we can't do it like that sir because holding company has purchased investment in subsidiary company think from holding company perspective this holding company this investment is an asset investment is an asset where did they invest in they invested in equity shares of subsidiary company that means indirectly can I say subsidiary company has issued Equity shares to holding company yes sir subsidiary company has issued Equity shares to holding company I mean subsidiary company has issued Equity shares means they will show it as equity share capital same component same component for one company it is an asset for another company it is a liability now are you preparing individual financial statement or Consolidated financial statement consolidation that means you're treating both the company as one same component you can show both as an asset and as a liability no both as an asset and liability same thing you will show no hence both will be shown or both will be netted off both will be netted off that netting off will happen in working number six is that okay with you okay that is what we've done here so investment also will get cancelled face Val of share Capital also will get cancelled instead of that what will come good will come so rent share Capital cancel no I only considered 80% why holding company only owns 80% so what about other 20% give it to minority interest that's okay that's the reason the way you present working out number five same fashion may you can't present working note number six because holding company showing already some investment same company cannot be sh both as an asset as well as a liability hence both will get nullified and instead of that what will come Goodwill or capital reserve will come and that good or capital reserve will come as part of working note number six this is this is a drum need a minut to process or next one okay last working note is working note number seven sir what is the what is the pnl balance of holding company already given the balance sheet one LH sir due to consolidation this balance will not be one lakh it will change due to consolidation this balance will not be one lakh it will change so that's a reason we have to find last working note we need to prepare for reserves and surplus initial problems if you remember I used to prepare this as a ledger then I told you if you prepare Ledger no you'll only be able to capture pnl balance other reserves and surplus you will be able to miss out hence I told better format is what sir one or two problems I Sol like this in class then I shifted over to another format and told you present it in statement format becomes you can because in statement you can capture if you have 10 reserves all the 10 Reserve information you can capture in statement format okay first thing what you do is check sir what in all reserves and surplus holding company has not subsidiary company subsidi don't bring in subsidiary company reserves and surplus no because subsidiary all the reserves you have split between H and minority interest so reserves and surplus of subsidiary compan is full done only holding company what is the reserve we have first Reserve we have what is general Reserve check have we taken General Reserve 2 lakh yes us come next do we have any don't do not forget capital reserve in this problem we got capital reserve or we got Goodwill we got Goodwill some problems may you might get capital reserve if at all you get capital reserve bring that in also don't forget that that is one okay next what Reserve holding company has other than General Reserve they also have pel what is a pel balance sir 1 lakh rupees considered one lakh one minute it's loading now one lakh consider yes now sir subsidiary company reserves in Surplus you split between two parts can you tell me what are those two parts pre-acquisition profit and postacquisition profit pre and post pre-acquisition profit you already reduced it from cost of investment minority share of pre and minority share of post is already distributed them what is one component which is still not distributed minority full pre and post distributed holding company pre already considered what is one component missing holding company post acquisition profit which is how much 44600 post acquisition profit means these profits were made by subsidiary company after holding company became shareholder so logically should H be entitled to holding company should be entitled to get it yes practically will they get it yes so this is your normal profit so that means your pnl balance will be 1 lakh for consolidation purpose or it will increase this is one lakh is as per H limited cup balance sheet are we preparing only H limited balance sheet now or combined balance sheet combined balance sheet of H and S so do you have any Consolidated post acquisition profit yes how much is that 44600 so that means add that done now along with this extra things will come sometimes in the problem what they'll say is Sir what is the correct journal entry for pre-acquisition dividend correct joural entry for pre-acquisition dividend bank account debit to Dividend bank account debit to div rather bank account debit to dividend or bank account debit to Investment Bank account debit to investment is a correct journal entry but you know what our super duper accountant would have done he would have credited it to pnl account instead of crediting investment they will say an adjustment in this problem it is not there in examination questions if you get pre-acquisition dividend this adjustment 99.999999 percentage it'll be there what they will say is this dividend this pre-acquisition dividend ideally you should adjust it against what cost of investment that means what should be credited investment but they'll tell in the problem pnl account has credited when will pnl account get get credited if it is your normal dividend what is the journal entry for normal dividend sir Bank to Dividend dividend to PN so if you add these two entries what are you getting dividend debit dividend credit nullified effectively what is the journal entry Bank to pay handle so that means our super duper accountant instead of treating it as pre-acquisition dividend he treated it as normal dividend that they will tell in the adjustment that they will tell in the adjustment in this problem do we have it or not there not there if it is there what to do is what you need to under now sir he has treated dividend as a normal income so this normal income he has transferred where to Pendle account who has received the dividend holding company okay and holding company accountant has treated this as normal dividend means he has treated it as an income and transfer this income to pendl because of this what will happen to holding company pendl balance unnecessarily increased should this income go to pendl or it should be reduced from cost of investment it should be reduced from cost of investment but unnecessarily pnl has been increased so what to do p balance you need to reduce so if you have any pre-acquisition dividend from working note number seven also you need to reduce understood that they will give in this problem it is there or not there not there okay s and last adjustment is stock Reserve stock res means I already told you the stock Reserve will come and holding company has sold Goods to subsidiary company holding has sold Goods to subsidiary company do you think sale would have happened at cost price or selling price selling price so some profit element is included in closing stock not only we call it a stock Reserve now holding company and Sub sell subsidiary company are two legal companies separate companies can one company make profit from the other yes but for Consolidated purpose are we treating them as two companies or one company one company so can you show this profit or you have to eliminate in Consolidated financial statements since you're treating them as one company all this unrealized profit you cannot show because if you show it look like you you made profit from yourself okay you made loss to yourself it look like that so because we are not treating them as two we are treating them as one hence unrealized profit you need to eliminate here who sold the goods to whom H2 s H2 s so who made the profit H that means H limited profit is unnecessarily increased and we have to reduce correct so suppose it is H subsidary sold Goods to holding company means sir if subsidiary company has sold Goods to holding company means in this case who would have made profit subsidiary company subsidiary company profit you show it under analysis of profit of here you do know here you bring it in here under post acquisition profit you bring it in okay so you so you have to due to this adjustment pendl balance should increase or reduce pel bance should increase or reduce reduce so what you'll do is if you have any unrealized profit under post acquisition profit you'll write less stock Reserve lesser stock Reserve whatever is the amount here the amount is zero okay so you'll reduce it from here is that okay because who made this profit subsidiary company so subsidiary company has made the profit means it'll come in working on number four because subsidiary company pnl and reserves and surplus analysis only we are doing in working not number four that's the reason done people this is about the steps I will do that yes so far good so this is all the working notes in fact the requirement of the question was only to prepare Consolidated balance sheet Consolidated balance sheet is the easiest these working not seven working notes are the most important in all the seven work work notes working note number four is the most important because maximum number of adjustments will be there over here if you get this right I am 100% sure that you will not do any mistake okay now can we quickly run through Consolidated a balance sheet what are the steps now sir Consolidated balance sheet is very very simple because take holding company balance sheet data to that you add subsidiary company balance sheet data that's all okay blind addition or one or two components are there one or two component Let's test our M memory what and all we remember tell me or you tell me how much you remember let's see first I'll give you an idea each component I'll discuss you tell me sir holding company share capital is 6 lakh subsidiary company is one lakh both you add or only holding company only holding company so I'll only tell the answer this one lakh will not come you need to tell me the reason why why subsidiary company share Capital will not come in Consolidated balance sheet this will not come only six lakh will come that is the answer why yes sir s limited car showing us one lakh no that is share capital for S it is share capital for H it's an investment both same component you will show both as investment and share capital or it will get nullified it will get nullified the share Capital also will get nullified the investment also will get nullified instead of that what will come Goodwill or Capital res okay now sir hence this will not come or another logic is when you are a shareholder when you are a shareholder when holding company is a shareholder they'll be able to control subsidiary company what they will be able to control a subsidiary company share capital and reserves and surplus or assets and liability what you can really control is assets and liability so or in the layman terms if you have to put it across only subsidiary company assets and liability will be added 100% only subsidiary company assets and liability will be added 100% subsidiary company share capital and reserves and surplus will not that's another logic is that okay because you can't control them what you can control over here or another way I think that that a previous explanation I think was lot more s sensible for usting for one company is share capital for another company it is investment same component you cannot show both as an asset as well as a capital hence they will get nullified okay okay and what about reserves and surplus reserves and surplus is already distributed among holding company and minority interest so this will not come three lakh also will not come we have already done working note no working note number seven where we prepared Consolidated reserves and surplus check what is our Consolidated reserves and surplus one minute 3 lakh 44600 check the balance sheet have they shown 3 lh44 600 I think I prepared that also here yeah reserves and surplus is 3 lh44 600 who share Capital will come H and or only hka only H share Capital we have shown subsidiary not sh okay sir now uh one minute now one more component should come under uh the sh normally after sharehold after shareholders funds what do you issue non-current liability after that current liability before non-current liability one more you need to show what is that one more minority interest you should also show minority interest sir do you know what minority interest balance do you already know yeah check working note number five what is minority interest of balance 48 150 check the balance sheet have they already shown 48 150 minority interest ah here 48 150 okay why I'll tell you in a bit okay for now you need to show next is what sir non-current liability does we saw the balance sheet do we have any non-current liability no next what do we have in the balance sheet check we have some trade payables current liabilities so this and all assets and liability you add 100% so add these two how much is this 207 but if there is any M reduce what is Yo Mutual owing same amalgamation those Concepts and all are same so if there is any Mutual o meaning holding company has some dear receivable from subsidiary company so holding company showing it as dear subsidiary company showing as credit so holding is a separate company subsidiary is a separate company but for consolidation purpose are you treating them as two companies or one company one company that means one company is showing as a debar another company showing as credit R are there two companies now or only one only one so who will pay whom nobody s if there is any Mutual Owings you need to reduce in this problem did we find any Mutual Owings no so add up this how much are you getting 2 lakh 7 check have they Taken 2 lak 7,000 in your balance sheet where is that part here one minute 2 lakh 7,000 so balance sheet total done done not done G okay next is your assets under assets you will show property plan and Equipment first PP is your missionary okay let's come back to the question card data for I think they prepared not stock accounts we'll take it from here so what do you do for assets and liability sir 100% addition so what is holding company planted missionary 90,000 okay subsidiary company you take 90,000 okay but are this 90,000 is a book value are we taking Book value for consolidation purpose or market value market value so compar to book value your market value was more no you got some revaluation gain right yeah how much was the revaluation gain on missionary 50,000 can we ignore this or add this also because we can't consider we can't consider Book value for Consolidated financial statement we have to consider market value but currently subsidiary company has considered Book value no so compared to book value how much is a revaluation gain 50,000 so add that 50,000 here so 1 minute I think we have showing here no okay it's taking a lot of time to load over hm too many things I think okay add 50,000 correct sir sir this is revaluation gain but you got only revaluation gain or due to revaluation gain you got some extra depreciation also you got some extra depreciation also how much is that extra depreciation 5,000 that means what is the missionary value 390 440 so 435 435 is the missionary final value it will come in your balance sheet agreed us sir later we'll check for now we'll update is that fine same data we have to do it for furniture holding company Furniture is I think it is not zero it's alignment error this is okay missionary is one lak 50,000 it's come below and subsidiary company is 177,000 on missionary you had revaluation gain or revaluation loss we had a revaluation loss of 5,000 and due to revaluation loss we got ex's depreciation or we have to reverse depreciation sir when you charge depreciation asset value will reduce here you charging or reversing reversing so due to reversal asset balance will increase so this how much is is now 167 162 161 250 162 750 yes ah okay so this is the value so they have considered this check 435 and 160 to 750 435 and 160 to 750 total is 597 750 got it that's what I've written over here take the data as given in the balance sheet if there is any revaluation gain add it due to revaluation gain if you're getting more depreciation reduce it for furniture take the balance sheet data if you have revaluation loss means subtract due to revaluation loss you you'll get excess depreciation or reversal reversal so add the reversal of depreciation you'll get the value donear okay next what is the next so PP already considered next is investment so investment will not come sir one second one second yes investment will not come whose investment will not come investment made by holding company in subsidiary company only that will not come but always check have they prepared any working note for investment yes come to working note number four what are they telling so total investment for holding company is how much 6 lakh entire 6 lakh did holding company invest in subsidiary company or only 160 out of 6 lakh investment only 160 investment is made in subsidiary company 440 is made in other investment this 160 will come in Consolidated balance sheet no why because holding company it's an asset for subsidiary company to share Capital they will get knocked off and instead of that what will come Goodwill or capital is a will come so this will not come how about other investment other investment will it come yes add these two how much is this this will be five lakh 90,000 yes aaru so check have they taken 590 5 lak 90,000 is your other investment so I told you should not forget Goodwill or capital reserve here we got Goodwill no so how much is the Goodwill we got as for working on number six 12,000 which is being brought in over okay now sir all right what are other components in balance sheet now this is over this is over what else is there in the question I think that's all right no other things we saw okay so balance sheet total should match I think it's matching because no other current ass ass is that okay now sir why do we show minority interest one second sir sir assets and liability what did you do you added only 80% 90% or 100% you took 100% of asset of holding company 100% of assets of subsidiary company you added them correct for all assets and liability you did this 100% addition you're doing but does holding company have 100% control and subsidiary company or only 80% only 80% that means we should have added only 80% no but we added how much percentage 100% why is that is Sir you does holding company have a control in subsidiary company yes when do you get control if you own more than 50% shares in one company you get the control you used to give the same example in class let's say the missionary you know subsidiary company has one planted missioner they're planning to use that missionary every day for 10 hours okay will holding company tell the subsidiary company I have 80% control in you Macha so first 8 hours I will tell you how to use the missioner next 2 hours you decide the way you want to use it does it work like this or holding company only has full controller just because holding company has 80% in subsidiary company does not mean they only control 80% of assets and liability with control you'll be able to control 100% of assets and liabilities so entire usage of planted Machinery when you need to buy when you need to replace who should operate it when the subsidiary company should expand from where they need to buy etc etc all this decision of subsidiary company will be taken by whom now holding company that means holding company has small control or full control full control since they have full control 100% of assets and liability we add though we have only 80% shares with 80% you get full control over assets and liability that's the reason we had 100% assets and liability we had to the extent of 100% but by chance if subsidiary company goes into liquidation subsidiary company liquidates if it shuts down now let's say subsidiary company first will pay The Outsiders like like Bank people deure holders creditors first all they will get the money after paying all them still 100 rupees is remaining with subsidiary company after paying off all of them how much money is still remaining 100 rupees entire 100 rupees holding company or subsidiary company will give to holding company no no no no whatever money is remaining only 80% of this will belong to holding company balance 20% you have to give to other shareholders that only we're calling it as minority interest so since you are showing 100% of assets does 100% of you may be showing 100% asset but does 100% of assets belongs to holding company or only 80% 80% that's the reason 20% entitlement you showing the liability side as minority interest on the asset side you're showing 100% on the liability side you're showing minority interest for 20% so on the asset side you're showing 100% asset on the liability side you're showing minority interest for 20% so what is the net effect 80% holding company has how much control in subsidiary company 80% this way that will be achieved hence minority interest also will come in Consolidated balance sheet is that okay and assets and liability will be added to 100% extent this your one question on walk through of Consolidated balance sheet if it comes it will be for minimum 14 to 16 marks sometimes may be straight away for 20 marks previous attempt now we'll have to Che see how it going to work because the pattern has changed okay we'll see so overall comfortable now so if you're comfortable with this some Theory pointers whatever have written in chart we'll run through again because whatever we have done now only I'm expressing it in pointers so I wanted to give you an idea about what and all we've done okay so just give me a quick walk through sir let me see because if you understood this Consolidated balance sheet is done that's all okay more or less this chapter only is done because this is one of the popular question from this chapter okay so what is it what did we do what is the working note tell me again working note number one is shareholding percentage of subsidiary company in sh basically in subsidiary company who are the shareholders that's one second one working not of General Reser and the working note number three is for p account of subsidiary company working note number four analysis of reserves and surplus of subsidiary company so in this working note what all will happen all the reserves and surplus of subsidiary company will be allocated or distributed to whom the shareholders who are the shareholders of subsidiary company holding company and minority interest allocation will be done in the respective share holding in percentage but before you allocate you have to split the reserve between pre and post pre-acquisition profit means those profits which were made by the subsidiary company before holding company became the shareholder those reserves and surplus which came after holding company became shareholder we call it as post acquisition reserves and surplus or postacquisition profits okay now do the segregation why is this segregation necessary because logically should a pre-acquisition profit holding company get no practically are they entitled to get yes so this pre-acquisition profit will you transfer to your normal p no you'll adjust it with cost of investment that's the reason we need to split the reserve between pre and post so working not number five we do it for minority interest minority interest is a shareholder they only ask for three things in fact two things capital and reserves and surplus but now reserves and surplus is already split as pre and post so they will ask for three components what are those their share of share Capital their share of pre-acquisition profit their share of pre-acquisition rather post acquisition profit so if it is pre-acquisition profit you will add postacquisition profit you will add suppose if it is postacquisition loss means data we have not seen any problems in ic study material like that but I've discussed in class it may be a postacquisition loss also profit means add loss means reduce okay then working note number six is your Goodwill or capitalism Goodwill here is also referred to as cost of control how do you get Goodwill or capitalism take the cost of investment from that reduce two things one is the pre-acquisition profit pre-acquisition reserves in Surplus then pre-acquisition dividend you'll get the net cost of investment compare it with the share Capital total share capital or only holding company share holding company share or share Capital you compare if you paid more or if you're getting a positive number Goodwill negative number capital reserve then the last working note is Consolidated reserves and surplus so you prepare one working note where you'll get the total reserves and surplus which you can directly show it in Consolidated balance sheet first show all the reserves and surplus of which company only holding company like General Reserve uh crr drr etc etc and do not also forget capital reserve then take hold company p and do some adjustment what is the first adjustment add postacquisition profit of subsidiary company and then if you have any pre-acquisition dividend reduce it why we need to reduce because that should have been reduced from cost of investment but by mistake our accountant transferred this as a normal dividend and transfer this income to pnl so pnl has unnecessarily increased hence we reduce it so that that is one and if there is any stock Reserve adjustment stock Reserve made by whom to whom holding company to subsidiary company since holding company has made this profit holding company C has increases which you need to reduce that's all okay sir and whenever you're preparing Consolidated balance sheet the simple fund only share capital of holding company will come reserves and surplus should you have to worry or we already have a working note working note number seven is there directly take from that okay so then do not forget to show minority interest as a separate category first you'll show shareholders funds under shareholders funds equity share Capital reserves and surplus next separate category is minority interest working note number five then non-current liability now remaining components is your assets and liability all assets and liability you add 100% take just 100% you add it if there is any stock Reserve reduce it from inventory okay and if there is any Mutual Owings reduce it from the respective component that respective component could be dear creditor Bill receivable bills payable loan given or loan taken like that and on fixed assets do not forget the revaluation adjustment if there is any revaluation gain add it if there is any revaluation loss subtract it so due if you have revaluation gain you'll get extra depreciation due to extra Dee iation asset value will reduce so reduce ex extra depreciation but if there is a reversal of depreciation means asset value will increase that's all is Consolidated vage okay Naru all right now can we go through the theory Point as I've written okay so this I've already written I think I'll not go through this I think it's fine maybe this one I'll discuss sir uh I I just now told no uh if it is post acquisition loss what do you do if minority interest me if there is pre pre-acquisition profit you will add post acquisition profit you will add if it is post acquisition loss means deducted let us say minority interest balance was one lakh in the first year minority interest car balance is one lakh second year no sir subsidiary company made a huge loss okay they made around 10 lakh loss and subsidiary has 15% stake in subsidiary company that means out of 10 lakh loss what is minority share of loss 150,000 what is minority ink balance one L sir this is profit or this is loss or loss sir post acquisition profit you will add post acquisition profit you will add if it is post acquisition loss what do you do Post acquisition loss what do you do deduct so how much is a minority there share of post acquisition loss one and a half lakh so if you do this what are you going to get minority interest balance becomes negative what as 20 21 CSS either show minority interest as a positive balance or zero don't make minority interest balance as negative because if minority interest balances become negative means they have debit balance meaning you can't show it on the liability side you'll be forced to show it on the asset side so what as21 says is don't make the minority interest balance negative either it should be positive or maximum it can become zero so but here it is negative sir if minority interest balance by chance become negative how much how much it has become negative 50,000 this 50,000 loss or 50,000 minority loss will have to be taken up by holding company this minority interest ex's loss will have to be taken up by holding company so that that means minority interest balance will be restored to how much value zero so don't show minority interest as a negative balance if it becomes negative that negative balance will be absorbed by holding company so unfair no sir yeah it's consolidation adjustment they're not really suffering losses this is just a consolidation adjustment suppose in year three hold subsidiary company made a bumper profit of 50 lakhs holding company made a bump or rather subsidiary company made a bumper profit of 50 lakhs what is minority C share 15% I think 155 7.5 so minority share of loss share of loss of profit profit how much 7.5 lakh now will you give entire 7.5 lakh to minority interest uh last year when the loss was there what did you tell Macha this ex's loss oh give it to holding company now we got loss of profit profit now when you get profit no don't give entire profit to holding don't give entire profit to minority interest how much loss you did not give last year 50,000 first adjust that first adjust that that means minority interest will only get how much now 7 like this so when they get X's loss give that ex's loss to holding company later on when they get more profit from whatever loss you gave no adjust it from profit this will go I think we had done one problem on this also okay that only I'm trying to summarize here because I don't have so much time to cover every problem in consolidation more than 20 Questions we have solved okay I don't have time for everything yeah so just discussing like this only hope it's good with you okay uh great so this is done all right so deduct Mutual Owings I think we comfortable with this sir Mutual Owings and all you need to reduce it from Consolidated balance sheet so whatever we did now only is what I've called out over done however by chance if subsidiary company has any preference share Capital I've not seen this in the latest question some old question may this used to be there possible that Minority a subsidiary company can also have a preference share Capital correct sir equity share capital of subsidiary company will not come because for subsidiary company it is share capital for holding company it is an investment so it'll get nullified but now we not we not talking about equity share Capital we are talking about preference share capital of subsidiary company okay so if subsidiary company has any preference share Capital at is this held by parent or somebody else is this preferen share capital is held by parent company or holding company or somebody else somebody else if it is held by somebody else whatever is the value of preference share Capital add it to minority you prepare a working note number for minority interest add preference share Capital to minority interest so why can't we show preference share Capital sir we can't show preferential capital in Consolidated balance sheet because who's preparing Consolidated balance sheet holding company Whoever has the control will prepare Consolidated financial statement so this Consolidated financial statement is group group who's controlling parent so if you show preference share capital in Consolidated balance sheet you know what it looks like holding company has issued preferential Capital has holding company issued preferen share capital or subsidiary company subsidiary company that's the reason this preferen share Capital issued by subsidiary company will not come in Consolidated balance sheet you will not cancel it also simply you will add it to minority interest cover King if at all it is there I've not seen this question in any of ICI study material question I think about in 2018 or 19 one previous year paper or MTP question had this adjustment I think if my memory SS right long long long long long back okay if at all they come you know what to do now okay that's can I move move on to the next work steps have already written this is stock Reserve stock Reserve you already know stock Reserve will come under two circumstance one when holding sends to subsidiary or subsidiary sends to holding sir who is the who controls whom holding controls subsidiary that means who Big Daddy holding company who comes under subsidiary who comes under holding company subsidiary that means if holding company sells Goods to subsidiary company means we call this as a downstream sale we call this as a Downstream sale because holding company is at the top he's the Big Daddy subsidiary company is under him so if holding company to if the sales is coming from holding to subsidiary the arrow will go down hence they refer it to as Downstream sale so sometimes in the problem instead of telling holding companies sold Goods to subsidy they may say Downstream sale is 50,000 so you must know the meaning of what is Downstream sale you know what does Downstream sale mean now holding has sold Goods to subsidiary company so if it is other way around placing is still same holding is at thep top subsidiary is the bottom who selling Goods to whom now subsidiary is selling to holding so arrow is going down or up up so what do you think this will be called as this will be called as Upstream sale adjustment we already know if it is Downstream sale what do you do if it is Downstream sale means holding compan is sold correct if holding company sold means who made the profit holding company so what happened to holding company of profit same or unnecessarily increased unnecessarily increased so where will you capture this working note in working note number seven correct it could be other way around means subsidiary is sold Goods to holding company means who made profit subsidiary made profit subsidiary profit where do we capture under working note number four analysis of profit of subsidiary company under both the working notes working note number seven and working note number four you deduct it because profit is unnecessarily increased which we need to reduce the question is where you will reduce that's all here under working on number seven here under working on number four that's what is this case all done ah okay next thanks uh revaluation of fixed assets revaluation we just now did so revaluation of fixed assets when will it come or why will it come because subsidiary would have taken their fixed assets at Book value but are we considering Book value for consolidation purpose or market value market value that means compared to Market compared to book value market value can be more or it could be less if it is more you'll get revaluation gain what do you do for revaluation gain where will you show it under revaluation gain where will you show just now we did revaluation gain you will show it under pre-acquisition profits under working note number four revaluation gain I'm not talking about depreciation I'm talking about revaluation Reserve revaluation gain where will you short Ender working oute number four as negative or positive number positive number okay however if you get revaluation loss means you'll show under working note number four itself but as a negative that's what I've written here this negative here it is increase but due to this revaluation gain if you have revaluation gain means you will get less depreciation or more depreciation you'll get more depreciation that means you have to account more depreciation now if you have to account more depreciation means pendl balance will reduce which pendl post car prea or post car under post acquisition profit you have to reduce the depreciation under post acquisition profit same under working round number four only but this will be under post post may you have to uh add or minus minus is that okay all right however if you get a revaluation loss if you have revaluation loss means will you get excess depreciation or you'll get reversal of depreciation reversal what do you do for reversal of depreciation if it is reversal of depreciation under working on number four under pre- column or post column post column May what you will do Post colum you will add back that's what we did here no in the same problem I've just expressed it in words that's all done okay can I move on to the next okay next is dividend declared by subsidiary company so if subsidiary company has declared the dividend means what will happen to pnl balance of subsidiary company it will reduce that's common now if subsidiary company has declared the dividend means who will receive it parent and or rather when I use the word parent don't get confused IND uses the term C final we use we don't use holding company we use the term parent I've just come out of CA final Marathon so some of the terminology may come like that is that okay parent company we call in as terminology we call it as holding company in indas terminology or CA final terminology maybe we call it as parent that's why okay you write holding only don't write parenting okay so uh so if subsidiary company has declared dividend means who will receive it holding company and minority interest so this dividend received now first you need to check whether it is a normal dividend or pre-acquisition dividend if it is pre-acquisition dividend if you want it as formula pre-acquisition dividend reduce it from working R number 3467 if you don't want logic okay simply if there is pre-acquisition dividend reduce it from working number 3 4 six 7 why is three sir if or you tell me why we reduce it from working RO number three first of all what is working RO number three p account of subsidiary company subsidiary company only declar the dividend no when you declare the dividend what will happen to pnl balance it'll reduce so hence reduce it from working RO number three okay why do you reduce it from working on number four because in working on number four are we Distributing closing balance or component by component component by component when you distribute pnl balance will increase or pnl balance will reduce if a component is increasing the balance means we give it as a positive apportionment if a component is reducing pnl balance means negative apportionment like here x is depreciation ex is depreciation you distribute it as a positive number or negative number negative number why because it was reducing P so here also due to Dividend pnl balance will reduce hence this also you in working note number four you reduce it is that okay working note number six what is working note number six goodwi uh so under Goodwill what is the first component under this working not cost of investment what should you do for pre-acquisition dividend reduce it from cost of investment hence it has to be reduced from working not number six okay working not number seven what is working number seven Consolidated pnl or Consolidated reserves in Surplus our super duper accountant of holding company he traded it as pre-acquisition dividend or he treated as normal dividend he accounted this as normal dividend and transferred to pendl that means pendl of holding companies unnecessarily increased hence to restore the balance we will reduce it hence if there is pre-acquisition dividend reduce it from working on number 34600 formula Okay g move on to the next one G however if it is the normal dividend what is the entry you already know Bank to divid dividend to that's what I've given now making sense that's the reason I took one problem but now only if you had taken this I thought it would have not made sense is what I felt so I took one question and coming back to this so other things is inter company eliminations that we already discussed Mutual o and all you need to eliminate now sir till now we did consolidated balance sheet there is also Consolidated pel because statement chapter name is Consolidated financial statement so there is also consolidated P consolidated p if it comes no big smile why no Dum only just take holding company income and expenses take subsidiary company income and expense go on adding in your calculator go on doing that's all simple addition that's all nothing else but however if there is any Mutual Owings you need to reduce so mutual WIS means holding company has sold Goods to subsidiary company for holding company it is a sales for subsidiary company it is a purchase eliminate because Mutual Owings holding company has given some service to subsidiary company and charging some money holding company has given subsidiary company has some asset that asset installation was done by holding company and holding compan is not doing it at free of cost they charge 1 lakh rupees for installation complex asset so installation charge is how much one lakh who gave installation charges holding company and holding company is giving this at free of cost or charging money charging money so think from holding company's perspective this one lakh for holding company is an expense or income income for subsidiary company it is an expense how much same one one lakh what are these These are inter company transaction so from income also eliminate one lakh from expense also you eliminate one that's all is the data here D okay and also watch out if some problems may they will subsidiary company has given some bonus shares if they give bonus shares now working note number one becomes important because shareholding percentage may change okay because maybe normally what they give is like normally in Consolidated balance sheet May they'll give balance sheet no in balance sheet May you'll say equity share Capital let's say subsidiary equity share capital is 10 lakh okay in the current year subsidiary company has already given bonus subsidiary company has already given bonus that means this equity share capital is before bonus or after bonus this is after bonus after considering bonus share share Capital has become maybe I'll take it as 15 lakh okay this is 15 lakh yes sir so all right but in the adjustment they will say holding company has purchased let's say 7 lakh shares holding company has purchased or maybe I'll take it as a smaller number holding company has purchased six lakh shares of subsidiary company but a cost of let's say 25 lakh rupees assumption okay so in some problems shareholding percentage directly they'll give in the one we problem we did 80% straight away was given some problems may we have to calculate is that okay and they will tell in the bonus was given in the ratio of 2 is to 1 or maybe 1 is to 2 bonus of 1 is to 2 meaning if you have or whichever what it means is don't get don't be misled by the word ratio here what it means is if you have two shares you'll get one bonus if you have two shares you'll get one as bonus okay sometimes they'll give it as 1 is to two sometimes they'll say it as 2 is one don't misr the ratio bonus number will always be lesser whatever whichever they give what it really means is if you have two shares you'll get only one as bonus shares now sir can you tell me the shareholding percentage H limited shareholding percentage in this problem actually make this as uh one second 60,000 shares and uh each sh of face value is 10 okay I in the rest of time I'll only do it okay uh so how do you get share holding percentage compare out of the total shares how much shares is held by holding holding company so how many what is the share capital of subsidiary company in totality 15 lakh each Shir face value how much 10 that means totally how many shares does subsidiary company have 1 lakh 15,000 okay in this 150 how much is held by holding company 60,000 so in this 150 60 is held by holding company means what is the shareholding percentage 60 divided by 50 is how much into 100 if you do you're getting how much 40% correct wrong calculation wrong calculation why sir sir this one 50,000 is after bonus but the 60,000 shares holding company purchased holding company purchased bonus shares can you purchase or it is received at free of cost that means this 60,000 is before bonus so when you doing a ratio analysis numerator denominator analysis both the numerator should be either after bonus or both numerator and denominator should be before bonus only then you will get the correct shareholding percentage here one number is after bonus another number is before bonus that means it is absolutely wrong yes no so you have to bring both the things to before one how just check over here after bonus how much it has become 15 lakh and bonus is given in what ratio 2 is to one that means indirectly what they're trying 15 lakh you distributed in this ratio how much are you getting this is 10 lakh okay and 15 lakh into 1 by 3 you do what are you getting 5 lakh indirectly what the ring is before bonus the share share share capital of subsidiary company was 10 lakh how much bonus you give 5 lakh so total has become how much total has become 15 lakh like this is that okay so now what is each share of face value of holding company 10 so how many shares does subsidiary company have one lakh in that one lakh holding company owns 60% now if you do 60,000 divided 1 lakh into 100 you're going to get 60% because the 16 lakh 60,000 is also before bonus this 1 lakh is also before bonus for you to get shareholding percentage either both the number has to be before bonus or both the number has to be after bonus whether you calculate before number bonus number or after bonus I proved it to you in the regular class both will give you the same answer okay whether you take before bonus or after bonus answer will be the same because only you are getting bonus or even minority interest is also getting bonus minority interest also will getting is getting that so bonus shares will not affect your shareholding percentage before bonus if H limited has 60% control after bonus also they will have 60% control because only holding company will not get bonus even minority interest also will get the bonus but the Point here is when you're calculating both the number has to be either in the numerator also has to be before bonus denominator also should be before bonus or numerator also should be after bonus denominator also should be after bonus so here one number was before one number was after that is wrong okay so that's the reason I split it up I think hope you got this ratio why did I take 2 by3 because bonus was given in the ratio of 2 is to one no so if you have if you have two shares you're getting one as bonus so whatever was a share Capital share capital of subsidiary company was how much 15 lakh I distributed in 2 is one ratio which you're going to get it as how much 10 lakh and after bonus it has become how much 15 lakh that means how many bonus shares have you given 5 LH indirect adjustment if you want you can retrace it also for uh two shares how many bonus one for 10 lakh worth of share how many bonus if you have two means you will get one as bonus shares for 10 lakh worth of old shares how many bonus shares worth you will give if you calculate this how much you getting 10 lakh into 1 by two which is how much 5 lakh how much have we return as bonus 5 LH it is R ring like this okay so share capital of subsidiary company was 10 lakh before bonus they gave bonus this is not number of shares this is the worth the worth of bonus shares given us 5 LH and the total has become 15 lakh now I'll take both the number on the before platform and find it out this also we have done a couple of questions in our regular class on this okay so I'm just running through this adjustment so watch out for these sort of adjustments also Okay g yeah all right one second I think one or two more questions I'll do sir all right sir till now you used to get Goodwill in one format can you tell me that format once again for me first you take cost of investment reduce pre-acquisition profit reduce pre-acquisition dividend reduce face value of share Capital holding company share of share Capital then you used to get Goodwill or capital reserve depending on whether it is a positive or A negative number okay there is another way to arrive with the same number okay that we have done in amalgamation can you tell me how did you do an amalgamation how did you calculate Goodwill andal you calculated PC with net assets correct you calculated PC with net assets that is also same till now we are also doing that only this is just like uh I mean another format I'll just prove it to you okay let's take this I've proved it to you in class also now in the interest of uh just for new audience I'll just prove it to you here once X acquired 90% shares in y limited I mean X limited as the holding company y limited as a subsidiary company and which day have they acquired the shares 31st March 2024 on the last day of the year they acquired the shares any day they can acquire no so here I've assumed it as what day last day of the current year the shares have been acquired I've given the balance sheet of on 31st 20 X4 of subsidiary company which is y limited some numbers are randomly have assume okay any number you can take answer will not change these numbers have taken okay all right sir let's calculate Goodwill or capital reserve as per the method we have just now applied okay first you will take what sir cost of investment how much is the cost of investment I think cost of investment we I think here I have to give it I think it's I've taken it as for 12 lakh rupees okay cost they purchase 90% shares in why limited for 12 lakh rupees assumption so how do you get Goodwill again for what first component cost of investment 12 lakh taken now okay then you reduce what sir pre-acquisition there's no pre-acquisition dividend red eliminate that okay because every problem there has to be dividend declared or not required not required okay if it is there bring it in otherwise leave it it's fine okay if divident is not there what is the next adjustment pre-acquisition profits or pre is it profit or pre-acquisition reserves in Surplus pre-acquisition reserves and surplus you need to reduce entire pre-acquisition reserves in Surplus or only holding company car holding company car sir which day you got the control last day last day balance sheet do you know yes and the last day how much was reserves in Surplus 2 lakh this 2 lakh came after holding company became shareholder or much before before holding company became shareholder only all this Reserve was already there correct no because holding company acquired the shares in the last day on the day they acquired reserves and surplus is already existing that means what sort of Reserve is this pre-acquisition reserves and surplus agreed us sir any problem no sir normally you prepare General reserve and Pendle account you prepare working not number two general Reserve working not number three pel why because we want to know among in p means there'll be one component or many many component many many components in that component how much is free how much is post we want to know that's the reason we prepare that working note number 2 three and all here do we have the drama or pre and post we clearly know you clearly know because there is only one Reserve in Surplus which is 2 lakh and all and you got the control on the last day so this 2 lakh was already existing that means entire 2 lak is what pre-acquisition profit so should I have to prepare General Reserve PN lger and all or not required not required because straight away you know the number okay so how much is pre-acquisition profit 2 lakh will holding company get entire pre- acquition profit or their share their share how much is their share 90% so calculate 2 lakh 90% how much is that 1 lakh 80,000 correct this method 1ak 180,000 yes sir and then we used to do what reduce share Capital entire share capital or only holding company share what is the share capital of subsidiary company 10 lakh what is holding company share 90% so 10 lakh 90% you do how much you get n LH so if you do this you're getting a positive number which is only used to call it as Goodwill yes saru any problem no okay there is an other method what is that is Sir if you own Equity shares of another company you have a right over assets or you have right over net assets if you are Equity if you own Equity as one company you have right over assets or net assets net assets sir if you if let's say company subsid one company has a land and building if you own Equity shares that land and building Stateway will not be given to you if company shuts down what will that company do they will sell land and building and after selling they will not give the money to equity shareholders first they will give it to creditors bank loan people debenture holders everybody will be settled first after everybody is settled whatever asset remains whatever asset remains that will be given to equity shareholders so Equity shareholders don't have a right over assets of the company they have a right over net assets is that okay B that's what is a definition of equity if you look at the definition of equity Equity is an instrument that gives the holder the right over the assets of the company after deducting all the liabilities or Equity is that instrument which gives the holder the right over net assets of the company we say okay now now sir can you tell me how much is net assets of subsidiary company calculate sir how much is net assets of subsidiary company do you calculate net assets to subsidiary company we have to take Book value or revalued amount revalued amount here do we have any revalued amount or no nothing no that means Book value itself Book value and revalued amount we assume it as same so calculate net assets for me how do you get adding all the assets we get 15 lak minus full you deduct or only outside liabilities outside liability which is outside liability current liability which is three lakh here so how much will be net assets sir 12 lakh this 12 lakh is a net assets of which company subsidiary company entire net of subsidiary company belongs to parent or only their share their share what is holding company share 90% total net asset is 12 lakh parent or holding company will only get their share so 12 lakh and 90% is how much 10 lakh 80,000 agreed normally in amalgamation how do you calculate Goodwill tell me again PC used to compare with net assets this PC only here we're calling it as cost of investment correct no sir okay there used to compare PC with net assets fully PC used to compare with net assets fully here are we comparing it fully or 90% 90% why sir sir in all amalgamation problems no we ac they used to say a limited absorbed B limited X limited acquired y limited when they say acquired it is 50% 60% acquisition or 100% 100% that means in all our amalgamation problem PC was for 100% here have you acquired 100% or only 90% so in that problem since it was 100% acquisition PC was for 100% so net asset also you compare it with 100% here net asset is for 100% but PC is for 100% ah no you acquired control only to the extent of 90% 90% PC can you compare with 100% of assets and Goodwill Asser is that right comparison or they have to be on same platform same platform so if PC is for 90% means net asset also should be for 90% that's the reason we take net asset 90% okay Naru so how much is 90% of net assets 10h 8,000 how much is PC 12 lakh how much are you getting 1 lak 120,000 what are you getting Goodwill how much did you get over here Goodwill that means indirectly till now you are doing amalgamation only you are doing amalgamation Goodwill that you calculate is not as for Consolidated financial statement the Goodwill that you calculate is as per as14 the Goodwill that you calculate no is as per as4 sir yes sir in your syllabus no as14 Deals Only with 100% acquisition in your ca intermediate syllabus as14 Deals Only with 100% acquisition meaning a limited absorbed 100% in B limited X limited acquired 100% of Y limited but to get control do you want 100% or more than 50% is good enough more than 50% is also amalgamation if you if a limited absorbs 60% of B limited it is also amalgamation just that it is not there in your syllabus CA final IND is 103 is that okay so whatever Goodwill that you are calculating no is same only because Goodwill calculation is not as per as21 it is as per as 14 steps are same so that mean this and this are same as s yeah sir see sir proved it to you sir simple simple logic I told you in amalgamation there net asset another name is capital employed another name is shareholders funds there are two ways in which you can calculate net assets asset minus outside liabilities all or shareholders funds here what are you doing check you're taking share Capital you're taking pre-acquisition profit pre-acquisition profit means on the date of control how much reserve and surplus was there share capital and reserves and surplus only you call it as capital employed that is only nothing but your net assets till now you are doing that only just fancy name so that means we can do like that no sir it is easy no sir no in normally in consolidation problem they'll give you a lot of adjustment like bonus dividend this and that so it's easy to work in that structure format stru structure I've given to you when you work it out from your normal method it may be a little confusing for you so in bigger problems always work out the pattern seven working outs we show do it in that way only when they give you smaller questions then you can use shortcut method like this we may not bother about this we'll directly use this is that okay with you what is this now what is a new shortcut method just compare cost of investment with net assets or holding company share of net assets just compare PC or cost of investment with holding company share of net assets accordingly you will get Goodwill or capital reserve okay some problems may you have to do this because they will only give asset information and liability information share capital and reserves and surplus will not be given at all if share capital and reserves and surplus information if it is not given can you apply this method or not possible for you to apply this method reserves and surplus and share Capital should be compulsorily given if it is not given then you have to apply previous method only welcome to the next question that's what we have to do in the next understood okay RTP May 2024 man this question was asked can we run through this question uh new method you no no just for my satisfaction tell once more just to take cost of investment compareed with total net assets no only holding company share of net assets that's all so what about pre-acquisition dividend sir pre-acquisition dividend is as21 concept or as13 concept as 133 concept what does accounting standard 13 say pre-acquisition dividend should be reduced from cost of investment so whether you are working from method number one or method number two pre-acquisition dividend should be compulsorily reduced from cost of investment is that okay that is just an add-on so whichever method you follow pre-acquisition dividend compulsorily will be deducted from cost so it doesn't vary based on method because it is not as21 adjustment it is accounted as for as 30 that is a Reas now can we run through this all this whatever I'm saying now ditto ditto will come in question number 170 ID solve this question but still 5 minutes I will solve okay Zoom acquired 70% of star so with 70% do you get control yeah all right at what price sir 30 per share following is extract of balance sheet of star 15 lakh Equity shares of 10 each which is 150 lakh and they've given balance sheet of which company sir star subsidiary basically here Zoom is the holding company star is a subsidiary company they also have debentures they have plant and PP and all they've given okay on the same day star declared a dividend of 20% one second sir Z Zoom limited acquired the shares on the day they became shareholder that day only they got dividend and that day only they got subsidiary company declared dividend sir they will declare dividend out of the profit existing they will declare subsidiary company will declare the dividend out of profit existing so today holding company became shareholder today's profit only is utilized to pay dividend so today's profit is post acquisition profit or pre-acquisition profit the day holding company became shareholder subsidiary company already has profit mean that profit only we call it as pre-acquisition profit any dividend paid out of pre-acquisition profit is what dividend pre-acquisition dividend I means they will not tell in every problem this is pre-acquisition dividend you need to figure it out today holding company got control and today only subsidiary company declared shares means obviously this is what sort of dividend pre-acquisition dividend and pre-acquisition dividend has to be compulsorily reduced from cost of investment okay okay all right and it was agreed between both companies PP were to be depreciated at 10% investment was to be taken over at market value revaluation adjustments okay yes because now whenever you're finding net assets we already did in purchase Method net assets you'll find it at Book value or agreed value agreed value so you'll take what now we'll take Book value or agreed value agreed value is that okay calculate Goodwill or capital reserve now we'll use shortcut method is that fine with you okay now F we will do so tell me sir first we one working note we need for pre-acquisition dividend I think why do we have to solve we quickly run through uh pre-acquisition dividend how much dividend is declared sir 20% first of all how much is a share capital or how many shares does subsidiary company have 15 lakh how much did parent acquire or holding company acquire 70% subsidiary company has 15 lakh shares in this 15 lakh shares 70% is acquired by holding company so that means the number of shares is 10ak 50,000 yes sir any doubt no okay what is the face value of each share of subsidiary company 10 Rupees how much dividend is declared 20% so can you tell me what is the dividend per share DPS 10 rupes is the face value you can so normally you multiply dividend on the fa on the total share Capital no if you multiply on the total you'll get total dividend if you multiply in each face value you'll get dividend per share one share face value is 10 Rupees they have declared the dividend at 20% means on one share how much dividend you'll get 2 rupees how many shares does holding company own 10 and a half lakh so total dividend received by Zoom that is the holding company how much on one share at 2 rupees 10 and a half lakh shares how much quickly I'm solving they've put up the solution okay so I'm quickly running is that okay with you this is 21 lakh what sort of dividend is this post or pre pre-acquisition divid what should we do for pre-acquisition dividend doesn't matter which method you follow pre-acquisition dividend should be compulsorily reduced from cost of investment so can we calculate Goodwill now so how do you calculate Goodwill now the Rev shortcut method sir first you'll take pc pc is nothing but cost of investment we have to calculate or given at 30 per share okay they have also given one share we paid how much 30 how many shares have we acquired 10 lakh 50,000 so 10 and a half lakh shares we have acquired on one share 30 rupees how much is this sir huh no want to tell H 10.5 into 30 that is what sir 3 3155 lakh can I write 3 15 lakh which is nothing but 3 15 lakhs okay then what sir immediately you'll compare with net assets n no no reduce pre-acquisition dividend how much is pre-acquisition dividend 21 okay then you'll get the net cost of investment so what is the net cost of investment in fact you don't have to do this but it's fine how much is that 294 294 lakh that means your cost of investment is only 294 compare this with what net assets total net asset or your share of net assets your share of net Assets Now for net assets for net assets we need to put up a separate working note first we will put up that working note and come back to this so how do you get net assets Book value or agreed value take your calculator it's okay uh we'll do it from this one minute first debenture have they told first we'll start from assets we have PP PP was taken over at same value or they told less 10% they show it has to be depreciated at 10% means we have to taken it at less 10% so 105 lakhs it is minus 10% is how much sir 94.5 lakhs investment what did they say investment has to be taken over at market value of 90 lakhs adjustment they have given Uh current assets have they told anything no one2 lakhs loans and Advance sir loans and Advance is G coming under current assets so this is not loans and Advance taken this is loans and Advance given meaning it's an asset so 33 lakh if you add all this what are you going to get total assets you want total assets or we want net assets so to get net assets what do we do reduce all the outside liability will reduce share Capital no only debenture how much is debenture have they told any agreed value no if they don't give agreed value book value and agreed value we assume it as s so this is 15 lakh and trade payable also we assume it as 82.5 reduce this how much is your net assets triple2 two two two two lakhs okay Triple Two lakhs is your net assets correct sir you paid 294 but net asset is only worth how much worth is triple2 but you paid 29 94 that means you're paying more how much more you paid 72 lakhs that means what is that goodwi okay huh hey some calculation went wrong here they're saying something more 294 they're saying this is right net they're saying it is wrong this is 294 we got 294 only no yeah this is right net asset I think they are saying wrong but it's not triple2 they are saying it is 1 55 40,000 PP 105 we took investment 90 current assets this much Lo once I think calculation mistake you done today do it again triple2 oh actually one second no no correct correct correct correct correct correct correct ah sir we took Triple Two lakhs mistake why sir Triple Two lakh is total net assets we own total net assets or we own only 70% we own only 70% so we can't take total net assets we have to take only our share of net assets so triple2 into 70% how much is that sir correct correct my bad so how much is this one 155.5 so 294 minus 154.32 Point F du 1386 L okay so that's what they're calling it as 1 38 60,000 is your good Goodwill okay do not forget yeah this could happen as a common mistake okay don't take total net asset because probably again see again muscle memory we told our share of net assets but we take notal net assets because we have done so many questions in amalgamation in amalgamation we never multiply percentage we just directly compare with net assets okay so happens sir is this a conscious mistake no in my mind I know that we should only take our share of net assets but my still hand my hand wrote triple2 so these sort of things happen okay because you can only develop this now you have to remind yourself that this mistake should not be done like this what and all mistakes you are doing write down in a small piece of paper maintain like through two or three sheets of paper these mistakes write it down so that on your examination no need to do here we can do whatever mistakes you want it doesn't matter correct but on the examination day these sort of mistakes should not happen because this mistake means two marks gone simple mistake but two marks gone okay from 40 our marks became 38 from 19 19 from 200 our aggregate became 198 we don't want to land up in that scenario okay so these sort of small small things only kind of will ultimately help us to become chared accountants okay so you have to identify this I'm not saying this mistake you will only do like this you make connect you may make another mistakes of your own identify write it down don't be a lazy okay you can only grow when you learn from your mistakes don't be scared to spell out your mistakes okay it's it's all right okay everybody even like as a teacher even first batch when I started I would have done 101 mistakes if you think I become better teacher now that's because only I've identified what I should not do now I will also remind myself next time when you're teaching D fellow don't do this or else n man will go yeah now I'll remind myself of that like that okay this way I will not commited in the next patch like that you should also remind yourself that whatever mistakes you doing note it down and don't commit it on the paper that's the reason we say write some mock papers so that these sort of mistakes you can identify now can I Mo people are laughing okay uh time up okay sir one question in MTP they have given okay that is there in study material also vat and Anushka problem okay name only is fancy nothing is fancy in the problem not even one adjustment is there sir here check balance sheet information they' have given verat acquires 80% Equity shares in Anushka since Anushka incorporation the day Anushka company was incorporated from that today only we is line Marine okay from that to day only vat has already acquired shares that means every profit which Anushka limited has made has come after vot has become shareholder that means every profit is what post acquisition profit that means if you don't have drama around postacquisition profit means should we have to prepare General Reserve working note not required pendel no analysis of profits also entire pre-acquisition profit gone only component that will come is in post acquisition profit so whole working note just for one adjustment okay then put the data under working on number 567 very very very straightforward question it's coming MTP and I hope and I pray that it will come in your exams yeah nothing literally nothing adjustment see everywhere z0 Z the whole working note is zero sir first working note they only give we acquired 80% so work first working note nothing second working note third working on not required because every reserves and surplus is post acquisition so how much reserve and surplus Anushka limited has what is reserves and surplus of Anushka one LH entire 1 lakh is post acquisition profit so put entire one lakh under post acquisition profit and distribute in 8020 ratio working on number four gone working on number four gone means working on number 567 is very very simple minority minority interest will ask for their share of capital their share of pre nothing their share of post 20 over Goodwill working note done Consolidated that also there is nothing else there is no stock Reserve there is no pre-acquisition dividend nothing okay so that is this particular problem yes sir so can you manage yeah that is what is given in MTP but we have solved this in regular class it is there and same question is there in study material also we have done it in our regular class just see okay uh and this one more question I'll quickly discuss maybe one one component I'll discuss and move on to the next one sir from the following data excuse me now it is no more 200 now it's become 150 only three papers no so agregate is 150 correct okay you told 200 one more Mist okay from the following data determine in each case all are different different cases minority interest you need to find out on the date of acquisition meaning date of acquisition means date of control and and on the date of consolidation so till now we used to find out minority interest only for the date of consolidation now they're asking on the date of control and date of consolidation same problem is there in study material also we have done it just quickly revising it they've given this data theyve given four cases each case is separate a owns 90% a is the holding company if a owns 90% means minority interest will own 10% simple sir don't these sort of problems don't use old method old method means seven working notes for don't use that use a shortcut method what is a shortcut method to get Goodwill what do you simply do cost of investment you compare it with total net asset or your share of net assets your share of net assets yes sir and minority interest is also a shareholder what does a shareholder if you are a share Equity shareholder in one company what are your entitlement net assets either you can say share Capital pre-acquisition profit post acquisition profit for that we need to find how much is pre how much is post we don't want all that drama if you are an equity share shareholder what you are entitled to get is a net assets how do you get net assets asset minus outside liability one way or share Capital plus reserves and surplus existing on the date of control whatever reserves and surplus existing on the date of control only we call it as pre-acquisition reserve and surplus yes no so simply take share Capital add reserves and surplus existing you'll get net assets of the net assets minority interest will get their share check in the first case how much does minority interest own 10 parent owns uh holding company owns 90% means minority interest will own 10% sir what is the date of acquisition 1st January on 1st January how much was share Capital 1 lakh how much was pnl 50,000 should we have to find out net assets using asset liability approach here or shareholders funds shareholders funds what are the shareholders funds on 1st January 1 lakh 50,000 that is nothing but net assets so total net asset of subsidiary company is 150 minority interest will ask for their share what is their share 10% so what is minority share sir 15, so on the date of control minority balance is 15,000 got it same data you have to find out on the date of reporting also date of reporting means date of consolidation yes no sir date of consol when will you prepare Consolidated financial statement on the date of control or the year end the year end what is minority interest balance they're seeing same thing on the date of control if you want minority interest you need to find out net assets on the date of control if you want minority interest on the date of consolidation then on the date of consolidation that is at the year end you have to again find net assets how can you find net assets same share capital and Reserve in Surplus on the consolidation is date is 31st December on the consolidation date share capital and reserve and surplus put together was 170 so on the date of consolidation or can I call it as do do as in date of reporting you prepare consolidation or you report Consolidated financial statement only at year end so that I'm calling it as do doc stands for date of control do stands for date of reporting so on the date of 14 that is on consolidation date how much was the net assets 1 lak 70,000 how much minority interest entitlement is 10% that means minority interest will be 177,000 that's like this they've given four cases can you manage sir is that okay I'm just revising is that okay I don't have to do everything no four different different different cases they've given that's it okay this is for minority Interest next they're asking you to calculate Goodwill or capital reserve for each scenario how do you get Goodwill or capital reserve new method cost of investment with your share of net assets Goodwill you will get at the end of the year on the day you get control when you get confused always think you calculate goodwi as per consolidation standard or amalgamation standard amalgamation standard when will you apply amalgamation standard when the moment you get control on the day you get control you have to Sir what is the difference between as14 and as21 Sir Sir as14 is applied once when you get control when you get control no you have to apply amalgamation standard and get Goodwill or capital reserve consolidation no sir is you prepare Consolidated financial statement financial statement you prepare it once or every year so at the year end no you have to go on preparing Consolidated financial statements so how long sir for how many how many ever years you have control for that many ever years you need to prepare CFS if you have control for 10 years that means for 10 years you need to prepare Consolidated financial statement so after that if you lose control if you lose control meaning if you sell subsidiary car shares then you will lose control in that case you don't have to prepare Consolidated financial statement in that case what do we do sir there is something called loss of control accounting you'll study in indas one10 and see fin not here okay what we'll do whatever is required for your syllabus not too much f as Sir all right so basically as14 is onetime activity but accounting standard 21 is onetime activity or recurring activity recurring activity so as long till you have control you'll go on preparing CFS CFS CFS CFS CFS like that okay this is the difference now coming back to Goodwill Goodwill you'll calculate it on the date of control date of reporting which date date of control okay so that means to calculate Goodwill we take what sir the date of control so on the date of control check how much is the net Assets in first case may we will calculate here what is the net assets on the date of control how do you get net assets same share capital and reserve and surplus so what is the net assets 1 lakh 50,000 correct that is total you can call it as total Equity you can call it as shareholders funds or you can simply call it as net assets entire net assets can you compare with your cost of investment or your share your share what does parent own in first case holding company owns only 90% so calculate 90% of net assets 90 into 150,000 you do how much is it 1 l35 so the worth of your investment is 135 but how much is the cost of investment in the first case 140 the worth is 135 but the amount paid is 140 you paid 140 worth is only 135 so holding company or holding company made a loss that loss only we call it as what goodwi understood maybe one more case I'll do okay second case on the date of control how much is net assets 130,000 how much percentage share each are independent case separate separate case how much does holding company owns 80% net asset is 1 lakh 30,000 130,000 is for 100% but holding company owns only 85 85% so 130,000 into 85% you do 1 L 10,500 so the worth of your investment is 1 lakh 10,500 how much did hold company pay what is the cost of investment in second case 1 lakh 4,000 for 1 lak 10,500 they paid only 1 lakh four so holding company has paid more or less less that means for holding company it's a loss or profit scenario profit scenario that profit only we call it as capital reserve like this can you complete for other one okay last step is calculate the amount of holding company's profit to be shown in Consolidated balance sheet so if you remember working note number seven you take holding company profit to that you add what post acquisition profit of subsidiary that they are asking how much is post acquisition profit of subsidiary post acquisition profit means what how much profit came after holding company became shareholder so check here the first case or maybe I'll take first case I'll take what was the pnl balance on the date of control 50,000 at the end of the year it has become 70 sir 50 has become 7 that means what 20,000 is po pre or post or post acquisition profit correct holding company will get entire post acquisition profit or only their share their share how much is their share in first case 9 that means how much will you get 18,000 okay now that's how they calculated one more can we do yeah this one maybe check this sir what is the PN balance on the date of control 30,000 it has become more 20,000 oh uh PN balance on the date of control was 30 at the end of the year it has become 20 means profit or loss so in this problem is it post acquisition profit or post post acquisition loss there is a post acquisition loss how much 10,000 parent will get entire loss or their share their share how much is their share 85% so into 85% you 8,500 so post acquisition profit means you will add post acquisition loss means subtract so 8,500 you should plus or minus orus that's this question also could be important fin sir so I feel they'll play around these sort of questions okay so with this consolidation standard we fully completed thank you break a day no break in all directly okay 1230 1230 plus 1 and half hours 1:30 we will take a break fine no yeah 130 that's that that's a strategy always tell 230 from that you reduce one 1 hour and then say 130 they'll be like okay now okay sir first only if you say 130 then say 1:00 you good sir yeah no problem sir we have two more corresponding standards so we'll quickly run through this particular standard as well as23 and as27 sir we covered accounting standard 21 sir as21 deals with what holding company and subsidiary company Consolidated financial statement okay now we have one more uh standard which talks about as23 what is as23 as23 is not nothing but accounting for investment in associate so as3 talks about the investor and Associate Consolidated Financial State how to prepare here also we need to prepare Consolidated financial statement but this is between invest investor and Associate company what sir how it ises an associate sir or when it becomes associate sir so for it to be become a subsidiary company you should have a control okay but if an investor does not have control but if he has something called significant influence he doesn't have control but he has something called significant influence then the other company know sir you don't call it as subsidiary wherever you are investing the other company we call it as associate company so associate company is that company where the investor does not have control but they have significant influence so when do you get significant influence so as a thumb rule if you own 20 % or more if one company owns 20% or more shares in another company then we say with 20% more or share you will get significant influence is that okay sir but more than 50% is control sir yeah this percentage is 20% or more up to up to 50% because if you're owning more than 50% you'll not be an associate you will become subsidiary company so it is 20% or more up to 50% like that so in this case how to prepare consolidated financial statement is what we looking at d s g okay this is one all right so this is very simple this no sir here in normal consolidation May what you used to do just now we did tell me holding company all assets and liability you will take subsidiary company all assets and liability you will take and had 100% addition you'll go on adding adding adding sir if it is an associate company associate company assets and liabilities will not be shown in Consolidated financial statement I'll repeat this associate company assets and outside liabilities will not be shown in Consolidated financial statement sir when you did subsidiary consolidation did you show investment in subsidiary when you did subsidiary consolidation did you show investment in subsidiary company no instead of investment you show Goodwill or capitalism but in subsidiary in associate consolidation investment in associate company will appear instead of assets and liability you show investment in associate company like this because we don't control the associate company know so showing assets and liability will not make sense but only we will show the investment so that means what is this consolidation so it was very easy so not easy there are some dramas here also this investment you have to show in CFS CFS means Consolidated financial statement so at what value will this investment come sir for that we use a particular method called Equity method we use a particular method called Equity method so this investment will not Comm at Cost let's say your investor to pay this 20% investor pay 10 lakh Rupees investor one company a limited they acquired 30% shares in one company with 30% will you get control or only significant influence only significant influence for this 30% let's assume that they paid only 10 lakh that means 10 lakh is a cost this investment will an associate will not come in Consolidated financial statement at 10 lakh at some other value so how that some other value will be derived that Equity method will give you the guidance okay that's what you're trying to say over here it do not come at cost it will come at some other value okay one easy way to remember this is match your investment to associate performance match your investment to associate performance now if associate company makes profit you will have a sad phase or a happy phase you'll have a happy phase correct no because your investment value will be same or it will increase so if associate company makes profit means investment value will increase if associate company makes loss means investment value will reduce so 100% extender sir will you if associate company makes profit 100% of profit will you get or only your share our share or if I'm sorry you are share you Equity shareholders you'll not get profit sir you'll get net assets sir yes if any company reports profit no their net assets will not be same net assets will increase n assets will increase okay you visualize the simple things you sold Goods you purchase the goods for 100 rupees you sold it for 120 that means you made profit how much 120 when you sell the goods and if you don't recover the money you're okay okay okay okay okay you made a profit of 20 agreed sir when you sell the goods you will show dat are at 120 so when you make the profit no sir your reserves and surplus will increase by 20 when you're preparing balance sheet if liability side increases by assets by 20 rupees means asset also should increase by 20 otherwise balance sheet will not match here datar also will increase by 20 you're showing cost at 100 you'll show datar at 120 like this there will be a corresponding effect both on the asset side and liability side or I think I've given you a better example now I don't have so much time I'm not diving into all this stuff whenever you make profit net assets of the company will increase okay net assets of the company will increase if net assets of the company will increase means you will have a sad phase or happy phase because if you are owning Equity shares in one company you are entitled to get net assets of that company if the other company Net assets increases means your value of net assets also will increase that's the reason if associate company makes profit means your investment value will increase not by total profit but only by your share if you own 30% means suppose associate company made a profit of 100 rupees don't increase your investment by 100 rupees if profit increases by 100 rupees means net asset also will increase by 100 which you get entire 100 or only your share your share investor has full control or only 30% so 100 30% is how much 30 rupees so your investment will increase by only 30 rupees like that only your share of profits you increase the investment value by is that okay sir if suppose investment associate company makes loss means if associate company makes loss means net asset will reduce so your investment also should Reduce by total loss or only your share only your share like that done now sorry associate company pays dividend so if associate pays the dividend means what will happen to cash balance visualize if associate company pays uh like they pay dividend what will happen to cash balance it will reduce sir cash is an asset if asset balance reduces means net asset will be same or it will reduce net asset will reduce if net asset reduces means your investment value should be same or it should reduce it should reduce so if associate company pays any dividend even in that case also your investment value will reduce these are the three common adjustments that will will give you and test you in this particular problem okay now sir that means Goodwill or capital reserve will not come sir Goodwill or capital reserve calculations we do but we don't account it separately because here are we showing Goodwill or do we show investment in associate we show investment in associate Goodwill and or capital reserve calculation we do but we don't show it in Consolidated financial statement okay we include that Goodwill value in investment itself how I'll take you through one question is this okay this is the one kind of problem that will be tested in your examin according to me can we take care can we do it one can we apply it the same thing I've written it whatever I'm doing in the problem same thing I've written it as a format in this particular table okay maybe one question we'll do and if if required we'll come back to the table otherwise not required okay now sir come to this particular question sir question number one I didn't see any RTP mtps relating to this so we'll directly take the study material questions because these are things which is newly added in our syllabus it was not there in our old syllabus it's newly coming so a acquired 40% in B with 45% will you get control or only si si means significant influence which day you got significant influence 1 April 20 X1 how much price you paid 15 LH following is the extract of balance sheet of the associate Company B limited paid up equity share Capital 10 lakh Security Premium 1 lakhs reserves and surplus uh 5 lakh uh okay tell here sir on the date of control this are all share capital and reserves and surplus one minute stop there why on the date of significant influence there given all this data why have they given share capital and reserves and surplus breakup share capital and reserve and surplus is nothing but your shareholders funds which is nothing but your Capital employed which is nothing but your net assets what did I tell in associate consolidation Goodwill is calculated but it is not accounted so first we have to do the calculation of Goodwill is the Goodwill calculation new to us or we already know we already know how do you calculate Goodwill normally tell me take the cost of investment come compare it with total net assets or your share of net assets your share of net assets can we do that first so first how much is cost of investment how much did you pay1 15 next we need net assets net assets you are working from asset minus liability angle or shareholders funds angle shareholders funds on the day you got significant influence on that data share capital and reserves in Surplus we want given or missing given so what is share Capital take your calculator how much is that 10 lakh say all reserve and surplus it could be revaluation Reserve Security Premium capital reserve General Reserve P whatever every reserve and surplus will be taken so 10 lakh + 1 11 11 + 5 16 so what is your net asset net asset is basically 16 lakhs this is net assets of 100% excident yes or no no is investor Own 100% or only 45% 45% so what is investor share of net assets 45% of net asset is how much what is 45% of this 720,000 correct 720 they're saying here correct no okay so 720,000 is a net assets but the cost of investment was 15 LH from cost of investment simply reduce net assets that's what we keep doing no so reduce what are you getting 7 lakh 80,000 that is the value of Goodwill this Goodwill is not accounted but it is show it we assume that it is included in the value of investment how to show it I'll tell you first working out everybody clear so this is what you need to do this is same as amalgamation correct now how do we show this in our Consolidated Financial first sir how much did you buy the investment for 15 lakh that means cost of investment is 15 lakh but they won't show 15 lakh they won't show 15 lakh you know what they'll start with sir you are an equity shareholder you have a right over net assets what is your share of net assets 7 lakh 20,000 start with that when do you have any Goodwill yeah how much Goodwill 7 lakh 80,000 add that how much are you getting 15 like this you show the Goodwill that means this Goodwill is shown separately or it is cost of investment only cost of investment meaning this Goodwill we assume that it is included in the cost of investment so don't start from cost of investment usually we start from cost of investment no instead of starting from the cost of investment started with net assets if you have Goodwill add so net assets plus uh Goodwill if you add means obviously you will get what cost of investment so indirectly what I'm saying is Goodwill is not accounted okay but you show it like this that's all and they extract the balance sheet foolish but that's why that's way it is doing how we comfortable with that that's that's what we mean by Goodwill is assumed to be included in the cost of investment and not shown separately in control when you get control Goodwill is shown separately in associate consolidation Goodwill is not shown separately but it is presented like this presented like what take the net start with net assets and add Goodwill then you'll get the cost of investment so suppose it is capital reserve means Goodwill you added so capital reserve you will minus that's then you'll get what automatically you'll get cost of investment like that okay sir ah after this match investment value with associate performance if associate makes profit investment value will increase full increase or your share your share if associate company makes loss reduce full law your share your share if associate company pays dividend net asset will reduce so investment value also will reduce these three adjustment will come as an extra fitting all the three may be there maybe some may be there can we look through the question okay what is it now this full stop B limited has reported a net profit of 3 lakh rupees okay stop that sir they reported net profit when you make net profit net asset balance will be same or it will increase increase entire 3 lakh as an investor you'll get or only 45% of this so calculate 3 lakh 45% how much is that one lakh so what should happen to your investment same increaser investment value should increase by your associate share of profit agreed okay next associate paid the dividend to one lakh if they pay the dividend means their cash balance will reduce so the net assets will reduce so if net asset reduce means our investment balance also should reduce full amount or our share our share 1 lak 45% you do how much is it 45,000 you need to reduce so the investment that will come in Consolidated financial statement is 159,000 remember associate company assets liability will not come but investment in associate company will come but this investment is accounted as per Equity method this is how the equity method calculation is okay sir this is not separate Financial State don't get confused there are two components separate financial statements and Consolidated financial statements separate financial statement means who the investor here a limited only if you prepare a limited data nothing else pure and pure a limited data if you take and prepare financial statement that we call it as separate financial statements or another term Standalone financial statement is that okay so in Standalone financial statement May investment will come AER yes but this investment is accounted as per accounting standard 303 and as13 says long-term investment should be valued at cost and what is the cost at which you acquired these shares 15 lakh so in separate financial statement may this investment will come but not at 159,000 it will come at 15 lakh because it's accounted as per as13 but when you prepare Consolidated financial statement investment is not accounted as per as13 investment is accounted as per as23 and in as23 says you have to Value investment under Equity method and valuing under Equity method investment value becomes 15 lakh 90,000 like this also they can give you a two marker McQ question this data they may give and say how much investment value will come in separate financial statement how much investment value will come in Consolidated financial statement we don't have such question and study material but just say okay now understood everybody so only in Consolidated financial statement May apply Equity method in your separate financial statement treated as normal investment and normal investment is accounted as per as13 itself and as13 simply says long Investments have to be valid at Cost short-term investment has to be valed at cost or market value whichever is lower which we will cover it in a bit that A3 also today only I'll take it up comfortable yeah one one more I'll do for extra practice sir what if you get significant influence in stages sir huh a acquired 10% in B limited on 1st April with 10% will you get SI or No SI for you to get SI as in significant in influence you should have minimum 20% but here you got only 10% and for 10% how much did you pay in fact when did you acquire 10% 1 April then another 15% you acquire you already had 10 you got another 15 that means now you have how much 25% with 25% will you get si yes so okay that means this SI you got it in one go or in steps steps so sometimes you also call this as step acquisition this is popular in subsidiary acquisition but the same so if you all this is there means how to do c final it'll be there okay but now only associate they've given the step method okay first you had 10 then you acquired 15 now you have how much 25% but this 15% did you acquire on the same day or later first 10% you acquired on 1st April 15% you acquired few months later okay some other information they've given cost of investment for 10% is 1 lakh for 10% you paid 1 lakh for 15% you paid 1405 net assets is 8 50 on 1st April on 1st October it is 10 lakh so that means now what to do sir you know sir Whenever there is an associate accounting happening Goodwill do we account it or we calculate we calculate and we assume that it is included in the cost of investment right so calculation of Goodwill is necessary they're asking you to calculate Goodwill that's all okay so here there are two Acquisitions now so how do we do it think that you you there's two acquisition for each acquisition calculate Goodwill or capital reserve separately for each acquisition calculate Goodwill or capital reserve separately so first when did you acquire 1 April how do you calculate Goodwill normal steps don't freak out normal step how do you get Goodwill cost of investment compared with your share of net assets on 1 April how much did you pay sir 1 LH correct compare this with your share of net assets sir first April May how much was net assets 8 lakh 50,000 850,000 on 1 April did you have 25% or only 10% 10% so calculate sir how much is that 850,000 10% how much is that huh 85,000 okay yeah so your share of net asset is 85 sir investment is one lakh your share of net asset is only 85 that means you ended up getting capital reserve or Goodwill Goodwill how much 15,000 okay now like this you do it for each step first step over once more did you acquire H yes when did you acquire once more 1 October how much did you acquire 15 15% so again repeat the step for 15% now how much is the cost of investment for 15% 1 lakh 145,000 agreed okay so around 1st October how much is net assets how much is net assets 10 lakh one second I think they've given here so on first uh 1 October net asset was 10 lakh how much percentage did you acquire in 1 October 15% so what is your share of net assets 1 lakh 50,000 you keep it in the same format don't change it it's fine so your share of net asset is how much 150 but how much is your cost of investment 145 so this time around you're getting Goodwill or capital reserve you're getting capital reserve of 5,000 first scenario may we got a Goodwill of 15,000 second scenario may we getting capital is of 5,000 net them off which is higher Goodwill is 15 capital reserve is five Which is higher Goodwill that means you show net Goodwill as 10,000 like that is your okay this is another thing so if you get the significant influence in stages for each stage calculate Goodwill or cap Capal iser separately and then finally net them off so if the neted of number is a Goodwill show it as Goodwill if the final neted of number is a capitalism mean show it as capitalism that working easy people working so this is the problem that can come in your as23 while drop let's run through as27 now I'll only revise those things which I feel has validity in exams we have already done in that previous topic also we have done some 8 to 10 questions but I feel but more or less all those are within the same lines so just the numbers and numericals are different okay can I start as27 sir okay as27 talks about financial reporting of interest in joint venture joint venture so what is this sir sir it's very simple sir if x limited has let's say more than 50% equ Equity shares in y limited then you apply accounting standard 21 because you have control okay if x limited suppose has significant influence can I write would you be okay with that yes if YX limited has significant influence in y limited then you apply IND or as23 which talks about associate accounting okay sir if x limited he exactly has 50% in y limited then we say we have JC JC means joint control in this scenario you apply AA 27 so that means if x limited has 50% and Y limited there will be another party let's say another party B limited let's say another party B limited he also has 50% in y limited that means y limited is basically jointly controlled by X and B limited X limited and B limited so in case of this joint control W scenario you apply accounting standard 27 understood yes everybody sir you'll get significant influence when 20% or more so suppose you have only I'll call this as a b this is C and let's say this is D sir suppose X limited has only 18% in y limited then it is what sir then it is your normal investment normal investment is accounted as per as30 not up to less than 20% as30 20% or more significant influence as23 exactly 50% as27 more than 50 50% as 21 that a break okay okay okay G all right now can we get to this aspect joint control ah join control means you tell me sir a company is controlled by one party or two or more parties not necessarily two it could be two or more parties two or more parties basically have a joint control in my example there were two parties but there could be many also it could be a joint venture of three parties also four parties also 10 parties also whatever basically for you to call it as joint venture okay there has to be a Jo control one single party should not have control control should be Diversified okay everybody should participate and then only decision should be made like that okay so I don't see any practical questions from this because the Practical questions from this chapter is very very childish okay it's lengthy if you open it looks like what is this and all but it is very very according to me probably it will not come it may come also because one or two attempts they keep it very very first normally when syllabus changes generally new topics of question they keep it pretty straightforward from study material so far that's the history history can repeat history may not repeat also don't blame me I am just giving you the what has happened previously usually when syllabus changes new new things come in for those new new things they don't bring in new questions whatever questions in there in our study material that only they will come in your examination that is what has happened ideally so in in your attempt one or two attempts and expecting the same and the questions of joint venture is very very straightforward okay I just quickly run through what it has done in my opinion mostly it will come as an McQ question Theory question question I feel that has a better chance okay so I'll tell you what for example what I feel is relevant from this topic sir there are three forms of joint venture there are three types of joint venture jointly control operations jco jointly control assets jca jointly control entity jce three forms of joint venture jointly controlled operations jointly controlled assets jointly controlled entities okay so maybe they may ask you different difference between the same some McQ questions you have to identify whether it is a jco or a jca or a jce those sort of questions I feel is has a more chance of coming from this topic than the numerical questions so how do we identify for that you need to know simple features so if it is jointly controlled operations one of the features of jco is no new entity will be form no new entity will be form join control means there is one party or two or more parties two or more parties have come together they're doing some business but they have not opened any new entity okay like let's say we have aru Academy and we have another another one Academy we came together we did not open a new Academy but we are doing some business we're doing the work together but did we open any new new company or We are continuing under our own name we're doing our own name okay such things we call it as once jointly controlled operation one of the feature of jco is no separate entities created so whatever existing entity is there that only is being utilized to do the new operations comfortable so operations means obviously you'll buy some Goods you'll sell some Goods you'll end up making some profit so this profit belongs to whom so our Academy and some other Academy does some work and if we generate profit that profit belongs only to our Academy or both of us both of us that means we have to share to share in what ratio sir maybe equally or we will have an agreement saying we will share the profits in 60 40 ratio 30 70 ratio 45 55 ratio like this agreement will tell the ratio sharing proportion that is what they're saying over here when venturers basically will settle the assets for joint venture business if you're doing any business means business will have some asset but does that is that business a separate legal entity or no legal entity no legal entity so any asset is there for that business means that asset belongs to whom now both the parties okay if that business has some liability means that that liability belongs to or that liability has to be settled by all the joint parties that parties in joint venture we call it as joint venturers joint venturers so the joint venturers will have to settle the liability same thing if JV has an expense if that business has an expense that expense who has to settle or who has to incur joint venturers so if you generate any sales or income from that business what will you do with that sales and income it will be distributed among whom venturers in what ratio as per their agreement ratio maybe equal maybe different we don't know agreement will tell is that okay sir that is a feature of jointly controlled operations is that okay can I move on to the next one so next one is something called jointly controlled assets so two or more parties will come to form an asset let's say we want to build an underground storage facility we want to build a huge storage facility maybe we are in the whatever we want to store some natural gas some petroleum liquid products we have to store so obviously when you're talking about petrol Diesel and all no sir you're not talking about 100 square fet 200 ft compromises petrol is a product which is used worldwide so that means if you're building a facility to store such product means the facility has to be really huge and you want to build that facility okay now to build such a huge facility do you think one party would be interested or they would like to share it with few they would like to share it with few people that we call it as jointly controlled assets so you are building an underground storage facility okay that storage facility belongs to you now or let's say there are three parties who are come together and building a storage facility so that storage facility is an asset it is a property plant and Equipment it belongs to one venturer or all of them all of them so this Venture no these sort of entity this sort of joint venture is generally formed to construct an asset and that asset will be shared by whom now every party in the joint venture that's all so here also no separate entity will be found existing name only business will be carried on no new entity will be formed whatever assets that you get no sir whatever asset you generate okay a part of that asset venturer will show let's say we built a storage facility in that storage facility we say ABC a has access access to use 33% of that storage facility B has access to use 33% C has access to use 33% storage facility we have buil to store the products no so a told 33% of the facility I will use B told same I will also use C also told I will also use 33% so in this case there is one asset what is that storage facility that one asset is shared by all the three parties so a will show his the share of asset what is a a share let's say this is like 90 CR is the value of that storage facility let's assume you built an asset whose value is 90 cres a has how much share 1/3 so 1/3 of that is how much 33% is nothing but 1/3 that means how much is this sir 30 so a no sir in his books will show he will show that storage facility as a property planning equipment to the extent of how much 30 CR B will show his asset to the extent of 30 CR c will show his PP to the extent of 30 CR such an entity we call it as jointly controlled asset so we are not doing an operation we have come together to form an or to build an asset that asset will be shared by whom now all the parties in what ratio agreement will see maybe equal maybe in different ratio whatever so their respective share that's what I've written here venturers will show only their share of assets and all in the financial statements obviously to construct this asset there will be some expense also who will bear this expense jointly because if you're operating storage facility means that storage facility there will be rent also there'll be electricity bill rent and all will be there no that means who will bear that all the parties so all the parties will share expenses and if you have some income all the parties will share their income but basically this this Arrangement is entered to generate or develop an asset okay you getting the difference between jco and jca okay two are over last is what sir jointly controlled entity name itself is saying jointly controlled entities so one of the features or highlight of jointly controlled entities new entity will be formed in the previous two version new entity was not formed here new entity will be formed to do a business you form a new entity you don't do it the business in the existing name you do it under the new name that itself is give away other two did not have it this will have so if they give this feature obviously you'll select the right option is that okay now sir entity we already learned company is a separate legal entity know if you have a company means company and shareholders are same or they're different different company assets belongs to company company liability belongs to company itself yes but company however if it makes any profit that profit distribution will be given to whom shareholders yes or no that is what we have to write over here so since there is a new entity what will that new entity do they will only purchase their own assets they that entity only will incur their own expense they will only settle their own liabilities but however if the entity makes any profit or loss that profit or loss will be given to as whom venturers in the form of dividend to whatever is that fine with you that is what I've WR okay for this you know sir for this particular if you have jointly control entity you have to prepare something called Consolidated financial statement because you have new entity here only in the previous two cases man there is no entity only sir Consolidated financial statement means clubbing to financial statement for you to Club there has to be two companies no in the previous cases and all was there new company no so company came into picture here only correct that means you will prepare Consolidated financial statement here so that means you have SFS also we have CFS also sir venturer has made an investment in Venture correct what is a venture name here jointly controlled entity correct so obviously if you want to float an entity means that that's a new entity how the new entity will get money now let's say there is a JV limited okay this there's a new company new company how will they get the money by issuing Equity shares let's know sir a limited has 50% investment in JV limited B limited has purchased 50% Equity shares in JV limited so obviously if a limited is purchasing Equity shares means will they buy it at free of cost or they will pay some money so a paid 10 lakh Rupees to buy the shares B also paid 10 lakh to buy this shares understood I means totally how much money JV limited got 20 lakh rupees correct now we are not talking from JV limited perspective we are talking from let's say we're talking from a limited perspective now a limited made an investment in JV limited so for a it is an investment so in separate financial statement how should you value the investment it's an investment no sir apply as 2123 only in Consolidated financial statement are we talking about Consolidated financial statement or separate financial statement in separate financial statement may you always have to apply as13 and what does as3 say Val if it long-term investment value at cost shortterm means cost or market price whichever is lower so do you think all this will be shortterm or longterm usually all this will be longterm so that means you'll value this investment as per is 30 usually this will be valued at cost understood but however in Consolidated financial statement you need to Value the things here how do you do Consolidated financial statement means you do something called proportionate consolidation method you do something called proportionate not Equity method you do something called proportionate consolidation method fancy name very very simple name itself is saying proportionate consolidation sir in subsidiary consolidation what did you do what did the holding company do 100% of subsidiary cets and liability we added correct here do we have 100% control or joint control joint control that means only our share of assets our share of liability we will add in Consolidated Financial State so if you have 50% means only 50% like here no a limited will not add 100% assets of JV limited they'll only add 50% of assets and they'll add only had 50% of liability is that okay same 50% of income they will add 50% of expense they will will add so this assets and liability if you add you'll get Consolidated balance sheet income and expense if you add you'll get consolidated p account okay so that method we call it as proportionate consolidation meaning don't add 100% of assets and liability add only your share your share could be 50 40 whatever agreement will tell that is that okay with you sir that is your proportionate consolidation method we have done some questions also in our regular class is that fine this is very very simple they will give you balance sheet PP value is one lak so if PP let's say this joint venture has a PP of one lakh what will a limited do what will a limited do in proportionate consolidation method they will have entire share of this one lakh or only their share their share what is their share 50% so one lakh of 50% is how much 50,000 this 50,000 a limited will show it as their PP that's all along with their own property plan and Equipment even JV PP limited PP they will add but not to full extent but only their share so since we are considering only their share we call that method as a proportionate consolidation method that's all is that okay sir that's all so know this this much this is good enough from as27 okay s g okay thank you we have some time so I think break if I give it at what time you said 123 12 12 is it okay to 1 minute I'll see which standard I can uh finish as2 means another half an hour to 40 minutes can we do half an hour to 40 minutes and then take a break would you be fine with that 130 it'll be okay now or already sap 130 is okay H yes or no I'm asking diog di okay uh for investment I need a little extra time I need about 1 hour at least I think you're not ready to sit for 1 hour I think it may become two also so let's not get into yesterday's scenario so investment I will do after sap I'll finish off maybe this standard now okay all right uh next we shall be revising accounting standard two which talks about valuation of inventory sir there are usually three types of inventories what are those raw material work in progress finished course so basically inventory is those goods which are held for sale in the ordinary course of business what do you sell in the ordinary course of business raw material do you sell working progress you sell or finished goods finished goods or inventory of those goods to be consumed in the or in the process of production of such sale it is in process it is in process means it is neither raw material nor finished goods it is somewhere in between what do we call that as work in progress or inventories are raw material or material to be consumed in the production process raw material do we sell or do we consume we we consume raw material so that we can produce something called finished goods so these are basically your inventory card definition and these are the three types also raw material working progress and finished goods now now you know the valuation of inventory how should the inventory be valuated sir inventory should be valued cost or NRV whichever is lower yes but before this no sir as2 is not applicable for one thing and this is quite a popular question also inventory should be Val at cost or NRV whichever is lower but for few guys you should not apply as2 that is producers inventory of livestock agricultural produce mineral ORS Forest produce if you are a producer like a farmer Farmer grows the product farmer grows the product that means he is a wholesaler or he's a producer producer obviously after producing will he keep qu or will he will he consume it or he will sell it he will sell it that means that good that particular crop whatever is growing it's an inventory firm yes or no don't value that crop as per as2 because he's a producer for producers inventory of agricultural produce Forest produce and all know inventor is are not valued at cost or en whichever is lower inventory is directly valued at net realizable value or any other practice we see okay this is only for not wholesaler keep in mind they can make a case study out of this this is not for a wholesaler this is for the producer only those guys who's producing this product okay for them they need not value their inventory at cost or NRV but directly at net realizable value okay sir for other guys other than these guys all other guys have to Value their inventory at cost or NRV whichever is lower so what is cost of inventory or what and all can be considered as cost of inventory one is the purchase cost if you Purchase cost can you add it to the cost of inventory yes okay now if you have any trade discount or non-refundable taxes then you can add it if it is refundable taxes means do not add it if it is already added to the cost of purchase means reduce it refundable tax means on those taxes where you're getting your input credits okay like that okay so if it is non-refundable taxes where input credit if it is not available you can add it to the cost of the product otherwise don't add it if they already added you need to subtract it that is one so cost basically are categorized into three categories Purchase cost convers cost all other cost incurred to bring the inventory to the present location and condition three these are the three B main categories so under Purchase cost what in all can come the main Purchase cost if there is any trade discount reduce it if there is any uh non-refundable taxes add it that is one next is conversion cost conversion cost means sir if you are a manufacturer what will you do you'll purchase raw material and convert it into finished goods so to convert this raw material into finished goods obviously you have to incur a lot of cost that way calling it as conversion cost and conversion cost are broadly classified into four categories direct material direct labor or direct wages uh basically direct cost and then variable production overs fixed production overes okay these three direct material direct labor direct cost variable production over it are absorbed on actual basis meaning if they give you all this cost is one lakh straight away you'll add them to inventory to the extent of 1 lakh how much ever you have incurred in actual that much you can add it to the cost of inventory however if you have fixed production overheads fixed production overheads means means your factory rent in okay that is a fixed production overhead I think overhead we know overhead is nothing but your indirect cost fixed production overhead means those indirect cost you direct cost means we can directly connect it with the product indirect cost means they are necessary for production but you can't necessarily connect it with uh the final product like factory factory means you'll only produce one product or you'll produce 10 product 10 product how much Factory was used for one fact one product alone can you clearly tell no difficult yes or no correct like uh Factory has th000 Square ft 100 square ft was used only for product one like that can you clearly pinpoint or quite difficult quite difficult because sometimes what happens know the machiner will be spread across one Machinery will be used for multiple products like this so are these is Factory necessary to produce the goods yes you don't own the factory you have to pay rent to the factory it's a rented premisis so Factory rent is it necessary to produce the goods yes but can you directly attribute or connect it with any particular product no hence we call that as what overheads overhead BAS is an indirect cost so if you have fixed production overheads that also can be added to the cost of inventory but on some basis what is that basis fixed overheads are absorbed based on normal capacity or actual capacity whichever is higher you have to take normal or actual whichever is higher I give you calculator example in regular class and proved it to you why do we take higher number now I'll not go into all that stuff okay for now you just remember this normal or actual whichever is higher okay that is one so this is about your conversion cost and any other cost incurred to bring the inventory to the present location and condition suppose you're buying the goods from some other location let's say I'm I'm in Bangalore I'm buying the goods from Chennai from Chennai if I have to reach my Bangalore car factory means obviously I have to incur some Transportation cost that only we call it as fright so that Transportation cost is it necessary to bring the goods to your factory yes so the cut off here is what as2 says is such cost incurred to bring the inventory to your present location present location is your factory whatever premises and not only present location present location and condition condition here refers to sellable condition till the inventory reaches sellable condition whatever directly related cost whatever you are incurring all that you can add it to the cost of inventory like Transportation cost incurred loading unloading charges incurred some assembly charges you are incurring okay so all the charges if you're are incurring on inventory you can add it to the cost of inventory till the inventory reaches your factory and it reaches the sellable condition any related cost on inventory can be added that's what we mean by present location and condition fine okay this is one then how do you calculate net realizable value sir NRV name itself is saying net realizable value so NRV is nothing but three components expected selling price minus expected selling cost because the word is not realizable value it is net realizable value you may sell expected selling price let's say is one L meaning if you sell the product you're expecting to receive how much one L but to sell this product you may have to incur some sales salesman commission so salesman commission let's say is 10,000 what is that salesman commission selling cost we are not talking about realizable value we talking about net realizable value that means though you received one lakh on sale of goods entire one lakh came to your pocket or 10,000 you gave away 10,000 you give away a selling cost so how do you get NRV again expected selling price minus expected selling cost minus further production cost if any this further production cost is necessary for wiip WIP means the product is 100% complete or not 100% complete it is not complete I maybe let's say in the current year it is 70% complete and the year ended you you're already on 31st March one product is 70% complete so 70% complete Min can I call it as finished goods or wiip this wiip correct no it becomes finished goods only when you complete the balance 30% so to complete this balance 30% will it happen at free of cost or you have to incur some extra cost have to incur some extra cost that we mean that's what we mean by here further production cost if any so this further production cost is relevant only for your wi is that fine that's how you get the net realizable value so find out the cost find out the NB whichever is lower the lower number will be adopted for valuing the inventory this is the fun yes sir work uh remind me once I'll discuss about this after this first I'll complete off everything next is joint products joint product means what sir you're producing multiple products but through one common production process let's say one one machinary you are using to produce three products one machinary you are using to produce three products one worker is working on all the three products one worker is working on all the three products sir product a is a separate inventory product B is separate product C is separate how should each inventory if they are separate inventory means can you value them together or separately separately that means for product day you need to find out cost separately NRV separately and value correct correct like this is what you do but here are you incurring can you tell how much cost you incur to produce product like that clearly it is given or it's a common cost sir you incurred let's say 10 lakh Rupees not to produce one product but to produce three products so this 10 lakh Rupees is what sir it's related to one cost or it's a joint cost joint or a common cost yes no all right so that is what we mean by joint products so you're incurring common cost to produce multiple products so but since each inventory is separate each inventory cost you need to find out so but this 10 lakh is a total cost relating to three products so in this case what we have to do is what the standard says is this 10 lakh of joint cost should be allocated among all the three products on some basis standard says use some rational basis usually they say this rational bases is sale value at split off point this 10 lakh will be allocated in some ratio that ratio of first priority is what sir sale value at split of point to be say so what does that sale value at split of point mean sir let's say you producing three products 100% of the production you'll do it together or after some point of time you will segregate them maybe let's say 90% of production process of product ABC are SE for 90% production process is same last 10% no sir for a you will put red color like you have cream biscuit no cream biscuits you have mango flavor pineapple flavor and all 90% of the production is s last 10% may you put or maybe I mean that so instead of cream biscuit let's maybe take it as a soap okay red color soap pink color soap that color soap okay 90% production process is same last may you put different D different color okay so that means that till 90% they are same last 10% you will segregate so sale value at split of Point means at what point of time are you splitting this product at 90% so find out the sale value at this 90% what is the sale value of this product at this 90% stage if you know that that we call it as sale value at split of point but do you think practically it'll be possible to find out this because this is product 100% complete no so if you have sale value at split of Point use it great if you don't have it you use the sale value because anyway after product is 100% complete you will sell it so use the sale value and uh allocate this particular cost in sales ratio you allocate it that is also okay or based on units produced also you can allocate it but what the standard really says is do the allocate based on a consistent and rational basis but one basis you stick this year I will do one sales ratio next year I will use production ratio don't go on hopping if you are following production means follow production ratio year on year every year same like that so follow a consistent and rational basis is what the standard says okay in our problem generally they will give you sales value so you do it in sales ratio okay if they give you sales ratio if they give you sale value find out the sales ratio okay now sir this is about joint product same thing I'm I'm pretty sure you have learned today costing as well drama continues or it's the same here as well next is the byproduct byproduct is one plus one offer you wanted to produce one product God Is So miraculously working in your favor one product you produce another product indirectly you are getting for free that's what happened during covid no the shirt manufacturers earlier sir when you let's say you insert about 500 M of cloth entire 500 M of cloth will be utilized to make a shirt or some will get wasted some will get wasted previously what they used to do they used to dump it now they don't dump it they dump it on our face called mask yes no now they won't waste that product they will sell it to that company this waste cloth they will sell it to that company who's making mask okay that means this wasted product now has some value that what we call it as byproduct though negligible but it still has some value so your main product is what shirt but the waste cloth whatever you're generating becomes your byproduct which you are able to sell it no that becomes your byproduct like this so do you think byproduct value will be very material or very small very small so what as2 says is find out the realizable value of the byproduct at what value are you selling this waste cloth for or remaining cloth for let's say you selling this waste product for or remaining product for 10,000 rupees the realizable value of that product is only 10,000 one the standard sales is you anyway have your main product that is product number one let's say to produce product number one you it takes about 10 lakh Rupees to produce our main product it takes about 10 lakh Rupees so you don't show this byproduct as a separate thing reduce this net realizable value of byproduct from the cost of the main product itself how much is the cost of the main product 10 lakh what is the value of this byproduct 10,000 so reduce this 10,000 from the cost of main product so how much it became 9 lakh 90,000 so you value the M main product so the main product of cost will not be treated as 10 lakh henceforth it will become 990,000 like this so by product there is no separate valuation it is reduced from the cost of the main product that's all okay so what if the value of by product itself is material sir if you're so lucky then you can't call it as a byproduct that itself becomes your main product that means in that case you will have main product number one main product number two okay how much cost you incur to produce main product number one 10 lakh that 10 lakh will not be the cost to produce one product it will become a joint cost that means this 10 lakh a portion of the joint cost has to be given to main product one and portion has to be given to main product two that means this is not byproduct analysis it becomes your joint product this will become joint product only when the by product value is significant which will be very very low case if at all it is so then you have to do it like this however if it is insignificant no need to Value it separately reduce the realizable value directly from the cost of the main product and do the valuation okay saru all right then few exclusion so we already saw what are the cost to be included now few cost to be excluded one is your General administrative and selling and distribution overheads okay now reception is salary we are producing some Goods in Factory we have a in our corporate office May there is a receptionist now you tell me receptionist salary and that inventory are they anywhere connected no so that is what we mean by administrative overheads all that administrative cost can you add it to the cost of inventory or totally unrelated unrelated so leave it off so you cannot add selling and distribution overheads sir there is a cut off for inventory valuation as per es2 what is that cut off stage present location and present sellable condition sir you're paying a Salesman commission one lakh can I pay salesman can I add salesman's commission to the cost of inventory no because the cut off is sellable condition you will pay the salesman's commission after he sells the product but the cut off stage is after sales or before sales the moment it reaches salable condition capitalization of inventory stops so hence all this administrative selling and distribution overheads will be transferred off to Pendle account so if they have any abnormal loss okay some you purposely you you you are so negligent that a missionary has to be switched off after five five hours you forgot that means that product that batch of product is completely wasted okay so all that we call it as what abnormal loss like tomorrow I told you we don't have class but I took class that is an abnormal loss because what will you tell sir you didn't inform only okay so conduct the class once again there more than the concept now they're worried about tell properly tomorrow class is there or class is not there tomorrow no class just give an example okay next class will be on Monday I think I gave you the schedule yesterday no we'll have a class on Monday at 2:00 afternoon because I'm coming back a little late only on Monday we'll have an afternoon session 2 to maybe 7:30 is what I'm thinking we'll see okay what the IPL happy happy okay fine so Tuesday and Wednesday we'll have a regular time 10 to 4ish 4:30 Wednesday I've kept as a deadline to finish the syllabus okay so that is the thing so now coming back abnormal losses and all you cannot be added to the cost of inventory then if you have any storage cost and refundable tax have already said non-refundable tax yes refundable tax cannot be added and storage Cost Storage cost of finished goods because you'll store the finished goods after it has reached the sellable condition so storage cost of finished goods you exclude storage cost however of raw material can be added is that okay that's what we mean by that so if they just mention storage cost always exclude it because we assume that if they just give you a storage cost we assume that it is a storage cost related to finished gos that is your exclusion all right sir how should the inventory valued again we told cost or NRV whichever is lower so you have to find out the cost no yes I was giving the cost so it was easy so imagine like a calculator dealer he will buy thousands of calculators every month he will buy the calculator at same price or price will go on changing price will go on changing every every time he buys calculator he'll make a note of it off and every time he sells he'll say okay this I purchased at 120 I sold it for 125 like that can you map difficult right so that means to find out the cost because you will purchase the product multiple times and at different different cost okay the cost value will keep changing it is very difficult to keep a track individually like this hence they've introduced something called cost formula cost formula is basically a shortcut which can find out the value of the cost of for the inventory valuation that only you have learned it as F4 LE 4 weighted average Etc ET that that methods of first in first out weighted average and all we call it as cost formulas okay so when do we use that so first of all what is cost formula is first is specific identification method then we have V4 standard costing retail this and all you learn it in your costing here it is not there all right fif for Le and all I think you worked out so I think I don't have to go in there yes sir these three no sir fif weighted average standard costing and all you will use provided inventory is interchangeable meaning they are not or rather they are are similar if inventory is similar you will go for one of the three methods like here calculator dealer he purchased let's say 5,000 units of calculator calculator number one calculator number 400 calculator number 4,40 different different or same every calculator is same no so whether you he sells calculator number one calculator number 25 calculator number 40 everything is same that means inventories are interchangeable because they are whats similar if inventories are interchangeable meaning if they are similar you can use one of these methods however if inventories are not interchangeable like your jewelry okay paintings designer cloths and all painting and our painter made two paints two paintings a painter made okay artist made both the paintings has same value both are same or both are different both are different so one painting painting number one cost you have to be valued separately painting number two valuation also has to be done separately because they are interchangeable whether you buy painting number one painting number two both are same or very very different very very different so if inventories are not interchangeable you cannot value under fif Le and all you have to Value them separately meaning if you have two paintings you have to find out the cost of painting number one separately cost of painting number two separately similarly NRV of painting number one and painting number two you have to separately find out and do the separate valuation such valuation we call it as specific ident identification method which is primarily applicable when the inventory are not interchangeable meaning they are similar or they are not similar inventories are not similar so these are some of the common examples F serg work disclosure and all it's fine not requir so I've written there it's okay all right so now let's come to some questions one or two questions we quickly take care so this question it is there in our study material also it is there in our class notes also it is there in RTP may24 question also it's come as a case study I'll finish up this any problem okay okay it one concept you did not tell thanks maybe I'll tell off that maybe then I'll take up the question so simple inventory we know that has to be valid at cost or NRV whichever is lower but for raw material there is a separate concept link raw material valuation to finished cods you need to Value the raw material based on finished goods meaning if finished goods is valued at cost then raw material also will be valued at cost so why is the separate concept for raw material sir finish how should the inventory be valued at cost or NRV whichever is loow NRV how do you get expected selling price minus expected selling cost minor further per production cost if any first component of NRV which is what expected selling price sir finish Goods you will sell wiip also eventually you will sell raw material will you sell ever raw material will you sell ever or will you use raw material you will use raw material that means how do you find out NRV of raw material because NRV means expected selling price raw material we never sell hence they said that you understood what is the pain Point here hence they said raw material inventory valuation because raw material also an inventory it also has to be valued hence the standard as2 or IND as2 CF also same concept they said link raw material valuation to finish Goods because from raw material ultimately what you'll produce finished goods so link raw material valuation with finished goods so if finished goods is valued at cost means don't have to break your head raw material also will be valued at cost if finished goods is valued at Cost raw material also at cost if finished goods however is valued at NRV then raw material also should be valued at NRV so how do you find out NRV raw material you may not sell but if your raw material gets over what do you do you replace it if raw material gets over if you need more raw material for your production you'll Place another order no that means you'll replace it so replacement cost you can substitute as NRV of raw material is that okay with you so if finished goods is valued at NRV means raw material also will be valued at NRV and NRV for raw material purpose is what sir replacement cost okay I'll apply this in one of the questions don't have to worry okay with this so far everyone so this is the thing since we don't have NRV for raw material they brought in this particular New Concept that's all done done okay now we'll go for some questions so as I tell this as I told this question is there in RTP may24 question as well as a case study this particular concept is been brought in so same we have done is there in ic study material as well in a production process normal wastages 5% of input normal wastage means it's a normal loss because no matter what you do you cannot Escape okay it it has to it will happen Okay and normal la we already studied in costing it has to be absorbed by the remaining good units so same F here also so as 2 also says the same thing normal loss can be absorbed by the inventory but abnormal loss should not be absorbed so now check sir how much is normal wastage 5% of input 5,000 metric tons of input were in process so 5,000 some process may you have inserted how many meters 5,000 m so and and they say how much ever you insert no about 5% of it will go wastage that you can't avoid it so calculate sir 5,000 into 5% is how much 250 that is your normal loss because no matter what you do you cannot escape from it so normal loss is 250 metric tons or meters or whatever that you want to call it yes a okay next you come to this uh 5,000 m of input where in process resulting in a weightage of 300 so actual wastage became how much 300 normal loss is how much 250 250 we expected and we were ready but actual loss became how much 300 so in 300 if normal loss is 250 means over and above the normal loss if you're getting any extra loss what is that abnormal loss here total loss is 300 normal loss is 250 so abnormal loss is 50 abnormal loss can you add it to the cost of inventory or it should go to P it should go to P it cannot be absorbed in the cost of inventory is that okay that question this is H okay now sir cost of metric T of input is 1,000 M for 1 m for 1 meter how much is the input cost 1,000 how many meter metric tons have you inserted 5,000 for one one metric ton it is th000 for 5,000 metric ton how much 5,000 into 1,000 you do how much is that 50 lakh so the total cost can I say is 50 lakh this is the raw Mater material insertion cost other cost they have not given this is the only cost available in this data yes or sir okay this is the thing the entire quantity of waste is on stock at the year okay state with reference to how will you value the inventory above case they've told okay sir what does as2 says normal loss has to be absorbed by the remaining good units what is the total units you inserted 5,000 in that how much is normal loss in that normal loss is 250 so what is the remaining good units 4750 basically 5,000 minus 250 which is 4750 correct now how much is the cost sir 50 lakh this 50 lakh of cost will be absorbed by remaining good units of 4750 50 lakh units will be absorbed by 4750 unit so 5050 lakh is a cost relating to 4750 unit for one unit how much is a cost how do you calculate this 50 lakh divided 4750 which is 10 52. 63 this is a cost per per unit per unit here they're calling it as per Mt met okay sir for 1 meter the cost is 1052 63 yes s okay sir totally how much is your wage 300 so 5,000 m you inserted 300 is gone how much remains 4,000 700 did you sell anything or they told entire is there in inventory they only told in the problem entire quantity is there so how many so that means how many how much units you have sir 4,700 you have it in your inventory okay yeah correct so and for one unit how much is a cost 1052 so for one unit 1052 will be transferred to the cost of inventory for 4,700 how much 49 lak 73,3 68 got it this is the cost that will get absorbed into inventory but how much is the cost you actually incurred you actually incurred how much cost 50 lakh entire 50 lakh be became part of your inventory or little lesser how much lesser 52632 lesser yes no why because there is abnormal loss abnormal loss can you add it to cost of inventory or it has to be transferred to pel it has to be transferred to P how much is abnormal loss per unit how much meters of abnormal loss is that 50 m and on 1 M how much is the cost sir 10 52. 63 multiply how much are you going to get 52 632 so this 523 632 represents abnormal loss that will be transferred off to P only this 49 lakh will be absorbed in your cost of inventory that's all is a three okay this is what has came is a case study with multiple options select the value of inventory you'll select the value of inventory as 49 lakh 47368 like this comfortable I'll move on to the next yes okay uh we just now discussed a concept around raw material okay so this question is around that particular concept Mr Mill gives the following information relating to item forming part of inventory as on 31st March his Factory produces product X using raw material a so the finished goods name is product X but to produce product X we need a raw material and that raw material name is product a okay now sir all right you know it valuation already raw material valuation is linked to finished goods if finished goods is valued at Cost raw material also is valued at cost if finished goods is valued at NRV then raw material also will be valued at NRV and NRV for raw material is replacement cost okay 600 units of raw material purchased at 120 so that is a cost of raw material replacement cost of raw material is given to be 90 okay they've given both 500 units of partly finished goods or partly finished goods means raw material finished goods are work in progress okay progress so 500 units of WIP we have and cost incurred till date is 260 so it is wiip means full cost is incurred or some portion is still remaining some portion is still remaining these units can be finished next year by incurring an additional cost of 60 this your further completion cost okay 1,500 units of finished product X product X is your finished goods uh 1,500 units you have total cost incurred on finished goods is 320 okay expected selling price of product X is product X is what sir finished goods expected selling price is how much 300 so they're saying how will each item be valued in your balance sheet so we have three categories raw material work in progress and finished goods so first we'll have this category don't worry about all the story okay so study material know sir whenever they give you answers they will first write story and then they'll present you the final conclusion so what should we do in exam sir sir you have to check if they use in the if they tell in the problem calculate the value of inventory don't give your blade don't put blade don't give stories and all that directly calculate and tell that's good enough if they ask you to say analyze comment then one or two blade you put as per inventory this has to be done raw material valuation should be linked with inventory like that you have to put the blade there so Masala is required only if they ask you to unal comment and unnecessarily don't write stories write stories only if they ask for stories and not to short shot stories not your life story okay keep that in mind okay so watch out for this word okay so here they just asked us to calculate so all the extra out and all not required directly calculate and leave it at that is that fine sir or if you're still not satisfied sir it came for five marks feeling bad sir one you right raw material valuation is linked with finish Goods that much you right if for your satisfaction because sometimes we feel very bad no five marks question if we finish off in two three lines you'll be like enough my opinion enough because they only asked you to calculate if your mind is not able to accept it write one or two lines extra not more than that okay can I calculate now yeah how many types of inventory raw material wiip finish CS okay first we will do it off for finish CS okay maybe we'll do it off for wiip first how many units of wiip we have sir 500 units that they have taken here yes sir so how many how much cost have you already incurred for WIP 260 so that they have taken here yes wiip should be Valu at same cost or NRV whichever is lower how do you find out NRV of wiip expected selling price so ROM WI you will sell or finished goods you will sell finished goods so that means you will not have value of WIP eventually WIP will become finished goods that finished product how much will you sell it for 600 so take that uh 300 ahuh 300 minus expected selling cost have they given any selling cost nothing minus further completion cost do you have any further completion cost for wiip yes how much is that 60 that means what is net realizable value for wiip 300 minus 60 which is 205 40 got it cost of WP is 260 NRV is 240 so which is lower NRV is lower so inventory will be valued at 240 per unit how many units you have 500 units so 500 multiplied by 240 you do how much is that 1 lak 20,000 that is the value of your work in progress easy okay now can we value the raw material or first we need to Value finish Goods finished goods because raw material valuation is dependent on finished goods so let's find out the finished goods valuation first how many units of finished goods we have 1,500 how much cost is already incurred 320 so 1,500 is a units cost incurred is already 300 so NRV how do you get NRV expected selling price how much will you sell finish goods for 300 minus selling cost how much is selling cost zero minus further completion cost finished goods is already completed you will incur any further completion cost h no that means what is the NRV of finished goods 3 300 300 minus 0us 0 correct okay so which is lower inventory should be valed cost or NRV whichever is lower 320 or 300 which is lower 300 keep that in mind this 300 is what NRV so finished goods is valued at NRV each unit should be valued at 300 how many units you have 1,500 so total valuation will be how much 4 and a half but one good thing that came out of this is we got to know that finished goods is valued at NRV so if finished goods is valued at NRV for raw material should we have to even think or straight away straight away so how should the raw material be Valu replacement cost do you know the replacement cost of raw material yes how much is the replacement cost 90 so each unit of raw material will valued at 90 how many units 600 600 into 90 5,400 okay 54,000 maybe my also S I think okay uh 90 not that 90 okay all right for raw material don't do cost and NRV comparison don't compare cost and NRV comparison for raw material is that okay directly write what since finished goods is valued at NRV raw material will be valid at replacement cost directly that okay saru all right one more question around probably same concept with little addition a limited is engaged in the manufacturing of chemical y for which raw material X is required so X is the raw material y y is the finished product the company provides you the following information first they've given the information relating to raw material cost price they've given unloading charges can you add us sir basically in the last problem cost was straight away given here they will give you many cost cost and you have to find out how many cost can be added or what and all cost can be added what and all cannot be added unloading charges can you add yes fright inward yes replacement cost and all don't add okay so what is the cost of raw material adding all this cost price is this plus 20 plus 40 you do what is the cost sir 440 that is the cost of raw material replacement cost they given it as 300 so replacement cost is lesser sir we'll valuate replacement cost sir raw material valuation always based on finished goods so don't compare raw material cost with its replacement cost that comparison is irrelevant what we have to really find out is the value of finished goods based on that raw material valuation will be derived okay they have given chemical y chemical Y is a raw material of finished goods finished goods raw material consumed is how much 440 because to produce finished goods we don't have to we don't take raw material purchased data keep this also in mind for finished goods no sir they are costing students when you do cost sheet we don't take material cost we take material consume in FM also we have done I only have taught yeah you don't take material purchase you take material consumes keep that in mind suppose they may give you that data also they may give you opening stock of raw material purchase of raw material closing stock of raw material don't take purchase data and work it out to produce the goods no we don't want purchase of raw material we want raw material consumed always have to find out raw material consumed data so here directly they have given raw material consumed is how much 440 that is consumption cost then direct labor can you add this is your material cost to produce finished goods you need only material or you need other cost also other cost also direct labor can you add yes variable overhead can you add yes all these are based on what actuals but theyve given one more called fixed production overs that tell me one sentence and make me happy perfect fixed one second somebody's trying to intrude us we'll send them out our our guys okay they're checking whether things are going smooth or not okay uh how should the fixer overhead should be absorbed sir based on normal capacity or actual capacity whichever is higher higher higher higher higher okay uh fix fixed production overhead for the year was how much for the whole year fixed production overheads was 4 lakh normal capacity is how much 10 20,000 okay so they have not given actual capacity if they don't give the data will we cry about it or you utilize what is given we utilize the normal itself so basically fixed overit cost is 4 lakh 4 lakh is for one unit or 20,000 unit 20,000 units for one unit because all this data is total or one unit level check the heading this is the cost per unit but that means fix it over it also we want cost per unit but what they have given us a total cost so 4 lakh is a cost for 20,000 units so how much is the cost per unit 4 lakh divided by 20 is how much sir 20 rupees so keep in mind don't directly take normal capacity fixed over it should be absorbed by normal or actual whichever is higher we have done one problem also on this in regular class yeah so here they've not given actual suppose actual was 30 ,000 what you would have done actual was 30,000 in the denominator you will not take 20 you will take 30 and do it in this way actual capacity is not given hence we are dividing it by the normal capacity absence of information okay s so how much is a fixed overhead cost per unit 20 can you add this yeah that's what I've added here fix it overhead cost so if you add all of this how much you're going to get the cost of the finished goods how much is that sir 460 560 580 580 660 correct that's if you're adding everything you're going to get 660 that is the cost of the finished course okay now let's see the other things closing balance of raw material is 1,000 units closing balance as in closing stock there's the units chemical vka we have 2400 units remaining as closing stock you required to calculate the value of closing stock under two scenarios one NRV of chemical Y is 800 net realizable value of chemical chemical Y is what sir finished goods finished goods can net realizable value is 800 what is the cost of finished goods 660 NRV is 800 so that means you'll value your uh finished goods at what value 660 or 800 whichever is lower which is lower since the cost is lower we will value it at 660 itself yes one unit the will be valed at 660 how many units of finished goods we have 2,400 for one unit 660 2,400 how much this much value sorry finished goods valuation is done raw material I don't have to break my head only how am I valuing finished goods Act cost so raw material also will be valid at Cost what is the cost of raw material sir what is the cost of raw material 440 so 440 for one unit how many units of raw material we have some they told how many units of raw material we have th000 units for one unit 440 for 1,000 units 4 lakh 40,000 so total closing stock will be this much done now this is in case one you have another case case number two what if NRV is 600 of finished goods so finished goods cost is 660 net realizable value is 600 now you will value the finished goods at what value cost or NRP whichever is lower which is lower that means the finished goods will be valued at NRV same finished goods will be valued at NRV of 600 how many units we have 2,400 if you multiply you're going to get 14 lakh 40,000 since finished goods is valued at NRV raw material will be valid at cost or replacement cost raw or material will be valid at replacement cost replacement cost where they must have given here check where is that ah here replacement cost of raw material is 300 one unit will be valid at 300,000 units it will be 3 lak that is your valuation yesu yeah with this inventory chapter we have completed thank you still time is there I'll take one more CH 130 you told okay already sap okay no problem okay no no issues no issues uh sir fine uh so we'll catch up at around uh 250 no I have a little I'm I'm traveling today so by I can't extend beyond 5 I'll have to leave by 5 or latest by 5:30 I want to do little more today so that on Monday know since we are doing afternoon session I'll not be able to extend so much okay I have another four or five standards spending which I would want to do it today so can we take in fact can we resume by by two would you be okay 35 minutes sufficient or that is too early can come back by two possible yes sir huh all right fine let's come back by two if if it gets over early we'll try to leave early all right people thank you yes 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 doc doents 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 account accounting so they've just brought in the accounting 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 it 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 measurement aspect Which accounting standard gives you the guidance third one is PP 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 CR will anybody understand it will somebody who's reading my financial statement understand it no obviously they would like to know what is this five how the hell did this come through or come yes that means we need to give some extra information about it what is this 5 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 sir 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 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 as 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 their shares or debentures whether in India or abroad that is one okay if you are already listed or if you're 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 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 is 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 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 okay sir so if 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 are not applicable for level two level three and level four entity if you are a level two level three or level four as3 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 level 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 we 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 SMC non SMC SMC non SMC SMC means small and mediumsized Company and non smmc means big companies so basically if you are an SMC company you get exemptions if you are not in SMC companies you don't get exemption that what that's what I in 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 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 borrowing exceeds 50 yes no if none of the conditions are satisfied you are an smmc 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 SMC means that company which is not into banking or a financial instit fud 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 all 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 as5 19 and 20 in they get some disclosure and some other exceptions 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 know you told you know the limits or you remember the limits let's see how well you remember the limits so 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 okay so what sort of an entity is this Rama Tex level level level level three entity level one entity what do a turn turnover limit exceeds 250 level two exceeds 50 but does not exceed 250 level three exceeds 10 CR but does not exceed 50 CR 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 CR but does not exceed 10 CR what's of an entity system 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're not a level three automatically you 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 mty like this the question can come fine now okay next this one a company has class a company was classified as non smmc non non smmc means small company or big company SMC means small company non SMC 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 ailable no but when they become SMC is exemption available is certain standards not applicable for them yes okay so which year they became SMC 20 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 comment 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 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 says 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 all don't write downg gradation only 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 that turnover has reduced drastically borrowing has reduced drastically means company is in a good place or a bad place bad place now this company 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 when that mind these Provisions are made okay so immediately 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 onwards 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 now I think few of them have come back so I think we can start now I'm seeing some rest F 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 combine 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 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 pendl 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 h because they are 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 inces Equity shares I purchased but not by be giving cash by giving land and building I purchased enforces carh 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 ditto ditto 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 so one is uh your chart is very nice would like to great if you pinned that in the 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 yeah but still I'll take your compliment yeah thank you okay sir Investments 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 Less Than 3 months less than one year 12 months everything wrong correct one mistake you also did he told did a lot of mistake I three Cash equalent 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 short-term Investments are those Investments which are which are held for less than 12 months when you 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 less sir 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 intention 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 a stries the classification okay so what if your intention changes your two steps ahead ahead of me wait okay I'll come to you come back to you in about five minutes classification is 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 bestest 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've invested in two private company shares I've invested in two private company shares both are in software 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 valid 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 as13 says is invest short-term Investments can be valued on individual basis or category basis both are allow 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 value 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 one this is for your shortterm 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's say you purchased infosis Cas shares and you want to hold it for 3 years you feel after three 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 longm term longterm long-term investment has to be valued at Cost I purchased it let's say for 10 lakh Rupees I purchased it for 10 lakh rupes 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's any temporary fluctuation in the 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'll be 10 lakh only or it'll vary it may become 10 lakh 5,000 10 lakh 2,000 11 lakh like this it will go up and down so if there is a temp 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 ad also you could say because of heidenberg report what happened to adani 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 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 ass it based on case to case 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 patanjali many people H H 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 leave 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 have 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 a 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 C 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 longterm to short term it could be other way around also that 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 amount it is cost okay cost or and F 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 about 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 now that is your classification while 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 you have like 15 20 minutes on the examination day flip quickly you can R through them like in previous casee 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 these limits write it in your one you maintain some two to three pages C some maintain some sheets and that she's 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 only ma you're only PA everybody you are only okay s so do remember it 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 finally it was all consolidation amalgamation they used to give four four five crazy big problems stff 55 66 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 cons since the standard is become too complex now those sort of problems they have reduced now okay but income tax we had a lot of cases and all know so I used to write down this some section number 32 stands for this like 109 I mean what whatever things I used to write down like that so that it help me my with my M 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 and 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 debentures 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 denture is it a balance sheet item or pendl item interest is a pendl item but denture 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 debenture is a balance sheet component debenture interest is a pendl component both they have merged 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 Acro 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 see 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 30th 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 while 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 acred yes is it received no that only we calling it as ACR 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 you're interested due dat Ates and if you're accounting here 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 on 30th September again they pay 6 months interest half yearly interest they are pay your let's say following accounting year as jant to December your following accounting year as jant to 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 your 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 approved 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 first April to 31st March can you tell me will there be any approved 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 aced 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 have 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 syn if it is same then you will not have a CR interest if it is not same here it is same or different different then only Acro interest will come and Acro interest will only come for 3 months fair enough in examination they'll always give you this scenario because if they give this scenario Acro 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 on full-f problem I'm going to do with all this it'll come but for those of you who 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 an 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 dividend basis what this means is if you purchased any shares on a come right 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 ah maybe we'll take this is an RTP May 2024 question we'll run through this question only a holds 25% debentures of 100 each so how many debentures 2,000 each face value 100 in XYZ 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 we had it already that means this is what sir NSA investment account opening balance because they did not use the word alimited purchased they use the word he's 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 dis okay interest is payable on what basis monthly basis or half yearly basis half yearly first six months interest they will pay on 30th June next 6 months interest they'll pay on 31st December now you know what the interest what they will say here here only clue is there they holding the debenture on first April so here is beginning on 1 April 2022 and that means your year will end on which date 31st March 2020 three 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 31st March 2023 so what is the difference between these three Jan to March how many months three months for three months is it part of your financial Year yes where you holding the Investments yes has interest ured yes but have you received no I mean should your account ured 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 multiple 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 isn't investment it's a balance sheet component but interest is a pnl 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 is interest is included and we have to exclude it that is one how many de how much did you pay for these debentures 1 lak 5,000 few months later on first number remember 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 debentures you sold it on come interest for 1 80,000 okay these are all data they given some opening balance we had two times we purchase two times we sold what do you need to prepare investment account you need to prepare using what method F4 method so normally when you sell an investment no you will end up making some profit or some loss that 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 waited average so the both the things you'll be comfortable with Okay so let's run through this so investment account Ledger is very very simple sir 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 will not get marks for that the marks what you will 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 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 oute 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 L your posting also has to be done chronologically or date-wise so this working note will help you 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 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 receive 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 lakh okay sir this interest has aced but you have not received will you pass journal entry or ignore current year interest has approved but you have not yet received will you pass journal entry or ignore pass or ignore 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 accred interest account debit correct you can't pass this entry instead of that you'll pass acred interest account debit to interest income account or interest received account correct this interest received is an income or it'll be transferred off to p what about this acred interest acred interest is what sir this AC we have this interest is acred 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 under 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 a BC limited holds the 2,000 debentures they did not purchase it they are holding it I means they holding it since last year sir acred 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 3 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 one lakh one lakh have just has taken as a random number for explanation amount is different but entry would have pass yes so first thing you will start in your interest working noce a interest car opening balance is that okay because does ACR 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 now sir everybody sir interest is always calculated on what value face value sir how many Dentures 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 two LH how many months interest acur have you passed the journal entry for last year three months which are those three months Jan Feb and March so face value is 2 lakh What percentage debentures are these 15% so 2 lakh into 15% if you do you'll get whole year car interest whole year car have you passed or only three months car So Into 3x2 You Do how much is that 7,000 fin so this is acred 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 purchase 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 1st May watch out for this you purchased on which date 1st May sir you are purchased the debenture means somebody else has sold you the debenture you have purchased the debenture means somebody has sold that somebody on these th000 debenture they have received the interest lastly on which date on 1st may they have sold they've received the interest only till 31st what is the interest due date interest due date again I'll write it over what did they say interest due date is 30th June and 31st December 30th June and 31st December so on these th000 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 mon four months is he your cousin maybe sir we don't know yeah obviously sir if seller has lost some interest means what will he say the buyer boss I have lost 4 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 4 months interest and excluded easy how four months they've received the interest only till 31st December but sale date is first May so if you count January February March April that is your four months we're talking about so calculate so how many debentures is sold th000 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 purchases interest on come interest purchase how many debentures you purchased 1,000 each face value 100,000 into 100 is how much one 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 4 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 all we'll do it later first we'll calculate the interest till here good okay sir 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 1st November any other transaction is happening yeah interest due date is appearing 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 purchased how much more 1 lakh so how many you have now 2 lakh plus 1 lakh which is 3 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 6 months interest they will pay So Into 6x2 You do because other company is paying you interest on a half yearly basis hence 6x2 Okay so so 3 lak into 15% into 6x2 will give you 22,500 that you as an investor you have purchased the debenture means you will pay interest or you'll receive interest don't think don't do the calculation from company perspective here okay now you are you are accounting this debenture from a from the company who's 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 debentures 1,200 deure on these th000 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 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 yes so you will recover this money from the buyer okay but how much of money you 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 1,000 200 so which date did you sell 1 November interest on X interest sale you call it th000 debentures you have sold each face value 100 so total th000 1,200 yeah 1,200 debentures you have sold each face value 100 so total face value will be 1,000 or one lakh 20,000 interest calculation always on the face Val 1ak 120,000 into 15% how many months interest you as a seller have lost 4 months so into 4 by 12 you do how much you going to get 6,000 rupees like this this 6,000 you'll recover from the buyer D okay after 1st November what is the next 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 purchase 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 received 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 receiving interest also you're making a sale also when ever they give you sale data purchase data okay so first account the sale data then account the interest received on holding C data what when which day 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 the selling price includes interest okay so now sir how many debentures did you sell 900 on these 900 debur 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 debentures or sold the debentures 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 last day 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 900 debur we have received the interest only lastly on 30th June how many months interest have you lost six 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 interest will you calculate 6 months which will be how much 6 on 5 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 immediately on 31st December there is one more transaction called interest received on holding so on 31st December again interest received or holding check sir from the beginning if you want to calculate or calculate it from here till here how many debentures you were holding 3 lakh you sold 120 so that means value will increase or reduce reduce so 3 lakus 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 minus 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 + 50 minus 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 will 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 a interest car opening balance if a cured interest has opening balance opening balance means it relates to last year current year also we have debenture so that means ACR 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 we received no so calculate aced interest on 1ak 140,000 debentures because that much only we are holding till now okay so 1 140 into 15% for how many months 3 months this is your approved 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 stuff so this working note becomes important so how many times have you purchased debentures in the current year two times one on first May another one on 1 30th November first have those columns 1 May what kind of a purchase 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 lak 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 1 5,000 which you need to exclude so that means we have to calculate interest no no no no you already calculated check which day did you purchase first may come back to your interest working note on 1 May how much is the interest sir 5,000 rupees this much interest is included in your purchase price which you need to exclude so DED 5,000 rupees 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 a net purchase price how much sir 1 lakh 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 debers did you buy 500 debur 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 manageable okay so this is your purchase price we'll finish off all the working note then post it into the Ledger next is so 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 another one on 31st December 1st November sale is X interest 31st December sale is come interest so I'll note that down 1 November X interest 31st December come interest on 1 November at what price did you sell first November May when you made a sale you sold it for 1 lak 28200 and here you sold it for 1 lak 18,000 so both I'll capture 1 lak 28200 and 1 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 me you are adding sales May 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 add it in this problem it is not there but if it is there we would have added but when you sell no sir 1 lakh 12200 you will get 1 lak 128,000 new will recover it's an inflow yes no this 1 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 are 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 reduce 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 reduce it in this problem if you have any brokerage or no brokerage no brokerage if it all is there what you have to do sir deduct 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 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 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 is the selling price net 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 is 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 Dentures did you pip first 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 de 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 F4 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 one minute I'll put it up in the next page 250,000 is a cost for how many debentures 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 sayell as for the question next time you sold 900 debentures 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 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 have we had 2,000 debentures from year beginning and cost was 250 not 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 2 lakh 50,000 entire 2,000 debentures did you sell here or only 1,200 for 1,200 how much is the cost pration 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 128 200 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 he already sold now 1,200 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 900 00 800 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, or 500,000 right 1,000 you purchase on first may know how much did you pay one minute maybe I'll write that down next how many how many did you buy th000 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 lak 5,000 you should take 1 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 1 L 5,000 net Purchase cost is only 1 L because 5,000 interest was already included understood so we have to take the cost as what sir not 1 lak 5,000 but one lak understood this this is a common mistake okay so you purchase th000 debentures by paying a cost of 1 L 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 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 the 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 debur the cost is 250,000 for 800 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 C debenture 100 you will sell from current debenture current year debenture th000 debentures you have purchased by paying how much cost 1 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 you see so sale value is 1 lak 11,250 cost is 1 lak 110,000 so we ended up making some loss or profit profit of 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 feif for 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 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 is a take away of this problem okay sir all these are working notes once these working nodes are done easily you can push the data into your Ledger because what is the journal entry for investment purchase investment to buy so like that we go 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 uh 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 refer it as cost some they call it as principal it's fine principal column here refers to the investment Ledger interest here refers to the interest account you remember in your golden days you used to prepare double colum cash book and all 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 leder no sir yes ideally they've not asked but in all our problems IC 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 acred opening balance sir interest acred 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 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 the journal entry for investment purchas 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 Chat Super Chat option H don't know what is it what is it sh sh Chan I don't know I think couple of times you sent that I thought you were just saying me mocking me yeah all right uh 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 R 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 me measure that in money thank you the intention you have now that is 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 s 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 under 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 L that you put in under your cost column or principal column like that every data is there in our working mod 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 22 500 face value column cost column nothing only under the interest column next uh this is over interest on X interest sale okay so 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 buy Bank 6,000 what is the face value of the debenture sold 1 lakh 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 heard we return on 1st November what is the sale proceeds 1 lak 128 200 that is the sale proceeds that should come here n 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 la loss loss will come on the credit side Ive 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 note number two what is your net purchase price 54500 check have they 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 6, 6750 interest you will pay or you will receive receive what's the Jal 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 first 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 1250 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 I material refers to this as a cost that is also okay next next what happened interest received on holding what's the journal entry for interest received on holding Bank to interest you will post it as buy Bank 10,500 done doesn't AFF face value principal call then interest accr closing balance the interest acred is an asset asset CL opening balance comes on the debit side closing balance will come on the credit side how much value 5250 face value of the debenture remaining is 1 lak 40,000 so by balance carry down 1ak 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 figure also so all these interest are pnl components interest where it will be transfer to pendl account all the interest put together you transfer it off to pendl ledger balance ni that's all okay sir lendy but very easy just that you can make a lot of clerical errors here instead of 3 months 4 months instead of post 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 a 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 Z you know H Target I'm crossing every topic at 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 purchase some shares earlier they had purchased gold and silver also on March 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 H uh it'll be 1 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 long-term market value of all the instrument theyve 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 shortterm or a long term now you have to make the Assumption okay sir shares you purchased it in the current year so you will 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 lak 25,000 however if you assume no no no 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 my shares will become long-term investment if it is long-term investment you'll value the shares also cost what is the cost 250,000 do you know the intention of holding not given it that means you'll give a subjective answer if it a 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 or lot two years before I'm going to assume that these are what kind 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 kite 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 as13 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 somebody is putting you some uh extra pointers there saying sir shares and debentures both should not come in exam sir both comes means go 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 will become very lendy 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 if you have Equity shares as an investment what to do now on 1st April 20 X1 Sund sundang 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 we 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 it 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 now 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 P you have 25,000 debentures each book value is how much 15 do you need any separate working out for this h 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 broad 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 our issue and bonus shares will you as an investor you 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 in 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 first 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 80,000 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 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 given 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 share holders 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 in 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 received in what ratio 3 is to 7 so three right shares the shareholders are eligible to buy if they are already owning seven shares what is the rights car 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 rupes 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 right issue not at 50 rupees let's say you will give the right shares at 23 rupees you give the right shares at 23 rupees Market made 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 sharees 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 issu uing the right shares at a discount that's all so right shares I used to say is like coupon is your like your Amazon car coupon if you have flip cart or Amazon coupon 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 subscribed or what he can do he can sell his rights only to somebody that we call it as rights renounced so first he has eligible how many eligible right shares the shareholder can buy if he has seven shares he can buy three how many shares currently 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 dat in mind bonus came first then right Shar is coming so on the right Shar how many shares is he holding 35,000 if he has 7 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 155,000 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 Shaker 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 one3 one3 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 chair how much money he's charging they 2 rupes so 5,000 into 10 is how much or 5,000 into 2 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 pel account are we preparing pel account here are we preparing bank account here no that means this transaction will it come in your investment Ledger no so just mention in the working note and say it not get captured that's all okay s s one third of the rights he renounced that means balance 2/3 he purchased subscribed 15,000 was eligible in that 1/3 he sold means 2,00 2/3 he subscribed 15,000 into 1 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 right 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 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 15,000 this much he sold or he purchased he purchased so right shares is also normal Equity shares only yes no that 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 1 lak 15,000 easy next what happened sir dividends dividends for the year 31st March 20 X1 one minute sir we are in what is our current year they gave opening balance is 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 declar the dividend for last year at the DAT 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 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 Sundar had 25,000 shares this dividend of 20% relates to current year or last year last year Sundar 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 shares into 10 if you do means you're going to get total face value of the shares held by Sund we want only Sund 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 joural entry for normal dividend bank account debit to dividend income account or dividend received account next entry will be dividend received to Pendle 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 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 the 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 Al 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 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 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 only 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 adjustment 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 I C 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 bases or come divident bases because that is the 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 a reason 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 of 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 for what sir accounting standard 13 as 13 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 div yes or sir guys guys guys guys yeah all right next on 15th November 20 X1 Sund he sold off 25,000 shares this was one Baki okay he also sold shares at a premium of five 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 datea and O 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 covering note what is the sale proceeds 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 account debit to investment so in your investment Ledger you'll post it as by bank 375,000 number of shares sold is 20 5,000 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 fif 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 our 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 that means how do you find out the average cost 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 15 15th November what in 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 added 375 + 80 455 for bonus shares is there any cost no cost zero then right shares 150 add it so how much is a 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 rupees is pre-acquisition dividend you should not forget to reduce this is the total cost divided by total number of shares add up all the shares 25 + 5 30 30 + 5 35 35 + 10 is 405 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 sharees 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 444 five profit where it will come credit side debit side debit side so post it 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 pnl account only extract two things will go off to pnl one is what sir one is rights you renounced you know when your 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 uh sale of Rights 10,000 yes sir that's all or you got some normal dividend 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're calling it as an extract extract means whatever pnl information is there only update that rest is not required okay saru so with this yes 13 we have fully completed thank you everything okay able to recollect is it all this we have done we have done in fact so many questions at least 10 questions if my memory serves right in this chapter we have solved okay at least one of you are able to remember Rec I'm happy all if you remember means you are D me okay uh next next what okay accounting standard seven we will take it out online also everybody there everything going good for online YouTube audience I mean yeah and there is a small delay people so that's the reason some of your comments I may not be reading so don't feel bad yeah I'm also in full J now yeah some of your comments I may miss out but still don't worry I still have I'm I'm still acting in your best interest only I want you also to clear exam and treat me everyone is writing here in the both the groups huh or only one group one group what about online man those of you are there you're writing YouTube audience you're writing both or only one how many groups are you writing suddenly they sto responding H something me sure ah group one someone responds so that means it is working fine maybe 345 no Brahma ittis yeah it's going on yeah maybe that one I can understand online May is very difficult to sit especially for uh this long and all I do understand these people only are cursing but all right so I can understand but still I'm also time pressed so we have to do okay yeah yeah no problem thank you thank you we can start no you need some break no no it's fine right yes sir sir no sir no worry I'm taking small small Concepts only three more standards then we'll be done for the day chinu chinu chinu ones not big big ones big big ones I covered before only yeah okay uh next are all just small small ones excuse me so the standard we are taking off for revision now is accounting standard 7 which talks about construction contracts now why we have this particular standard is let's boring I don't know he said okay I also don't know okay sir let's say there is an architect or a builder what is architect job he will construct a building for his usage or somebody else's usage somebody else's so he has got a contract to construct a building he feels this contract this building of construction will go on for about 3 years and let's say he's charging about 10 cres to construct this building now the question is for a contractor this 10 CR is a revenue agreed for a contractor this 10 is a revenue now this building car construction will have will get over only by the end of year three so should this contractor recognize the revenue in year one year two or entire 10 crores at the end of year three some confusion is there because each one of you can give your own answer you all maybe many of you will say recognize only at the end of year three some of you may say recognize everything in year one some of you may say recognize it for all the three years equally so that means there is some guidance required so those sort of guidance know uh accounting standard seven is trying to give you fine all right so when to recognize Revenue when to recognize cost and all in relating to these contracts as7 is giving because these sort of contracts don't end within one year they generally go beyond one year so how much to recognize revenue and cost is what ASV income main fund is all about okay now there are two of contracts one is fixed price contract another one is Cost Plus contract fixed price contract means here construction uh the architect will construct the building and how much is he charging 10 CR that 10 CR is fixed so hence it's a fixed price contract okay another contract is let's say architect told the customer sir I will give you my cost C data okay I will give my cost carard data let's say cost 7 CR architex is saying whatever is my cost to that you add 30% and give me the amount I will give you all my cost correct records to the cost you simply add 30% because 30% is my profit margin add that and give me if such a contract is there means we call it as Cost Plus contracts fine all right next is segmenting segmenting means showing if you have multiple contracts if you have two two or more contracts should we show them separately or can we account to them as one segmenting means showing separately let's say you have two contracts when will you show both the contracts separately let's say here we have we we have one let's say we are a contractor we have won two contracts one to construct fly over number one another one to construct flyer number two in the same Bangalore only we have won both the contracts now the thing is should we treat fly over number one contract uh separately fly over number two contract separately and do Revenue recognition or can we combine them and treat them as one contract if you are if you want to separate them that we call it as what sir segmenting you can treat them as separate or you can segment them or you can show it separately provided certain conditions are satisfied those conditions are one separate proposal should be sent for both the contracts for flyover number one you should have sent a separate proposal flyover number two you should have sent a separate proposal second one you should have negotiated each of the contracts separately flyover number one can negotiation separately fly over number two negotiation separately okay and revenue and cost information for both the contract also you should be able to identify separately how much is a revenue and cost relating to f one number one F number one you should be able to to find out how much is a revenue and cost related to flyover number two also you should be able to separately find out if all these conditions are satisfied then fly over number one you will account separately fly over number two you'll account separately if condition fails you'll treat them as you'll combine and treat them as one contract that's whatever it not that important for exam we just discussing all right next one is additional asset what is this additional asset let's say we had a contract to construct fly over originally the contract was to construct fly over for 2 kilometers okay later maybe government liked our work and they said don't construct it for 2 kilomet extend it by one more kilometer extend it by one more kilometer that means now it you will construct how much 3 km that means how much extra you are constructing 1 kilom more you are constructing this 1 kilomet more you are constructing now that constitutes your additional asset this additional construction whatever you're doing that only here we calling it as additional asset a or a that one all right so now the question is this additional asset should we treated as a separate contract or can I merge it with old contract this additional additional asset can I treat it as separate contract or can I merge them and show it as old contract you can show additional asset as a separate contract provided certain conditions are satisfied one that additional asset differs significantly with respect to design technology and function when compared to original asset original asset can nature function and design and original AET nature design function are different this is different that is different price of all either one or price of additional asset is negotiated separately original for 2 kilometers you negotiated sep price for 1 kilomet you negotiated separate price you have done a separate negotiation so either one of the things if you have done means this 1 kilomet stretch you will treat it as separate a is that okay but naturally you think in this example it'll happen like that no do you think this 1 kilom and this 2 kilomet are different it is same design WISE Technology wise function wise these are same and negotiation also in most cases will happen What as a separate negotiation or combo combo so usually you will treat this as additional asset no it will get merged with a old assets itself finea work so when can you treat it as separate asset sir you are constructing a mall but Mall didn't have an escalator initially it only had a lift you you have a contract to construct a mall let's say that mall did not have only it had a lift later the customer told build one escalator also build one escalator also that means this functions could be different like that you can treat it like that so I mean rare cases in generally most of the cases additional AET will get combined with the original assd itself most of the cases but again all all these are not that much relevant for your examination maybe Theory at best McQ question can be asked all right next is incentive payment incentive payment means some bonus like here let's say architect is constructing the building and building if you construct the building how much revenue he will get totally 3 CR I'm assume that to construct this building it takes about 2 years 2 years means 24 months the customer told the architect if you complete this building within 20 months architect told how much money how much time he needs 24 months customer is saying if you complet it within 20 months I will give you extra 25 lakhs I will not give you three CR I will give you three CR and I will give you 25 lakhs extra this 25 lakh extra amount bonus only we calling as incentive payment that is your incentive payment so incentive payment can you recognize as revenue or sir yes incentive payment also you can recognize provided two conditions are satisfied one the contract should be sufficiently Advanced to say that the specific performance targets will be met second one incentive payment Revenue should be or value of incentive payment should be able to measured reliably what it means is Sir let us say what is the original term of the contract 24 months okay now will we get bonus irrespective or there is a condition there is a condition what is a condition within 20 months if you complete the construction then only you will get by the end of first year no sir 80% of the work is complete by the end of 12 months end of one year means 12 months no by the end of 12 months 80% of the work you completed that means you tell me will I be able to complete the work within 20 months or I will not be looks like I am right I've done the work in good speed in one year only completed of 80% that means what are the chances of be receiving this bonus low or high quite high that is what the standard is saying just because you have incentive payment don't treat it as contract Revenue one the contract should have progressed to such a level from where you can say I will be able to receive or we will be able to receive bonus the day that or the stay or the day that stage is reached that day you record incentive payment till then don't record sir I've just started the contract can I record incentive payment no if you want want to record incentive payment contract should be sufficiently Advanced meaning contract should have begun and reached such a stage from where you can tell you will receive this incentive payment like in this my example one year is already over and 80% of the work is already over that means the contract has sufficiently advanced so now can you tell will you receive this bonus yeah so this at the end of first year you recognize incentive payment like that so when at the beginning of the contract don't recognize incentive payment because not contract has not even began okay this is first condition second condition is incentive payment should be measured reliably meaning how much bonus or how much incentive payment you will receive you should be able to measure it reliably in this case is there any problem in that or clear Clarity total Clarity if you completed how much money you will get 25 lakh but you should have a reasonable assurance that you will receive this okay that's what they're trying to say contract cost is okay not that important the main thing that is relevant for this topic is the revenue recognition sir when it comes to construction contracts Revenue we recognize the revenue on two methods one is percentage of completion another one is completed contract method percentage of completion is simple sir now in my previous example I told you over here if building a construction takes 3 years should architect wait for three years to recognize the revenue standard says no you don't have to just because work is going on for three years you don't have to wait three years to book your Revenue you can book the revenue on percentage of completion method meaning in first year let's say 20% of the work is complete means 20% of the revenue you can record if 30% of the revenue is complete means 30% of the revenue you can record you know the total revenue no that will be there in the agreement total revenue 20% you can record provided if the work completed is 20% that is your percentage of completion method things but sir when will you go for percentage completion standard says you can go for percentage of completion method when the outcome of the contract can be measured reliably when can you say outcome of the contract be measured reliably one Revenue should be able to measure reliably by completing this contract how much totally Revenue you will get you should be able to measure it reliably cost also should be able to measure reliably obviously if you're constructing a uh if you're doing a Construction contract means you'll incur some cost also so cost also you should be able to measure it reliably okay then the third one is stage of completion meaning percentage of completion also you should be able to measure it reliably and benefits to will flow to the entity benefits will flow to the entity means means the customer should not be our uh Vijay Malia okay like that now if you're constructing any building for Vijay Mala you may construct the building but will you get the money don't know no Allah don't I don't he may pay he not paying the bank or government he may pay you also whatever yeah all right so that's what they're saying here you are constructing a building means you will recover the revenue there should be a reasonable assurance that you will receive that money so that's what we mean by benefit should flow to the entity if all these conditions are satisfied we say outcome of the contract can be measured reliably so in that case you can go for percentage of completion method and what does percentage of completion method say how much of percentage work is completed that much revenue you can recognize in the end of respective years so take how Revenue recognize is simply person contract price multiplied by percentage of completion okay this is your percentage of completion method the next one is completed contract method don't be misled by the term what is it saying what is the name saying completed contract method completed contract method does not mean you will book the revenue only at the in in completed contract method what we say is revenue you don't recognize based on percentage every year you'll incur some cost you know you recognize Revenue to the exet of cost first year to construct building if you incur 10 lakh as cost Revenue also you'll book it to the exet of 10 lakh basically under completed contract method profit should not be accounted you'll book The Profit only when you fully complete the contract till you fully complete the contract profit should not be accounted how much of cost you have incurred that much extent you book the revenue so if cost is 10 lakh means Revenue also will be 10 lakh so that means profit will be zero like that is that okay that's how percentage of our completed contract method works so if this method this criteria fails means we'll go for completed contract method that's where to choose so how do you find out percentage completion sir multiple ways are there but I'll only tell the ones we use in exam that is cost we use cost as a metrics to find out percentage of completion sir I need 2 lakh to complete I feel to complete a particular or Construction contract we have to spend 2 lakh one lakh I've already spent how much work percentage work is completed to construct to complete this contract fully totally I have to incur two lakhs in that 2 lakh one lakh I have already incurred so how much percent work is already completed 50% because out of 2 lakh I've already incurred one lakh means the percentage of completion is 50% now this you tell me in Formula let's see what is this one lakh cost incurred so instead of cost incurred we'll say cost incur till date cost incurred till date what is your denominator denominator is your total cost total actual cost or estimated cost estimated so the formula is cost incurred till date divided by total estimated cost into 100 that will give you our percentage of completion there are multiple ways but for exams we'll only use cost metrics so this is the one so based on this find out the percentage and accordingly go ahead and recognize the revenue okay sir amount due from the customer or due to the customer obviously sir if you are doing some activity the customer means will you collect entire money at the end of the contract or installment may you will go on receiving money now if you're building any building architect will collect the money from the customer at the end or every month or every year some every two two months 3 three months he may collect some money correct no so that means that think from architect perspective the customer is our datar you have to collect the money so datar you have to show it where in balance sheet so how much is the value of the data you need to show it in your balance sheet is given by this formula this is how do you get this it's nothing but cost incurred till date plus recognized profit minus recognized loss minus progress billing from the datar sir you will recover only cost or you'll recognize profit also profit that's the reason add profit okay sometimes no sir you may end up taking some loss making contract also that's the reason if you have any loss you will deduct it minus progress billing let's say uh cost is 10 lakh my recognized profit is 2 lakh so how much I have to recover from my data how much I have to recover lak so my datar has already paid me 9 lakh so that means what is my datar balance 3 lakh so tell me this in Formula what is this 10 lakh cost incurred till date what is this 2 lakh profit so recognize profit you will add okay why did you subtract N9 lakh because datar has already paid me the money that to in cont as7 terminology we call it as progress billing so progress billing means how much bill amount you have already sent it to the customer make how much you have build it to the customer in that some portion you might already paid some portion is yet to pay progress billing simply means how much have you build it to the customer okay so reduce this progress billing and finally you will get what sir the datar balance to be shown in your balance sheet so sometimes if it's possible that sometimes they may collect extra money from datar from Customer because customer know if he acts cranky if he doesn't pay on time what will the architect do collect advance so better to be on the safer site so sometimes this number may become negative if this number becomes negative means he's our data or becomes our credit credit r no credit R that's the reason I've written both amount due from the customer amount if it is due from the customer means you will show it as an asset as a datar however it could also be amount due to the customer amount due to the customer here means same in scenario let's say progress billing here is not 12 lakh it is 15 in that case you're getting positive or you're getting negative negative negative means you will show it as a liabilities of the balance sheet that's why okay s all right so sometimes cost incurred till dat data no directly they'll not give they'll use the work certified and work uncertified okay sir you're doing construction contract means obviously there'll be an engineer engineer will approve the work based on that payment will be released so instead of cost incur till date sometimes they given the problem work certified and work uncertified cost incur till date is nothing but work certified and work uncertified submission okay all right that is one and progress billing I already told progress billing means progress payment received and progress payment yet to be received progress billing simply means how much have you build to the customer in that is one all right one more last pointer you need to keep before we dive into the problem is if there is any loss expected on this construction contracts apply prudence concept what does prudence concept say if there is a loss in future should we have to wait or account it right away accounted right away so any expected on loss expected loss on this Construction contract should be accounted immediately doesn't matter even if the contract is just signed no work has begun you have signed a contract and that contract itself is lost making contract even though still you record a you record this loss so why will we take a loss making contract sir sometimes for marketing and giv you my example our own Academia initially we did I told you in fact CA final I mean CA inter Bach initially we have done for five five students 10 10 students CA final I started with one student yeah that is true One recording in fact like because CA final know people don't trust the faculty so much because it's they are in the final leg so they don't want to take a chance that to my first this and all going the P only know okay first time my only one student trusted me that was my C CA Foundation student CPT it was back then he only came only one student face to face he came with that we recorded classes for almost three months okay there were like five students of mine who took recorded classes same okay plus only one face Toof face student came after that more than 500 students purchase that's a different issue all right but I'm saying initially when we started this contract initially when we announced this contract it was Heavy loss because sir three months I'm spending for one student okay can I collect 10 5 l 10 lak Rupees from one student he will say a day for 5,000 only is more I will pay so much yes no that means that means that contract for me was a profit making or loss making loss making because I had to prove myself that I'm capable of handing CF final so I had to go through with that contract okay now will I do that contract probably no now a little bit already proved so it's okay yeah know I'm just saying so that's the reason initially you may end up making some loss making contract for marketing purpose okay so if you have any loss in any contract if you find out that any contract is a loss you don't have to wait for the contract to end to book the loss the day you get to know that there is a loss on that day only you book the loss I've given you a small example contract price is five but to complete this contract how much cost you'll incur 5.75 crores you will get the revenue of only five CR but to complete this contract you have to incur a cost of 5.75 CR so that means this is a profit making contract or loss how much loss making contract 75. 75 crores or 75 lakhs when will you book this loss immediately like that okay G can we take up some problems G yes G RTP May 24 question following data is provided for M's Raj construction code contract prices 85 lakhs material issued is 21 lakhs of which material costing 4 lakh is still lying unsold unused at year endend sir obviously sir uh to find out percentage of completion we need cost incurred till date cost will be what to construct building and all what and all cost you incur material cost labor cost some specification charges so many some you'll incur a lot of cost right so they've given you cost data so basically here you the Crux is to find out cost incurred till date how much is the material cost 21 LH out of this 21 lakh 4 lakh worth of material is lying up unused so what we want for cost incur till day it is not Material purchased but material utilized how much material is utilized entire 20 lakh did you 21 lakh have you utilized or 4 lakh is not utilized so in 21 lakh if 4 lakh is not utilized means how much material got utilized 17 lakh so you'll only consider 17 lakh as a CO cost incur Del okay why we do this is so suppose I have a I'm a construct I'm a I'm doing a Construction contract I feel it'll take two years I feel material cost will be 50 lakhs entire 50 lakh I purchased in year one only entire material I purchased in year one only so that means what is my percentage completion let's say this is my only cost my total cost is how much 50 lakhs how much material have I purchased 50 LH that means how much is my work complete 100% Revenue that means I will book the revenue to the extent of 100% but my building construction will get over in first year or two years two years hence the standard says people will do jards like this they will purchase of more material keep it in their go down so that cost in Cut till date will increase if cost in Cut till date increases means percentage of completion will increase so Revenue booked also will be more hence the standard says nothing doing we don't want material purchased we want material utilized how much material have you used for construction so though 21 you have purchased only four is unutilized how much got utilized 17 so only 17 you'll consider it as cost for this purpose okay now labor expense they not did not say labor expense paid they said what sir labor expense for workers engaged at site is 16 lakh expense is 16 lakh out of which one lakh is still unpaid so total expense is 16 lakh in that one lakh is unpaid means how much have you paid 15 LH we don't want expense paid we want expense we want expense how much is labor expense 16 lakh so 16 lakh you will add so why did you segregate I segregated because in one of our class material question the same question is there but there the wordings will be labor paid if you check go through actually both are there in the initial problems if you say question number four five I don't remember you will see labor expense paid labor expense if they use the word labor here in this problem they modify and say labor expense paid is 16 lakh payable is still 1 lakh we want paid data or we want Total labor expense total labor expense toal toal labor total labor expense will become in that is 17 lakhs is that okay here have they given expense paid or expense itself they've given labor expense itself they've given it as 16 lakh we don't want expense paid we want the actual expense only so 16 lakh only will be considered as construction cost there is a difference between this question and the One initial question in the class both the typ you have solved our student in case you're having that doubt I'm just okay that's the reason I brought this break up with you okay everybody good all right next specific contract cost so this cost is specifically related to these contract can we add this yeah added 5 lakh subcontract cost for the work executed 7 lakh Advance paid is 4 lakh sir we don't want all these are not payment basis accounting what is the cost what is a subcontract cost 7 lakh add 7 lakh because sir in case of big big contracts no every work we will not be able to do it on our own some we may have to Outsource okay like if you're constructing a building how to construct a building architect may be aware but what about this electrical sockets so Plumbing work and all will we have will he have complete knowledge or he may have to Outsource this work to somebody else he will Outsource this work to electrician correct or no but that is also cost related to building only know so it doesn't matter whether you are doing on your own or whether you are Outsourcing to somebody else it's fine both are can be considered what is a subcontract cost 7 lakh so entire 7 lakh can be considered how much Advance paid and all is irrelevant for us because we want expense we don't want expense paid we want expense further estimated cost okay further estimated cost means have you already incurred this or you will incur in future you will incur in future so that means what is your cost incurred till date sir add all this expenditure 17 + uh 16 so that is what 23 33 33 + 5 38 38 + 5 38 + 7 45 so cost incurred till date is 45 lakhs how much cost you expected to incur in future 35 lakhs that means what is your total estimated cost 80 lakh in 80 lakh 45 lakh you already incurred so what is the percentage completion how do you get percentage of of completion cost incur till date divided by total estimated cost cost incur till date is 45 lakh total estimated cost is 80 lakh into 100 if you do how much percentage 56.25% so that is your percentage completion why do we find out percentage completion to recognize Revenue what how much revenue totally you will get what is the contract price 85 lakhs that is your total revenue entire 85 lakh can you recognize no how much percentage work is completed here 56.25 so 56.25% of total revenue you can recognize so 85 lakh of 56% is how much 47 81 250 cost is booked on actual basis how much cost have you incurred till day 45 LH cost you'll recognize for 45 lakh so 47ak 81,000 is your Revenue contract cost is 45 lakh that means did you end up getting some profit H yeah how much is a contract profit you booked in the first year these two comb minus is how much 2 81,50 this is the profit that you'll book it in the one okay whenever in this problem know do not forget to check whether we have any expected loss whether you have any expected loss because what does the standard say if you have any expected loss should you have to wait or book it right away book it right away how will you get simple how much is the revenue total revenue expected is how much 85 LH compare it with the total estimated cost what is the total estimated cost 80 lakh that means this is a loss making contract or profit making contract this a profit making contract so I don't have to worry let's say contract price is 85 lakh contract price is 85 lakh but contract cost is 95 lakhs total estimated contract cost is 95 lakh that means this is a profit making or loss making so how much is that loss 10 lakh should you have to wait any further to book this loss or right now right now so always check for this some problems May it'll be there some problems may it will not be there so check and then proceed Okay g next one more question we will do you remember we discussed balance sheet p and and all that H table huh that one question we will do this question is from our class notes only Shankar limited undertook a contract to build a building a crane of how much for how much value 10 lakh that means this is your contract price or total revenue can I say okay as on 31st March it has incurred a cost of one and a half lakh so one and a half they have already spent it expects that 9 lakh more will be required to complete the crane so 9 lakh cost have you already incurred or it's a future cost future cost it has already received 1ak 120,000 as progress payment okay so you need to discuss the treatment first sir uh this this is a order I used to present all the questions we have solved six seven questions in this chapter using the same format so I'll bring in the same format first contract price how much is the contract price 10 lakh Rupees we want percentage of completion for percentage of completion we need three data or two datas what are those cost incur till date and total estimat cost First you take cost incurred till date how much is cost incurred till date 1 and a half lakh okay this is cost already incurred are you expecting to incur some further cost in future yes how much is that n lakh so estimated future cost is n n lakh so what is the total estimated cost 10 lakh 50,000 totally are expecting to incur 10 lakh 50,000 in that 1 and a half lakh you already spent 10 and a half lakh is a total and in that one and a half you already spent so what is the percentage of completion so basically 150,000 divided by 10 50,000 into 100 if you do you're going to get 14.29% correct now so yes sir yes sir 14.29% of the work is completed means 14.29% of Revenue you can book what is the total revenue 10 lakh 10 lakh of 14.29% you do how much you going to get 10 lakh into 14.29 percentage if you do you're going to get 1 lakh 142 900 Revenue you book it based on percentage of completion cost you'll book it on actual how much cost have you incur to it 150 so cost you book it to the extend of 150 so revenue is 142 cost is 150 that means you are getting contract profit or loss in first year you're getting a contract loss how much is that 7,100 agreed sir till you're good I told in the problem what every problem is check if there is any expected loss what is the total contract price 10 LH what is the total estimated cost you already calculated 10 lakh 50,000 that means is there any loss yeah there is a loss of how much 50,000 that's what I've written here total loss is how much 50,000 so if you know that there is a loss of 50,000 can you delay or account it right now account it how much loss have you already book booked 7,100 how much loss totally you need to book 50,000 totally you have to book in that 7,100 is already booked so that means additional provision for loss is required how much 50,000 minus 7,100 which is 429 7,100 loss you already booked 40 to more you book so that the total loss will become 50,000 that as a table this format may I used to solve all the questions of Construction contract if you remember okay okay one more maybe quickly oh I think this question has one more uh you have progress payment also no so we have amount to Due what sir amount to Due from the customer or to the customer how do you get amount to Due from the customer tell me cost incurred till date I've told you the logic of all this in the regular class I'll not go into too much detail now we'll keep it at formula level it's fine cost incur till date plus plus recognized profits minus recognized loss both profit loss both will not be there it's an equation have constructed both either you will have profit or you'll have loss minus what sir progress billing so here do you have cost incur till date yeah cost incur till date is how much 150,000 do you have profit here or loss loss so recognize loss don't say recognize loss is 7,100 what is the total loss 50,000 total loss 50,000 what does A7 say the moment you get to know it is a loss total loss has to be booked right now 7,100 you already accounted 40 to 900 more you accounted so totally how much loss have you recognized 50,000 so recognized loss is 50,000 minus progress billing have they given progress billing yeah progress billing is how much 1 lak2 ,000 given in the question so do this plus minus how much are you getting so 1 lakh minus 1 lakh so you're getting 20,000 as negative that means this you'll show it as an asset or liability this 20,000 will be shown in your balance sheet as a liability because you have received more okay that means we'll refund this money sir no contract is over no contract is still running this year he has paid more next year we will adjust like that that's what it's given away all right uh next one more if you want it in uh entry in Ledger format rare but sometimes it could be asked they may ask you to prepare pnl account in case of a contract so let's run through this x limited commenced a construction on 1st April 2013 fixed contract prices 2 lakh that is your total revenue company incurred 81,000 in 20134 for 45% of work so that means they only told 45% of the work is completed sorry 45% of the work is completed means 45% of the revenue I can book what is the total revenue 2 lakh 2 lakh or 45% is how much 90,000 what is the journal entry for sales sir credit sales that to sales correct so for 90,000 you have to book Revenue so the journal entry you will passes for first year datar account debit to revenue 90,000 agreed and this Revenue where will you transfer to P account so the revenue account debit to pnl account is a transfer entry yes sir okay they asked you pnl account no so tell me the posting of this entry in pnl they asked you pnl account so posting will be what by Revenue in the first year you will post it as by you can write it as contract price Revenue whatever name it's fine all these numbers are in thousands so they have written it as 90 effectively it is 90,000 okay now next so how much company has incurred in the first year how much cost they have spent Ed 1,000 what's the journal entry for cost incurred cost paid expense paid what is the journal entry contract cost account debit to bank account how much 8 1,000 contract cost is an expense where will you transfer that expense to pendl what is the transfer entry pendl account debit to contract cost how much 81,000 what is the posting of this entry in P where will you show the contract cost how much 801,000 easier Revenue you recognize 19 first year cost you recognize 81 how much is the profit 9,000 arrived as a balancing figure for first year P Okay g in the first year have you received any money yeah and received 79,000 as progress payment from the customer so that means you you have recovered $9,000 from datar in year one only what is the journal entry for money received from datar bank account debit to datar 79,000 so check what is a datar balance you have debited dat's balance by 90,000 you have credited by 70 you want it or you you had to receive 90 in year one but you only received 79 what is the balance 11,000 rupees so this data will be 11,000 will be shown in your balance sheet as a asset okay now sir that's all now same thing can we do for year two in fact datar Ledger also they post so datar Ledger may you tell me the posting for this entry sir in datar Ledger what will you post it as two contract price or Revenue 90,000 so then you receive money from datar no when you receive money it will be Bank to datar so the posting will be by Bank 79 then anything else happened in year one or that's all that's all so balance carry down 11,000 first year closing balance will become second year opening balance let's see what happened in second year the cost incurred in 20145 that is year two year two was 89,000 to complete the rest of the work that means contract is still pending or fully completed fully completed sir if contract is fully completed means can you recognize full Revenue yeah what is your total revenue 2 lakh in that first year you already recognized how much 90,000 2 lakh is your total revenue in that 90,000 you already recognized last year how much more you'll recognize in the year to 1ak 10,000 what's the journal entry for Revenue recognition dat to revenue account okay and then this Revenue will be transferred off to pel account so in your pendl what will be the posting by contract price 1 lakh 10,000 yes sir okay how much did you spend in year two as cost 89,000 what's the journal entry contract cost account debit to bank how much 89,000 this contract cost is a cost is an expense it will be transferred where pel account so the transfer entry is p account debit to contract cost 89,000 so the posting in pnl will be what to contract cost 8 9,000 revenue is 110 cost is 89 the balancing figure will be profit so p and Ledger is fully closed yes sir sir that's all they said so since the work is completed will we keep the money outstanding from datar or we will collect it we will collect it totally how much we have to collect what is the contract price 2 lakh first year how much have you collected 79 so in 2 lakh May 79 you have collected in year one means how much is pending 1 lakh 121 that you will collected in which year second year so the journal entry is bank to datar so the posting of this entry in re in datar account is what datar to revenue is the entry so the posting will be what sir to revenue 1 lakh 110,000 balancing will be by bank account 121 so datar Ledger also will get closed off not that popular but sometimes they've asked this also okay instead of asking as uh the percentage and all that they'll ask you to prepare Ledger extract so with this yeah seven also we have completed enough sir I know but not enough for me I have a Target in mind no so to hell with your targets sorry but I have to continue don't worry I will do as4 and as5 and then we will leave as4 as5 and then Tata byby okay that's all small small standard small small milestones syllabus also will be more or less completed because Monday I'm thinking we'll have a little lesser shorter session so I we'll do a little longer session today okay small standard so not too much of concept so it should not take much time how much more sir maybe maximum 1 hour maximum 1 hour maximum one hour minimum 10 minutes also if you want to say so or if you say I know the standard I can finish in 10 seconds also Tata bye-bye yeah you're your call I am okay or I will post my regular class revision videos anywhere there no I'll attach to this Marathon you go through that only yeah want B no response online also is not responding online is okay okay uh quickly we'll start and finish off this stand okay first we will start with accounting standard four accounting standard four talks about contingencies and events occurring after balance sheet date okay so this as4 now talks about only those events which has come after the balance sheet date so let's say current year is 1st April 2024 to 31st March 2025 one event or one transaction has happened on 1st May 2025 so this 1st May 2025 is it within our current year or it has gone to the next year it has occurred after our current year is ending yes no after our current year has ended this particular transaction has happened so only these transactions or events as4 is trying to Target so if an event has happened within the current year you don't need any standard for it if it has occurred within current year means you'll account it in the current year itself so this particular standard is only targeting those events which occur after current year okay so if you look at the definition of event as per as4 events are those events or those material events both favorable as well as unfavorable it could be a happy news that event could be a happy news or a sad news occurring between the window what is that window occurring between the balance sheet date and the date on which which financial statements are approved by the board of directors in case of company and other competent Authority in case of other entities we say okay so basically sir if a particular transaction happens within a certain window only then it'll be considered as an event for as4 purpose so there is a clear window what is that window the balance sheet date and the date on which financial statements are approved normally after the year ends the board of directors will sit they'll gossip and finally accept the accounts right so or what the date on which the financial statements will get approved so those events which occur between the balance sheet date and financial statement approval date so if the event is happening within this date then only it will be considered as an event for as4 purpose if any any event occurs in my example in my example what is the event uh financial statement approval date 1st July so if any event has occurred after 1st July it is not an it's not even an event for as4 application purpose if you want to call it as an EV it has to be within this window okay that is one and as4 says event no sir if it is an event first check whether it is an event for it to be an event it has to be within this window if it is an event then that events are further categorized into adjusting event non-adjusting events events are broadly classified into adjusting and non-adjusting event adjusting event means event has occurred after the year end but we knew that this event is going to at balance sheet date or before only we had an idea that this event is going to occur later on balance sheet date or before only we had an idea that this event is going to happen in the next year meaning condition was existing on the balance sheet date okay meaning company had an idea don't write idea no idea and all in exam this is only for remembrance sake okay so if condition existing on balance sheet date means we call such an event as adjusting event if it is adjusting event though the event has occurred in next year we have to account it in current year itself if it is an adjusting event though the event has occurred in next year we have to account it in current year itself so give us an example sir let's say we had already made a provision on on doubtful debts on one data on 31st March itself on the balance sheet date itself we had already made one provision on data because he was not paying we were going on asking him he was going on giving reasons today I will pay tomorrow I will pay like this he's going on delaying the payment that's the reason we already made how much provision 20% provision 20% provision we have already made on the balance sheet date later on on 1 15th June datar became bankrupt he filed for bankruptcy he told I have no money whatever credit or you whatever you want to do you do it to hell with you I will not pay any money because he filed for bankruptcy now you tell me bankruptcy is an event our current year is ending on 31st March 2025 now this bankruptcy is an event is this event happening on the balance sheet date or after balance sheet date after balance sheet date and our accounts are approved on 1st July what is an event for this purpose if you want to call an event for as4 purpose it has to occur within a particular window window is what 31st March and 1st July why 1 July 1 July is the date on which financial statements are approved anything that happens between this only is an event between this he only filed for bankruptcy no so is this an event is this an event yes this event was a total surprise to us or we knew we knew that's the reason we already made provision we already had made a provision means we had an idea about it further Evidence we got it later but condition was already existing that is the reason we had already made the provision so what sort of an event is this adjusting event so if it is an adjusting event what you have to do what you have to do is how much provision have you recorded 20 20% this datar has become bankrupt no that means if you feel you'll not receive any money that means make the provision for 100% when not next year current year itself current year itself from 20% increase the provision to 100% that is adjusting event that's what we mean by adjusting event if it is adjusting event you have to account it current year only fin this is adjusting event the next one is non-adjusting Event non-adjusting Event means like our classes full bouncer nothing understanding meaning it was a total surprise if we had absolutely no idea it came as a full surprise then we call it as what sir non adjusting event so example sir sir one of the fact let's say current year ends on 31st March 2020 25 on and financial statements are also approved on 1st July but when due to fire one Factory was destroyed on 1st May due to factory due to fire Factory was destroyed current year is ending on 31st March 2025 accounts are approved on 1st July 2025 between this one event occurred what is that destruction of factory by fire Daga correct that only yeah on 1 May Factory got destroyed so is this an event yes on 31st March we had an idea that there will be fire and our Factory will be full Daga Daga or is a full surprise surprise that means what sort of an event is this adjusting or non-adjusting event on balance sheet date we had no idea that means this is what sort of an event non-adjusting event so if it is non-adjusting event so your factory has destroyed means obviously there will be a loss Factory and all is a property plan and equipment you need to cancel on balance sheet date was the condition existing or not existing that means what sort of an event is this non-adjusting event if it is non-adjusting event accounted next year when is the factory destroyed current year or next year next year so account it in the next year itself current year you just give a disclosure current year just give a disclosure that a factory has destroyed by fire and the loss suffered by me is 10 lakh Rupees like that you can only give a disclosure no accounting treatment only a disclosure in notes St accounts usually we say we disclosure in director statement also we say FU this is about adjusting and non adjusting EV fine that's all you need to do they will give you a scenario in this chapter and ask you to and ask you to identify whether it is an event and if it is an event whether it is an adjusting event or non-adjusting event that's all they will ask from this chapter usually four or five scenarios they will give each scenario will carry one one Mark so don't write stories in just the answer adjusting non adjusting adjusting non adjusting like that that is good enough okay at best maybe one more pointer you can write okay that's all is required from this particular chapter or if they give you one case study rare if they give you only only one case study put full blade what is evento what is adjusting evento what is non-adjusting evento facts of the case and finally conclusion like that okay if it's different different case no masalah just the answer to the point take a call how they have asked according to answer now one more thing you need to probably remember here is before you go to the case study sir if going concern assumption is no more valid if entity is no more a going concern then all adjusting event or even non-adjusting event becomes adjusting EV meaning all events will be come adjusting what do I mean by that sir let's say in the previous example Factory was destroyed by fire maybe I'll write the again data what is the current year ending date 31st March 2020 4 or 25 4 okay Factory was destroyed what day was that factory was destroyed I think five it was okay Factory was destroyed on or maybe it's okay 1 May 2025 Factory was destroyed accounts were approved on 1st July 2025 sir Factory is destroyed by fire and I had only one Factory and that was my major Factory now that factory is destroyed by fire unfortunately was to problem my insurance also expired my insurance also I was busy I forgot to renew my insurance that means everything is full toss for me now go I feel I'll not be able to survive the business the loss is of that magnitude or it's such high that I feel I have to shut down my business that means am I a going concern or not a going concern not a going concern first of all what is going concern mean we assume that entity will go on forever it neither has the intention nor the necessity to shut down correct so now is my entity going concern or not a going concern The Entity is not a going concern means even though this is a non-adjusting event still you'll account it as adjusting EV because business only not there no sir I may not have next year I only have this year so everything you record in this year itself that's this is one exception okay thank you thank you Pap all right so can I move on to the next one everyone understood this no yes sir so just just because there is a factory destroy don't assume entity is not a going concern always give a subjective answer if they ask you to put Blade no if they say Factory is destroyed by fire first say it is non-adjusting event then give another subjective answer is saying if entity is no more a going concern then it can be a adjusting event because all the facts of the cases will not be given to you in the case study so actual answer answer for fire is what sir non-adjusting event then give another subject to answer that if entity is not a going concern then this may become adjusting event like that you give an answer okay next is all errors are adjusting event if you find some errors or frauds if you have detected okay if you have deducted after your balance sheet date okay current year is 31st March 2024 after the year ending date you have deducted an error that means condition is not existing on balance sheet date no sir ah this is where I say ignorance is bliss sir now you know as4 as5 and all that stuff okay if you didn't know this adjusting non-adjusting event I simply tell you there is an error in financial statement what you would so you will think oh this is adjusting this is non-adjusting like that you'll break your head or what one answer you will give me error is there now correct it that's what you will say will you say I will correct it next year or correct it this year only this year only so all errors are adjusting it okay you will detect the error obviously after the year ends but pure logic sense do you have let's say year is ending on 31st March 2024 accounts are approved on 1st July 20124 on 1st June 2024 you detected an error sir once the accounts are approved can you change it or you cannot change it once the accounts are approved that is done and dusted you cannot do anything but before accounts got approved Only You detected the error that means now do you have a chance to correct the error yes if you have a chance to correct the error will you correct this error or push it to next year correct so that means all that's the reason all errors will become what if you're correcting the error means are you disclosing it or correcting it correcting correcting means you adjusting so hence all errors becomes adjusting event but for you to treat it as adjusting event error should be detected before approval of financial statement suppose you detect this detected this error on 10th July 2024 instead of 1st June you found out this error on 10th July now can you correct no you already approved your accounts means your accounts is already closed now you can't do it anything okay all errors will become adjusted event but it should be detected before approval of financial statements like that okay next some of the data they will give you sir they will say we want to purchase a PPE we want to purchase an investment we want to purchase a business then they will say we are only in negotiation stage this answer this is quite popular in this particular thing a lot of case studies have come from this chapter around this concept only that's the reason I brought it specifically here so if they say we we have a plans to purchase PP or investment or a business check the word what are they saying is it in negotiation stage or is it in proposal stage if it is in proposal stage you will treat it as non-existing event if they use the word we've already finalized the value sale agreement is already entered then you will treat it as adjusting event keep this in mind I'll take you to some case studies you'll get a better context related to this okay all right can we apply it in some of the case sir Surya limited follows April to March for a year again an RTP question a a suit meaning a case against company advertisement was filed by A Party On 5th April sir year is ending on 31st March 2023 current year is ending on 31st March 2023 when did somebody file a case against me in the current year or after current year after current year that is 5 days after current year that is on 5th April he has filed a case demanding compensation of 5 lakh tell me condition existing or surprise surprise on balance sheet date you had an idea that somebody will somebody will file a case against St or no idea no idea that means what sort of an event is this condition was not existing so it is a nonexisting event a company sends a proposal finalized or only sent a proposal they only sent a proposal to sell an immovable property okay keep that the key word there is proposal not a final have they finalized or only proposal stage proposal stage to sell an imov property for 45 lakhs in March March may they already sent a proposal book qual property sold is uh property is 30 lakh you planning to sell for how much value 45 lakh Book value is 30 lakh so you are expecting to make a profit of 15 lakhs however the deed was registered in 15th April the deed was registered in April now what did I use the word check the key word whether they have finalized or whether it is in proposal stage here it is finalized or just proposal sent if it just they sent the proposal means sir normally Sir You could argue with me saying sir we already sent the proposal means condition is already existing on balance she she date because when did we send the proposal in March only that means we had an idea on this okay further Evidence we got it later on okay that is on 15th April we sold it idea condition was already existing on balance sheet date but we have taken a little liberal approach over here so when it comes to PP purchased PP sold intangible asset purchase sold and all sir they are of lot of big significance that's the reason what they said is proposal stage and all no sir if you want to treat it as adjusting event means you have to account the sale in next year or current year only current year only you have to account it yes no hence they've taken a stage over here is because in PPS and all know the deal may get backed out later on proposal may not get accepted so what they are trying to they've taken a little liberal approach saying check if it is already finalized then only you accounted in the current year if it is just at proposal stage don't account it if it is just at proposal stage don't account it here is it finalized or proposal only current year we had only sent a proposal finally it got sold on which date current year or next year next year so that means you current year you treated it as non-adjusting event simple layman terms don't overthink on this just think of it as what stage is it is it if it is at proposal stage or negotiation stage non-adjusting event if it is at finalized stage agreement entered etc etc if they use you'll treat it as adjusting event based on that you conclude because these assets have a significant value attached to this hence they've taken a little liberal view on this I'll give you some more to bring out a little more clarity take up I think this was MTP question uh take this uh 1920 that is a year year is beginning on 1st April 2019 and ending on 31st March 2020 uh accounts were approved by directors on which date 15th July okay so I'll write the year for you here current year is ending on 31st March 2020 accounts are approved by 15th July 2020 for you to consider it as an event it should occur within this particular window they've given five cases so let's run through them a suit on company's advertisement was filed on 20th April claiming damages 25 LH just now we saw it condition existing not not not existing so it is what what event non-existing event terms and conditions or acquisition of a business you're not buying an asset you're buying someone's business was had been decided by March so that means you are at negotiation stage or already finalized read this line once again terms and conditions for acquisition have been decided by March that means negotiation or finalized finalized okay but the financial resources were arranged in first April obviously if you want to buy someone's business means you need money so agreement was made finalization was done in March finally you arranged the money in April and you purchase the business how much did you purchase it for 50 lakh this is a negotiation stage or finalization stage that means you'll treat it as what event adjusting if it is a negotiation stage means non-adjusting event like that able to get the difference okay the theft of 5 lakh cash on 31st March 2020 was deducted on 16th July so this is a theft so that means all errors and frauds are adjusting unit but but but but there's one more condition this should be detected before approval of financial statements when is the financial statement getting approved 15th July when did you detect 16th July that means accounts are already approved that means now is it really an event it is not an event they've given the answer as non-existing event actually the answer should have been not an event at all because for you to call it as an it should be within window is it within window or going Beyond going Beyond so obviously it is not an event company started a negotiation I don't have to read further it started a negotiation that means it is what event non-adjusting okay now major fire occurred in the factory on 5th April so condition was existing or surprise surprise fire natural Calamity and all you will not know about it you'll only come to know when it occurs so this is what event nonexisting event assets were fully insured if it is insured means I will suffer heavy loss or no that means will my entity not be a going concern or still a going concern still a going concern so you will write you should you have to write all the drama or not required not required non-adjusting EV write and more on one more maybe I'll say an agreement to sell the land was entered on March agreement itself is entered so negotiation stage or this finalized stage finalized that means what it will become adjusting event further they will say registration happened on 15th April okay agreement was done on 1st March but the agreement was registered on 15th April okay but since you are at finalization stage you will treat this as an adjusting event next negotiation with of with another company was started on February it's a negotiation stage so you'll treat it as what non adjusting like this okay Naru all right so with this as4 also fully we have complet that's all end sir no sir one more standard that's all sir then we all live happily ever after sir don't worry May more than you I have to rush because I have a bus to catch okay all right I'll finish this and take it yeah they're saying take care sir leave sir yeah no it's okay I'll finish this and I'll go yeah all right to the last standard for the day is accounting only for the day tomorrow tomorrow no class Monday again come back and we'll resume yeah don't don't spread rumors and all you cancel class I'm not canceling class yeah okay accounting standard five accounting standard five talks about profit or loss for the period prior period item and changes in accounting policy basically accounting standard 5 only covers five components ordinary item extraordinary item EX exceptional item prior period item changes in accounting policy changes in accounting estimate six components in fact okay only these components ordinary extraordinary exceptional prior period accounting estimate change accounting policy change ordinary item means those income and expenses which are related to the business like for us for aru paying teacher salary is it totally out of the blue or related to the business that related business income expenses and all we call it ordinary activity so teachers fees paid uh fees collected from students all these are related to our day-to-day business that is ordinary activity if it is ordinary activity you don't have to do any fancy accounting nothing no disclosure nothing whatever you're doing continue there is another one called extraordinary item extraordinary item means something which is clearly different from your ordinary activities like let's say we want some we put some money in Lottery and got Lottery income so our business is to invest in Lottery yeah now our bus businesses to provide coaching but and we decided okay let's take the chance anyway students are not supporting us at least Let's uh put the money in Lottery and earn extra money okay so we W knows 100 rupees okay all right so that 100 rupees of Lottery income is it related to our business or totally unrelated totally unrelated that we call it as what sir extraordinary item something which is clearly different from your business we treated as extraordinary item examples could be a loss due to your Earth earthquake fire flood etc etc or company's property attached company did not pay tax to the government tax Authority seized company property all that you see in your day-to-day business are completely different completely different so you will account this as extraordinary item so if it is extraordinary item what you have to do sir you have to separately disclose sir where sir pendl sir this your P format pel format here check what have they written profit before exceptional and extraordinary item exceptional item also you need to show separately extraordinary item also you need to show separately so you can't Club it with other item you have to show them separately this extraordinary item could be an income or it could be an expense okay so whatever it is but it has to be shown separately understood okay next is exceptional item exceptional item means they are related to ordinary activities only but their nature their size is such that if you disclose them separately user will understand your financial statement better they are related to your ordinary activities only but their nature and size is such that if you show it separately it'll be better everybody will understand your financial statements better like example could be write down of invent to what sir net realizable value not normally sir net realizable value is your selling price correct selling price minus selling cost you expect selling price and all to be lower than cost or higher than cost normally let's say if the cost of the inventory is 100 rupees means you expect NRV to be 100 or much more much more maybe 120 130 150 etc etc suppose NRV of one company inventory is 80 correct that means this is a normal scenario or it looks like your company is going into loss scenario loss scenario don't you think if you show this separately it be it'll be better for users hence so is this really extraordinary for our business or this are related to our business only this is related to our business only but if you show this now the inventory will be valid at what sir if cost is 100 and NRV is means inventory will be valued at 80 that means you wrote down your inventory by how much 20 rupees you purchase the inventory at 100 rupes NRV is 80 means from 100 rupees you have to reduce your inventory by 20 rupees that inventory reduction of 20 rupees show it separately because if you show it separately it'll help the users to understand your financial position better so write down of inventory to net realizable value is an exceptional item or sale of long-term Investments of pp if you have any long-term Investments usually we'll be selling long-term Investments no by chance in the current year if you sell at some point of time you will sell but if you sell it in the current year better disclose it properly so that user will understand your financial statements better that is the reason or if you have any litigation settlement litigation settlement means your court settlements all those are examples of exceptional item and just now I showed you exceptional item means it has to be shown separately in PN both extraordinary and exceptions you have to show it separately next is prior period item prior period item means name is is saying prior period prior period means it relates to current year or last year or years prior period item means they are those income and expenses which are coming in the current year why because you did some error or Omission in the preparing financial statements of last year some last year expense or last to last year expenses and income you missed out some expense only you forgot to account now you got to know will you escape or will you book that expense you'll book the expense when the current but does that expense relate to current year or many years before many years before that we call it as prior period it okay it will come in the current year but it is related to the previous year or previous years okay such a component or such an income and expenditure we call it as prior perod item that also has to be disclosed separately that's all they'll give you a case study in this problem all you need to identify is what sort of an item is it and what you have to do with for it that's all Extraordinary exceptional whatever that's all you need to give so it'll be a PL case study usually they'll give you five case study you have to answer that's all one one Mark each cases those sort of questions come from this particular topic next is changes in accounting policy so what does accounting policy mean accounting policy are basically some rules protocols or principle used in preparing financial statements like how will you value the inventory sir C you you no no that is a basis to how do you find out cost of inventory either you can go for fif method or weighted average method can you select both or you'll choose one either you'll go for fifo method or weighted average one among them you'll choose that chosen one we call it as accounting policy similarly for property plan and equipment in as10 I'll revise it with you but we' already discussed a property plan and Equipment either you can value go you can go for cost model or revaluation model can you select both or only one one The Chosen One becomes your accounting policies unless you choose one you'll not be able to prepare your financial statements hence we say accounting policies are basically rules that is required to prepare your financial statements sir accounting policies and all can be changed sir sir it's a rule no okay rules and all should be changed frequently or once once in a while so accounting policies and all so generally you should not change your accounting policies you should follow accounting policies consistently every year you should follow same accounting policies but that does not mean you can't change it forever they say you can change your accounting policies under three circumstan One requirement of law two requirement of accounting standards three requirement for better presentation so let's say we are following uh revaluation model for our PP We are following revaluation model law of the country said no more revaluation model BJP government said no more revaluation model for PP I don't know why they're interested in BP but they passed one rule saying revaluation model is banned We are following revaluation model henceforth can we follow this or shift it over shift it over because it's a requirement of law or requirement of accounting standard so accounting standard band revaluation model We are following revaluation model till now that means what we have to do shift over because it's a requirement of accounting standard these are pretty rare the last one is more popular if the management Feels by changing accounting policies it'll lead to a better presentation of financial statements you need to always also convince your Auditors how it is so if you are able to do that using that as a ground you can change your accounting policies however if you change your accounting policies it has to be accounted retrospectively retrospectively means you need to work it out from the beginning let's say you were following uh cost model you are following cost model till year first four years you are following cost model in year five for property planed equipment you want to follow revaluation model you want to follow revaluation model so there's an accounting policy change accounting policy change means you have to do it retrospectively what does retrospectively means is from the beginning if you had followed revaluation model you are you want to follow revaluation model from which year year five onwards but if you had followed revaluation model from year One what will be the value of property planning equipment find out let's say if you had followed revaluation model from the beginning PPA value would have been 10 lakhs assumption okay but currently the value of pp because you're following cost model the currently the value of pp is only 7 lakhs currently the value of pp is only 7 lakh that means what you have to do sir you have to increase in the value of pp by 3 lakh rupees which year current year so you have to work it out from the beginning but give the effect in the current year that's what we mean by retrospective calculation retrospective mainly means don't go and change previous year financial statement that you cannot change previous year financial statements are already approved audited and all that that you cannot change work retrospectively means work it out from the beginning calculate the impact and give the impact in the current like that okay sir this is is important has been asked a couple of times adoption of new accounting policies or adoption of accounting policies for transaction that significantly differs from previous occurring events is not a change in accounting policies okay A lot of times this question comes from this particular topic so what does this mean sir earlier the company had no Pension Plan same example you'll see in the case study also I'm building it up earlier company had no pension plans now they brought in pension plan now they brought in pension plan so earlier they had no plan now they brought in plan that means is this a change in accounting policy no adoption of new accounting policy is not a change in accounting policies earlier we had no plan no now we have brought in a plan so adopting a new plan is not a change in accounting policy that is one or let's say earlier we have used to pay gratuity based on management intention if management likes any employee they will give gratuity if management doesn't like any employee they'll not pay gratuity So based on their whims and fancy are based on their likes theyed to pay gratuity now a formal policy is introduced earlier also gratuity was there but was there any formal policy or just management intention management intention now a formal policy is introduced both are same or completely different completely different that's what the second Point says adoption of accounting policies which significantly differs from previous one is not a change in accounting policies okay fine is Sir okay this I will again tell it to you in question there it's fine it will come this is this is important from this topic go through that case study uh so what should you give disclosure for accounting policies disclosure of accounting policies is same as change an accounting estimate I'll do that and then this whatever I've written here this disclosure requirement is same for accounting estimate and accounting policies now change in accounting estimate the last one for this topic uh conceptually accounting estimate change so what does accounting estimate mean so accounting estimate simply means approximations account in estimate simply means approximates sir there are few components in financial statements whose value know sir you cannot say with Precision with total Clarity you cannot find out their value like to calculate depreciation you need useful life useful life of the asset is 10 years is that 10 years a Paka number or an approximate approximate it could be more than 10 also it could be less than 10 that means is it a Paka number or just an estimate estimate or just an approximate so many there are some components in financial statements whose value you cannot find out with Precision so you need some approximates also the use of that approximates only we call it as accounting estimates wherever you are approximating that only we call it as accounting estimates you use accounting estimates for finding out useful life for finding out residual value etc etc for all this you use the approximates is that fine sir all right so accounting estimates means it's an approximates approximates will be based on what based on the facts whatever facts and Circumstance and condition is existing on the day you estimate based on that you'll find out or you'll approximate yes or no all right sir will the facts stay forever sir when I bought the asset I thought I will use it for 10 years when I bought an asset let's say I bought uh excuse me I bought a planted missionary okay I thought I will use it for 10 years later on after 3 years technology changed advanced Ed product started coming Advanced product started coming now do you think I'll be able to use this missionary for 10 years or lesser years lesser years because when I bought the Machinery mine was the latest technology the fact and the condition said mine was the latest technology and this technology will last for how many years 10 years so missionary also I can you you can use this missionary and produce a product which will last for how many years 10 years but after 3 years Market condition changed technology changed now I feel I can use this asset for two more years correct am I done any mistake or circumstance changed circumstance changed so accounting policies are always based on circumstance and facts and those facts can also change so any facts change means accounting estimate also will change if the facts change means approximates also will change and change in accounting estimate is always accounted prospectively because is it my mistake is it am I doing any error here no when I bought it I thought based on condition I will use it for 10 years later on condition changed and I feel I can use it only for 2 years that means I did not do any wrong I relied on Market data market data itself changed that means my estimate also changed now you can't put penalty on company and say do retrospective accounting yes no because see do I have a choice over here retrospective accounting is not easy to calculate sir imagine an asset was purchased 20 years back retrospective means you have to do it from from the beginning easy task no so accounting estimate since it is based on facts and Circumstance and is not any mistake hence the standard is given a leway that any change in accounting estimate are always accounted prospectively okay so depreciation change and all is accounted as a accounting estimate change because depreciation is based on useful life and useful life is a Paka number or estimate number estimate number so if the useful Life Changes means depreciation also will change so hence any change in the depreciation amount the depreciation method all that we call it as accounting estimate change and done only prospectively okay so if you have any change in accounting estimate you need to give a disclosure what disclosure first check if you have changed any accounting estimate due to that change do you have any material effect in the current year or future year due to that accounting estimate change is your financial statements getting affected in the current year or future years material means audit materiality you have to use what is materiality you have to analyze based on case to case what is material for one company may not be material for another company based on facts and Circumstance this will vary so if if due to accounting estimate change it has a material effect either in current year financial statement or future financial statement then you need to give a disclosure what disclosure one the fact that you have changed accounting estimate that is one and how it affects your financial statement meaning due to this accounting estimate change our depreciation will increase by 10,000 so property planed equipment will reduce by 10,000 like that you will call out its change okay that is one or it has no material effect it has an effect let's say it's a, CR companies they changed an accounting estimate and due to accounting estimate depreciation is reducing by 1,000 rupees for a, CR company is th000 rupees material or looks immaterial immaterial so if you feel there is a change in accounting policy but due to that change it has material effect or no material effect no material effect either in the current year or future year then no disclosure is necess you can simply ignore that F now however if the company feels it has a material effect not in the current year financial statement but in the future year and Company feels we cannot estimate we have changed an accounting estimate due to that it will have an effect in the future years how much it will affect we are not able to quantify we are not able to find out its value if that is the case means disclose the fact of the change and also tell that I'm not able to it's not possible for us to quantify the change so disclose the fact that you have changed an accounting estimate and also and tell that you are not able to find out how how much it will affect your financial statements by those disclosures you need to give it for accounting estimates okay zaru all right so let's quickly run through this question some Concepts we are done let's run through one or two questions and wind up the standard a company finds that inventory sheet on 31st March 2016 did not contain two pages oh two pages containing inventory worth for 14 lak 50,000 oh super storekeeper you have maybe you didn't pay him bonus properly what did he do two pages of inventory only he T it and that value of the two pages is how much 14 lakh 50,000 that happened last year State how will you deal with the matter in the year ended 31st March 2017 sir he tore off the paper last year we came to know about it in the current year what is this now it's a prior period item correct no no because this item is relating to current year or last year last year but we got to know only in the current year so what is the answer this is a prior period item and requires a separate disclusion that's two marks done now next uh accountant of mobile has sought your opinion so story they've given we'll go to the case study provision for doubtful debts stop there only sir provision for doubtful debts is a Paka number or approximate approximate can provision change yeah any change in provision is an accounting policy change or estimate change initially you made a provision for 2% there afterwards you changed your provision to 3% what is the answer from this there's a change in accounting estimate that's all during the year ended 31st March 2017 that is current year management has introduced a formal gratuity scheme in place of ad hoc X Gracia payments to employees earlier they used to pay it on adhoc basis meaning based on their mood if they like it they will pay if they don't like it they will not pay that was the plan before now what happened some formal Plan was introduced okay that means there are some conditions whoever fulfill those condition will get gratuity like that so is this a change in accounting policy or not a change in accounting policy there's not a change in accounting policy because earlier you had a weird plan now you brought in a formal plan so last earlier plan may this plan May are same or completely different completely different so adoption of accounting policies for a transaction which significantly differs from the previous occurring events is not a change in accounting policies that's what you need to write if possible otherwise simply right not a change in accounting policies okay till till the previous year company has depreciated an asset on straight line basis now they no till uh till previous year Furniture was depreciated on straight line basis over a period of 5 Years From the current year useful life of the furniture is changed to through 3 years so if useful Life Changes means depreciation also will change you useful life is a Paka number or approximate approxim meaning it is an estimate so any change in useful life or any change in depreciation is an change in accounting estimate okay management has decided to pay pension to those employees who have retired after 5 years such employees will get 20,000 pension earlier there was no pension scheme earlier there was no accounting policy now they brought in a new accounting policy is this a change in accounting policy no that means this is also not a change in accounting policy during the current year there was a change in cost formula for measurement of inventory cost formula means your fif till now let's say they were following fif method in the current year they changed it to weighted average method sir account cost formula and all I already told fif for weighted average and all is an accounting policy so that means accounting policy you have changed so what does this constitute this is a change in accounting policies which has what effect prospective effect or retrospective have to work it out retrospectively okay S one second sir just one second as1 is related to that I'll just see if there's anything here as1 and as5 Concepts is everything is similar okay so I'll just quickly run it by accounting policy meaning and all you know okay sir fundamental going uh uh fundamental accounting assumptions fundamental accounting assumptions we can call it as gak gak means G for going concern a for a c for consistency so if going cons if all this fundamental accounting assumption if it is followed by the company no disclosure is required if any of them if it is not followed then you have to compulsorily give a disclosure remember this so how will you Select Accounting policies based on Prudence substance over legal form and materiality Prudence is your conservatism concept substance over legal form means reality is more important than legality we'll study more about this in as as 19 materiality means you know that materiality means all important things whichever which affects the user decision making should be shown separately in financial statements So based on these three things you will select an accounting policies so if there is a change in accounting policy what to do have you learned or yet to learn thought yet to learn accounting same as accounting estimate change same D put up okay this two points also is there here also so as1 and as5 concepts are same so with this as1 also I will consider it as okay so thank you for your patience you been wonderful audience be wonderful audience on Monday also enjoy your Sunday now okay I'll see you on Monday but in the afternoon session we'll have it at 2:00 2 to 7 7:30 is what I'm thinking on only on Monday okay people so that's all for today take care see you bye-bye happy afternoon one and all so welcome to the next day of our revision session and we'll be starting our revision with a topic called accounting standard 10 which deals with property plan and Equipment earlier the name was called fixed asset now we don't call it as fixed asset anymore we call it as property planed equipment okay so one sir this particular as10 no it's not applicable for your biological assets as10 is not applicable for biological assets so what does biological assets means living plants and animals we call it as biological assets but for Bearer plant as10 is applicable beer plant is also one kind of plant only for that plant as is applicable for other plans and all as10 is not applicable because we have a separate standard which you don't have it in your syllabus you'll study in CF final as indas 41 called agriculture okay so for biological assets as10 not applicable but for Bearer plant as10 is very much applicable okay so what does property planning equipment mean sir sir if you want to call a tangible item or if you want to call a component as a property plant and Equipment it should have three features PP definition has three features one it should be a t tangible item meaning you should be able to see touch and feel it should be an asset means sir what does asset mean asset means something which is within our control from which we will get all the benefits human beings are not assets for a company human beings are not assets because company cannot control their employees or human beings that's the reason no human being is shown as a property planed equipment so first feature is it should be a tangible asset second it should be held for use meaning you should use that item for what either to prod use Goods or to render a service or administrative purpose or rental purpose for one of the four purpose that fixed asset or property plan and equipment should be utilized for okay production of goods and rendering service is pretty common sir like we are giving a service now teaching service we are using laptop TV AC iPad and all to give a service like that so we that so that PP should be deployed for one of these four purposes production of goods rendering service what is the third one administrative purpose sir majority of the asset which or PPS which the companies have will be used for administrative purposes meaning they will not give you direct revenue or direct in fact they will not be used for production of goods or service directly like we've installed AC in our classroom classroom is used to give a service but the same AC we have also installed in our receptionist area in our uh wherever our employee are sitting like our marketing team is sitting our sales team is sitting there also we have installed AC will we will we conduct the class there no still those assets are also known as property plant and Equipment because they are necessary for administrative purpose so the water purifiers that the companies buy the paintings the company buys the furniture the company's buys all these aesthetic assets are also property plant and Equipment because they're necessary for administration is that okay so majority of the pp will fall under the administrative category okay or that PP should be used for rental purpose meaning you should have rented out that property plan and equipment and earn some r income out of it so one of the four purposes the pp should be compulsorily utilized for and the third last feature is it should be used for more than 12 months if you want to call a PP as a PP that PP should last in your business for more than 12 months so these are what sir features of pp one it should be a tangible item held for use usage could be either to produce Goods or render service or administrative purpose or rental purpose and that usage should be for more than one period or 12 months okay this is the meaning of pp but if you want to show PP in balance sheet there are two recognition criteria if you want to show PP in balance sheet there are two recognition criteria that only we used to call in our class purpose as Feb and cost measurement Feb means future economic benefits because of that PP some benefit the entity should get not necessarily immediately if organization feel they will get the benefit from PP after one year after 2 years still it is good enough in future may if you are expecting benefits also that is considered that is your FIB last one is what sir cost how much you have spent towards that PP you should be able to able to measure reliably so if I have to put it on layman terms if you want to show PP means five characteristics should be satisfied tangible item held for use you should be for more than 12 months and you should also get some future economic benefits and cost of that PP also you should measure it reliably so if all are satisfied then PP will come in balance sheet otherwise whatever you have spent will directly go off to pel account okay now so one thing we learned is for Bearer plant is as10 applicable or not applicable for beer plant for beer plant as10 is very much applicable for other biological assets I told as10 is not applicable so what does bearer plant mean sir if you want to call a plant as a bearer plant it should satisfy three criterias one that plant must be used in the production or supply of agricultural produce so let's take an example same example we used to give in our regular class also a mango tree a farmer has planted a mango seed and it has grown into a mango tree now we are testing whether that mango tree is a barer plant if you want to call want to call Mango Tree as a beer plant one that mango tree should give you an agricultural produce from mango tree what do you get mangoes mangoes is an industrial produce or agricultural produce agricultural produce so condition number one satisfied second one it must bear the produce for more than 12 months meaning that mango tree know from from that mango tree you should get the mangoes not necessary for 12 months for for more than one year now if you have a mango tree will it give you mangoes only for one year or more than one year more than one year that is what second condition is trying to say it must give you the produce for more than 12 months third one it has remote likelihood of being sold as agricultural produce except for incidental scrap sale is what the standard says on in lemen terminology this farmer what do you think he will do from that mango tree what you will do he will collect mangoes and what will he do with the mangoes sell the mangoes because mangoes is his inventory but tree will he sell up tree he will cut it and sell it to the wood industry or Timber industry will the farmer do that no he should not do that is what they trying to say this beer plant itself should not be sold in the ordinary course of business Suppose there is a farmer he'll plant a mango seed get a mango tree from that mango tree he collect mangoes he will sell mangoes after that immediately he'll cut mango tree also and sell it to the timber industry this is what he does every year now is that mango tree a beer plant no because what is that farmer doing every year he's cutting the mango tree and selling it that means that mango tree also becomes inventory PPS will be sell this laptop or TV television uh AC and all will we sell it every year sir no we will what we will use it that is what they're trying to say the third condition this tree itself should not be sold regularly as part of your business that does mean that you cannot sell tree at all sir no if tree becomes Six Sick means what we'll do if laptop if it is not recording well for us what will we do we will replace it meaning we will sell this as scrap and buy a new one yes or no so if you want you can sell it as a scrap sale but regularly you should not sell it that is what this particular criteria is trying to say okay fair enough any example for that matter apple tree mango tree okay chicku tree if you don't like it everything will come under your beer plant W things okay Naru all right next is spare parts and SP standby equipments normally sometimes when you have huge missionaries no the missionaries will have some of the key Parts they will have some important parts so suppose if that part is not working then the whole Machinery will break down okay let's say that part we have to import it from China that particular part we don't produce it in India we have to we have to import it from China and Company feels they you know need about one months to one month time to import it now do you think what will the companies do over in this case when the missionary breaks down then only they will order this part or they will keep some part already for safety purpose they will already order some parts and keep it yes or no so what should we do for such spare parts is what they're trying to say so this paare part sir if it meets the recognition criteria what is the recognition criteria of pp Feb and cost measurement due to this I mean due to this Parts if you are getting if the recognition criteria is met meaning if you're getting some future economic benefits and if the cost of that part is measured reliably then you can add it to the cost of pp else if the recognition criteria is not met then you treat it as inventory is that okay all right next replacement parts obviously sir when some parts gets worn out if the some parts gets broken down what will we do we will replace it with a new one yes or no so now that is not the fun let's take a small example so let's say we have an electric car the life of this car is 10 years sir car means it'll have various parts okay sir this car sir obviously electric car means one of the key component is battery and this battery will only come for how many years I've assumed five years but other parts of the car like wheels or steering and engine and all probably will come for 10 years other part will come for 10 years but battery will only last for 5 years is this okay now sir what the thing is till now you've been depreciating electric car means obviously it's a depreciable asset will you calculate depreciation on this car yes how many years for how many years don't say 10 years don't say 10 Years sir this car has one part or two major parts two major parts what is battery life 5 years what is other part 10 years if different parts have different useful life if different parts have different useful life that means a calculation of depreciation also should be separately this battery will be depreciated over 5 years other parts will be depreciated over 10 years this we call it as component accounting if different parts of asset have different useful life then each part should be calculated each part of depreciation should be calculated separately you pass one journal entry for depreciation no problem journal entry you pass it as depreciation account debit to electric car that is fine but calculation of depreciation has to be done separately why because Parts have different useful life this particular naming this particular company I mean accounting what do we call it as component accounting yes saru all right now let's say this battery Ence we have its life is 5 years we've been depreciating this battery over a period of 5 years but was to problem at the end of year three the battery broked we thought it'll come for how many years five years but third year only full Damar that battery gone now what we'll do sir if battery is gone means old battery is gone means we have to compulsorily buy a new one so we purchased a new battery now new battery means think sir will that new battery give us some future economic benefits from the new battery will the company get future economic benefits yes is the cost of the new part measured reliabil how much you have spent for that new part can you tell yes so recognition criteria of the new part is met or not met met if recognition criteria is met what do we do add it to the cost of property Planet equipment so new battery cost you'll add it to the cost of property Planet equipment what what is the pp that we talking about hit here electric car correct we not talking about that just that sir this old battery you are depreciating over how many years 5 years it lasted for five years or it came only for three years three years let's say this old battery car cost is 5 lakh let's assume that old battery total car cost was 10 lakh total cost car was 10 lakh in that five lakh was for battery other five lakh was for others just assumption okay sir can you tell me what is the depreciation relating to old battery Alone 5 lakh let's assume no residual value how do you calculate depreciation sir carrying amount which is 5 lakh minus residual value divided by useful life okay now so how much is this now 5 lakh minus 5 divided by one if you do you're going to get 1 lakh rupees every year sir how many years this old battery came for 3 years that means you will multiply by three so how much is the total depreciation you have charged on Old battery 3 lakh okay but initially when you bought it what was its value 5 LH it has got fully depreciated or only for 3 lakh that means how much is the carrying amount of old battery remaining 2 lak two lakh of old battery depreciated or not yet depreciated not yet depreciated correct now is this old battery there in your car or gone is that old battery there or we replaced it with new one we replaced it with new one sir if old batter is not there and your physically if old batter is is not there in your car should this two lak be there in your books are no be wrong right old battery you have thrown away from your car but this old battery carrying amount is still there in your books so what the standard says is whenever you replace any part new part cost you add it but if any carrying amount of old part if at all if it is still remaining then you what you have to do sir deducted from the cost of pp so there new part cost you add but old part remaining carrying amount you have to reduce it did you understand everybody all of us are good with this sir suppose I replace let's see how will you have understood suppose I replace this battery at the end of fifth year initially I thought this asset will this battery will come for how many years 5 years this time vastu is on our site the battery came for how many years Five Years sir what was the original cost of this battery 5 lakh can you tell me what is the total depreciation you have charged on this battery 5 lakh minus 0 divided by 5 and this came for how many years 5 years that means how much have you depreciated 5 lakh that means what is the carrying amount of old battery sir zero now we have to deduct anything off no only if the old part has any carrying amount then only deduct it otherwise deduction is not necessary this only we call it as this whole process we call it as component accounting done a okay in component accounting one line if you have to summarize means what is this component accounting a whole drama if you have replaced any parts the new part cost can you add it to the cost of pp yes that is the only process or one more one more what is that any carrying amount of the old part if at all if it is any remaining that you need to derecognize as in you need to deduct it that's all is the whole process all then that's what I've written here as s okay sir so same step you do it for major inspection charges also some assets like Airlines ship and all no you have to inspect it every five five six six years so whatever you have done for replacement parts same thing you apply for inspection charges also meaning new inspection charges you add Book value of old inspection charges if at all if it is any remaining means deducted these two concepts are same manageable can I move on to the next one okay so initially all the property plan and Equipment initially all the property plan and Equipment are recorded at Cost initially when you buy an asset you have to show the asset in your books no at what value is the property plan and Equipment initially is recorded I told sir at cost so what in all is cost for this purpose one sir Purchase cost is it cost very much yes because this is your major cost no okay so Purchase cost you can treat it as cost if you have any import Duty and other non-refundable taxes non-refundable taxes means on these where we don't get input tax credit ITC we don't get so if you have any import Duty and other non-refundable taxes add it same like inventory okay if there is any trade discount that you received you need to reduce it so this is one part of your cost done sir all right another one is directly attributable cost or in our class purpose we used to call this as DC if you have any directly attributable cost can you add it to the cost of pp yes so what does directly attributable cost means those cost which is incurred to bring the inventory to the inventory or PP P same thing there in fact when we did inventory what did we say those cost incurred to bring the inventory to the present location and condition sellable condition here also same thing any directly directly attributable cost means those cost incurred to br the pp to the present location and to the management intended sellable or usable PP we don't sell PP we use so any cost you incur to bring the pp to your present location and usable condition which usable condition management because who will use this Asset Management so till the asset is management ready whatever cost you are incurred on that asset can also be added to the cost of the asset like installation charges site preparation charges site preparation charges means sir let's say your land is Humpty Dumpty your land is not properly leveled can you keep a missionary there or first you have to level the land first you have to leveling so this leveling charges and all we call it as what sir site preparation that also becomes your directly attributable cost so delivery charges installation charges testing charges all these are examples of directly attributable cost if at all you have them you can add it to the cost of pp it'll give you this is also one popular question in examination they'll give you a list of cost and tell you what and all can be added what and all should be ignored there is also one popular thing that generally comes tested from this particular topic can I move on to the next one okay there's another one which you can add is decommissioning and site restoration cost and for our class purpose we used to call this as DSR okay DSR I used to give you in fact Reliance example do you remember okay so let's say Sir if Reliance sir if they want to have a good connection Reliance One of the major business now is our telephone Gio Dad D definitely for mukes correct no all right sir if they want to make more money that means they have to capture more Market more customers should use their signals or Sim when will more customers use their Sim sir when the connection is really good correct or not so if you want to get the connection means what will the Reliance do they will install Telecom tower telecom Tower is the tower through which or there is a mode through which you get the signals yes no so the more and more Telecom Towers you have the better and better the signals will be okay now let's say this this Telecom towers and all are not posted on the road side they normally installed on high-rise buildings big big buildings may they install this at the top on the roof me okay now sir can they just keep this Telecom Tower as it is or they have to fix it they have to fix it in such a way that whether there is window storm rain D doesn't matter that telecom Tower should sustain it should be there let's say this Telecom Tower life is 5 years Reliance called up one of the building owner and said I would like to install the Telecom tower on one of your building building owner said okay what's in it for me Reliance told I will give you money every month I'll give you 10,000 rupees every month as rental if you give me permission to install Telecom tower on your building Rel uh the owner told how long life of this Telecom Tower is 5 years so I need permission for 5 years then the owner asked the Reliance guy after 5 years what will happen I'll pluck this Telecom Tower I air Li this building owner told is there any damage cost to the building Reliance owner told yeah there will be some damage what will the building owner tell now you repair the cost K okay he told you repair the building and you you incur the repair cost because my building was already functioning smooth you did one extra by installing the Telecom Tower and because of you the building is suffering some damages so obviously building owner will now pass on this damage CA to whom Reliance now you think about this repair cost this repair cost isn't it not daak is this repair cost not a d d means what sir directly attributable cost and DAC means those cost necessary to bring the asset to usable condition now think about it if Reliance says I will not incur this repair cost what will the building on to say I will not give you permission to install the Telecom tower on my building so is this particular cost necessary for Telecom Tower to operate as intended by Reliance if the Telecom tower has to function means is this cost necessary yes that means this is also what sir DC this is also what directly attributable cost so that means why can't we bring it under DAC only sir why separate section the main difference between the normal DAC and DSR is normal dacs sir you will incur like installation charges delivery charges you'll pay later or immediately if I buy a missionary today I will incur the installation charges delivery charges immediately but this repair cost will we incur it now or at the end of fifth year at the end of fifth year so that means these costs are necessary but they'll not come immediately they'll come it in they'll come in future let's say the repair cost is 10 lakh repair cost is 10 lakh can I add entire 10 lakh to the cost of cost of pp what is a PP here Telecom D can I add entire 10 lakh to Telecom Tower no why sir this 10 lakh you will incur it immediately or in future future we are doing the accounting in future or now now hence what we have to find out is the present value you have to use a discount factor and find out its present value and only present value of that DSR cost can be added let's assume that present value of DS cost is how much 7 lakh but how much are you incurring 10 lakh is there any difference yes that three lakh is the difference that is nothing but time value of money interest charges so Reliance will book this three lakh as an interest charges meaning this interest charges will be transferred off to P account like this so find out the present value of DSR cost and add it like that D asaru there's another inclusion these DSR cost also can be added so in one line we have to summarize DSR cost can you add it to the cost of pp yes full value or to present value extent only to the extent of present value that's fine all right next sir these are some cost inclusions next we're talking about certain cost exclusions what are the costs that cannot be added to the cost of pp meaning what are those costs that will be straight away transferred off to pnl account if you have any general administrative overhead selling and distribution overheads any sort of promotion expenditure advertisement salesman promotion anything you have all that will be transferred off to P account if you have any relocation reorganization cost also like let's say we shifted the academy okay right now am I using already my laptop yes that means is my laptop management ready is my laptop man has it reached management usable condition yes now let's say I want to shift my Academy to another location that means I'll incur some shifting charges the shifting charges can I add it to the cost of laptop no because PPA has already reached cut off stage what is cut off stage of pp here present location and management intended usable condition once that cut off stage is reached any other cost if you're incurring all that cost will straight away go off to DL account so any relocation reorganization cost any sort of promotion expenditure inauguration blah blah blah and all all that are not directly related to PP it relates to business as a whole because when you do any promotion do we do promote like when we do a promotion for Academy let's say is it related to laptop or it's related to allall business allall business hence all this inauguration expenditure advertisement expenditure which is related to overall business will be transfer off to P hence these are all your exclusions can I move on to the next one okay all this we have done in detail May with question and example in a regular class but I not I not have time to do everything now so I hope you understand that but hope it's still you're able to connect with me on this regard okay next is subsequent recognition sir initially all PPS are recorded at Cost okay initially when you buy all PPS are recorded at Cost we not talking about initial recognition now we talking about subsequent subsequent recognition means at year end you bought a Machinery in year one beginning now at year one beginning may you will valued at cost at year one ending May what you can do year to ending May what you can do all that we calling it as subsequent recognition so subsequent recognition May PP can be valued under cost model or revaluation model cost model means your golden days approach on PP what do you do go on depreciating yes no so that is called as cost model whatever value you purchased for show at that and go on reducing depreciation every year so that particular model we refer to as what sir cost model there is another model called revaluation model so revaluation model means so revaluation model means to show the asset at fair value like here let's take an example sir land we purchased for 10 lakh Rupees three 3 years back we purchased a land for 10 lakh Rupees okay currently what is its Book value 3 years ago I purchased this asset for 10 lakh okay now what is the book value of this land 10 lakh only why sir because land we don't depreciate on land we don't depreciate that's the reason currently also after 3 years also the book value of the land I'm showing in my books is what 10 lakh but I did a market survey sir I got to know that the fair value of this land is 40 lakhs the market value of this land has become 40 lakhs happy face no I bought it for how much 10 but currently its market value or fair value is 40 lakhs yes so organization has a choice either they can continue to show that land at 10 lakh itself if they continue to show that land at 10 lakh we say they are following cost model or company has another choice to show the asset at fair value what is the fair value here 40 so if they want to show the asset at fair value we say they are following revaluation model OKAY revaluation model simply means to show at every year end or every every reporting period show the asset at Fair okay sir what entry I'll tell you in a bit first we'll go through some Concepts okay so if you the company wants to go for revaluation model partiality is not allowed entire class of pp has to be revalued if they want to go for revaluation model then we're not saying whole PP should be revalued what are we saying entire class of pp should be revalued so what does class mean class means that group of assets class means that group of assets which are similar which have similar characteristics and nature like if you have two machinaries both machinaries are used to produce a particular product same product okay now you tell me sir are both the missionaries are what identical that means now if company wants them to follow cost model to both the missionary or revaluation model to both the missionary for one missionary I will go for cost model another missionary revaluation model not acceptable because they are asset of are of different type different nature same nature if as PPS are of same nature we say they belong to same class or they belong to one class within the class partiality is not allowed if you have under one class if you have three assets like let's say planted missionary one number one planted missionary number two planted missionary number three for all of them either you should go for cost model or for all of them you have to go for revaluation for one cost model one revaluation model not acceptable like this okay all right sir is land building one class or different class land and building same class or a different class sir land is a different class of asset building is a different class of assets so this is one class this is second class is that okay that means for land the company wants to go for cost model for building they want to go for revaluation model is it acceptable yeah if they belong to different class you can do you can choose in whatever permutation you want it one cost one revaluation both cost both revaluation model any permutations and combinations is acceptable not a problem okay now all right that's what we said all right so how often should we do this revaluation sir standard does not give a conrete number what they say is check the volatility of pp meaning you just check how often does the value of this asset change if you feel asset is very volatile meaning its value CH it value goes on changing frequently then the standard suggest you need to do the revaluation annually at least once every year you have to follow the you have to do do the revaluation if asset is not so volatile you can do the revaluation once in 3 to five years because revaluation means to show it at the asset at fair value no so every year should we show the asset at fair value or can we skip some years is what was the guidance so that is based on the volatility of the asset if asset is very volatile every year you have to show it at fair value otherwise once in three five years if you find out fair value and show the asset at fair value that is good enough done now all right so revaluation obviously should can't can't be done by any Tom Dick and Harry because to do revaluation you need a fair value now by looking at building can chartered accountant tell how much is its value they are not we don't have necessary expertise in this regard who has the expertise maybe the architect maybe a civil engineer correct because they have the necessary expertise that's what we mean by that revaluation has to be done by qualified values okay now the important aspect to us with respect to is the J Jal entry sir in this particular example land was valued at what value what was the book value of the asset 10 when you did Fair Val when you did fair value exercise how much did you get the fair value as 40 lakhs that means land value has reduced or increased increased so it's a revaluation loss or revaluation gain revaluation gain so first time you did revaluation first time an entity did a revaluation and they got a gain okay let's say they've got a gain of file so in that case what to do sir any gain that you got first time when you do revaluation and if you get a gain that gain will be transferred to one Reserve called revaluation Reserve let's say this is land can you tell me the fill the journal entry for me here I've got a g gain of 5 lakh rupees can you tell me the journal entry land account debit to RR RR is in revaluation Reserve five lakh five lakh this is a journal entry you will pass this is a journal entry when you will pass first time you did revaluation and got a revaluation gain that gain will be transferred to a specific Reserve called revaluation Reserve that is one so how will this rrb utilized and all for an our syllabus right now is not they're not targeting all this little bit of its usage we'll talk about it in impairment standard majority of its usage you will study in IND 16 CA final syllabus okay for now we for now we'll keep it like this that's good enough okay all right so first time you did revaluation is it necessary you have to get gain or you may get loss also you may get loss also like let's say first time you did a revaluation and you got a a loss how much loss sir I assume 7 lakh in that case the loss will be transferred off to P account first time first time you did revaluation and if you get a loss it'll be transferred off to dend account so land value has decreased by 7 lakh in this case what journal entry will pass land value is if it has reduced means obviously you need to reduce the value of the land land is an asset assets have debit balance how do you reduce it crediting so the journal entry will passes pnl account debit to land 7 lakh 7 lakh this is the entry you will pass this is the journal entry for what sir first time you did revaluation and got a gain or loss respectively now revaluation is onetime exercise or happens frequently frequently let's say subsequently subsequently let's say you have done the revaluation in second year only second year only you did revaluation because this is a very volatile PP if it is very volatile PP you have to do the revaluation annually every year you have to do the revaluation so second year also we did revaluation what did we get is we got a loss we got a loss now I'm taking this scenario first scenar first year you did a revaluation and you got a gain how much gain five okay now I'm continue second year you did a revaluation and you got a loss how much loss 8 lakh this I'm continuing first time you got a gain of 5 LH next time you're getting a loss of 8 lakh in that case what you'll do one second stop there so law revaluation loss where it will go generally revaluation loss go to P end but hang on this is first time or subsequent subsequent sir check previously previously did you do revaluation yes what did you get gain how much gain you got 5 lakh so already five lakh gain did you transfer it to pnl or revaluation Reserve revaluation Reserve hence entire 8 lakh loss don't transfer it to pendl how much balance is there in revaluation Reserve 5 LH knock it off first adjust this loss with revaluation Reserve still if any loss is remaining means transfer it to pendl so how much loss is how much gain is there in revaluation Reserve 5 lakh so out of this 8 lakh loss first adjust 5 lakh with RR still how much loss is remaining three LH that you transfer it where to P account so if you want the entry for this what will be the entry for this you have a loss loss means asset value you need to increase or reduce reduce that means you'll credit Land by how much 8 lakh what will you debit it's a loss so you'll debit P to the extent of 8 lakh no no no first you will debit revaluation Reserve how much balance is there in revaluation Reserve LH so you will debit revaluation Reserve by 5 lakh any more balances there in revaluation Reserve or fully exhausted fully exhausted that means for balancing figure you'll use what sir p and this is a journal entry you'll pass in this case done now so what scenario is this first time you did a revaluation and you got a gain next time you did revaluation and you got a loss now is it necessary it has to be like this or order can get changed order can get changed now I'm visualizing the other scenario first time you did a revaluation and you got a loss how much loss 7 lakh first time subsequently when you did Future when you did revaluation you got a gain gain how much 9 lakh so normally revaluation gain means where will you transfer that gain to revaluation Reserve but hang on is this first time revaluation gain or subsequent subsequent first time when you got a loss did you transfer that loss to revaluation Reserve or PN PN how much pnl balance is there 7 so when you got subsequently when you get a gain don't transfer into entire gain to revaluation Reserve first adjust of with pendl how much loss had you transferred to pnl before 7 lakh so out of this gain of 9 lakh 7 lakh you adjust with DL balance 2 lakh gain only you transfer to evaluation Reserve understood that's what I've written here if you want this an entry what is a journal entry gain means asset value should be reduced or increased increased so what is a journal entry land account debit 9 lakh entire 9 lakh to revaluation Reserve no first to pnl how much loss was booked earlier 7 so credit PN to the extent of 7 lakh balance gain only you transfer it off to revaluation Reserve that's the okay sirg that's about your revaluation adjustment normally they don't ask you the journal entries okay finals may have seen the journal entries coming in in inter they may ask you the treatment in words or this and all may come as an McQ question what you'll do how of this re subsequent revaluation gain May what you'll do you'll transfer entire thing to revaluation Reserve or this amount to revaluation Reserve this amount to P like this they will give three four options you need to select the right one maybe those sort of questions I feel is more popular from this concept according to me or they may also ask journal entry what they ask I will not bother that is not my business my business is only to cover now can I go for the next coverage online people are also there everything looking good sir online give a quick confirmation online okay great next PP acquired on a deferred credit basis PP acquired on deferred credit basis what does this mean is Sir let's say normally when you buy a PP credit are gives one month credit meaning you can buy the asset today and make the payment within one month but you told that particular vendor I will pay after 2 years give the pp give me the planted missionary now but payment I will make after 2 years okay so normally how many how many months credit he gives one month and normally for this PP know sir he charges how much the vendor charges 10 lakh he charges 10 lakh and he gives you one month credit now are you taking one month credit or two years credit two years Credit Now do you think wendor will charge 10 lak Rupees huh now what do you think he will say boss you're delaying the payment so much for you for for you 12 lakh rupees for you 12 lakh rupees okay that means we are buying this asset for How much rupees 12 lakh rupees and this 12 lakh will be settled now or after 2 years after 2 years now the question is since we are buying this asset for 12 lakh rupees so should we record this asset to 12 lakh rupees only no why sir because you purchase this PP on a normal credit basis or deferred credit basis deferred credit basis means you are you're not purchasing under normal terms you are extend in it Beyond normal terms is that okay so in that case what as10 says is Sir you think logically is the value of pp really 12 lakhs or only 10 lakhs the value of pp is really 12 or only 10 10 why is the vendor charging you 2 lakh rupees extra because you are delaying the payment by two years that is the reason he's asking you 2 lakh extra so that 2 lakh is extra what you are paying is nothing but your interest charges yes or no is it related to PP or it's interest charges interest charges that's what and also say if you purchased any PP on a deferred credit term you have to record the pp at cash price equivalent or cash selling price we say or cash price equivalent meaning if you had purchased this under normal credit how much you would have paid if you had purchased this PP and a normal credit of one month how much you would have paid 10 lakh so you will record the pp at cash price equivalent of 10 lakh ex but how much payment are you making 12 lakh so what is the difference 2 lakh that 2 lakh is nothing but interest charges don't add that interest cost to PP I transfer the 2 lak Rupees to that's all is a fun easy yes sir move on to the next concept okay next one sir PP acquired on Exchange PP acquired on Exchange so normally when you let's say we buy bought a missionary 10 lakh Rupees what what should we do the 10 lakh Rupees we need to settle normally that's settled by giving a check or rtgs or whatever yes through a banking Channel we'll pay 10 lakh Rupees agreed but this time around I did some weird transaction I purchased a planted missioner okay I did not give cash I gave my land and building I gave my landed building that means what asset is coming in planted missionary what asset is going out landed building that means we are doing a barter system that means because am I giving cash here or something else something else that to be referred to as what sir exchange PP acquired through exchange exchange here means one non-monetary item is coming in another non-monetary item is going out non-monetary item means what sir non-monetary item means those those items whose value fluctuates non-monetary item means those items whose value fluctuate monetary item means those items whose value is fixed we studied all this in as1 blah blah okay now this land and building value will be same or it will fluctuate based on marketing condition market demand demand condition its value will fluctuate similarly missionary value will be same or based on usage that will also change that will also change change that means both are what items non-monetary item one non-monetary item is coming in another non-monetary item is going out that scenario only we call it as what sir exchange basically B system so if you have done this exchange transaction if you have done such a exchange Transaction what as10 says is as a thumb rule we have to always Record Exchange transaction at fair value as a thumb rule all exchange transaction should be recorded at fair value okay now what fair value sir because we have two assets here in my example what in all one is planted Machinery another one is land and building we have two assets which fair value sir standard says whichever fair value you can find out more clearly whichever whichever assets fair value is more clearly evident or whichever assets fair value you can more clearly find out use that fair value is that okay that is one all right normally when we say fair value we prioritize fair value of the asset given we use fair value of the asset given up because given up asset is ours given up asset is ours our asset fair value we can find out more clearly yes or no so practically if they give you fair value of both the Assets in the question if they give you fair value of both the assets always use fair value of the asset given up because that is ours so our asset fair value it is assumed that we can find out it more clearly is that fine so whenever there is an exchange transaction exchange transactions are always recorded at fairwell as a thumb rule that's a normal rule however fair value need not be used under two circumstan fair value need not be used under two circumstance one if the transaction lacks commercial substance if the transaction has a the transaction lacks commercial substance or two you cannot find out fair value both assets of fair value you cannot find out if transaction lacks commercial substance or if the fair value is not determinable at all in that case may you cannot use fair value you have to use only book value okay it need not can not be used so when do we say transaction does not have commercial substance or transaction lacks commercial substance asset wise cash flow also to be same entity wise cash flow also to be same meaning in this example let's take like this what came in sir plant and missionary what went out land and building sir if you want to say transaction does not have commercial substance what we are trying to say is whether you use plant and Machinery or whether you use land and building company will get same cash flow that means indirectly we're saying both assets are same now you think sir is using plant and machinery and using land and building same or completely different completely different because if you use planted Machinery you may get 10 lakh Rupees benefit but from landed building you may get only 5 lakh benefit possible so if you want to say transaction lacks commercial substance or transaction does not have commercial substance assetwise cash flow to be same meaning whether you use this asset or whether you use that that asset you gave a one asset no whether you use asset given up or whether you use asset acquired both will give you same or both should give you same cash flow in my example is it giving same cash flow or completely different cash flow this using planted machinery and using landed building same or completely different completely different if the cash flows are different we say transaction has commercial substance transaction has commercial substance so give us an example where transaction will lack commercial substance this example same thing I used to give you let's say there is a land a we have been all allocated land a our neighbor has got allocated land B okay we have land a there is another person who has been allocated land B now they have doing an exchange both are agricultural land both are situated aaju both are next to each other both are used for agricultural purpose okay we have been allocated land a the other person other company has been alloted land B both the companies now did an exchange this company they gave away land a and acquired land B okay now the carrying amount of land a is 10 lakh fair value of land a is 20 lakh fair value of land B is also 20 lakh now stop there and tell me whether this transaction has a commercial substance or does not have commercial substance has or does not have so if you want to say transaction does not have commercial substance assetwise cash flow has to be same meaning whether you use land a or whether you use land be you should get same benefit isn't it so sir correct no because both are what land agricultural land both are used exactly for same purpose correct that means whether you use land a or land B you will get different benefits or same benefit same benefit that means assetwise cash flow here is what sir same okay now that means indirectly you can say over here what sir transaction has or lacks commercial substance here a transaction does not have meaning it lacks commercial substance if transaction Lacks or it does not have commercial substance means fair value need not be used fair value need not be used what came in what came in land a is going out what is coming in and B is coming in whatever asset is coming in you will debit okay whatever land whatever asset is going out you will credit land a currently is going out and what is the book value of that land 10 lakhs you will credit by how much 10 lakh land B also you debit it to the extent of 10 lakh because in reality May on legally you may say we have done an exchange but in accounting parland May is there any benefit or this just a jugar just a normal some you you were gone crazy you had probably wanted to do a lot of time pass and you did this exchange okay whether you use land a or whether you use land B the benefit is same that means if you're using Book value means will you record any gain loss no if you're not using fair value means which asset is going out land a so land a you'll credit at at 10 lakh no so land B also you debit it at 10 lakh it meaning no gain or loss will be recorded Ed if we use what amount car only if we use fair value gain or loss will be accounted okay and then will we use fair value if transaction lacks commercial substance or transaction has commercial substance has commercial substance is that fine with you this first part are we comfortable assetwise cash flow to be same so what is the second part entity wise cash flow also to be same so let's say this particular land this particular Land one company was using to grow corn this particular land land was used to grow corn but however this particular land was used to grow wheat that was used to grow wheat now you tell me asset may be next to each other same Dimension same area same everything okay that means asset wise cash flow is same but one entity is using this asset to grow corn another entity is growing this asset to grow wheat now they did an exchange now this land sir its fertility limit is set to grow what it is ideally suited to grow what now car but now now land be company has exchanged no that means now what is coming into US wheat land is coming to us but using this wheat land we want to grow car we will get same benefit or benefit will differ differ if you want to say transaction does not have commercial substance asset wise cash flow also has to be same entity wise cash flow also has to be same meaning both the entities should be using this for same purpose if they are using for different purpose means you will will not get the same benefit from the asset because this land is suited to grow corn that land is suited to grow wheat if you done an exchange now both the benef the companies who are getting benefits before they will not get same benefit after exchange their benefits could be more or in ideal scenario their benefits will be lesser is that okay so in this case what sir tell me sir in this case it will be transaction lacks has commercial substance what the transaction has commercial substance that means can will we use what if transaction has commercial substance compulsorily you need to use fair value and if you're using fair value you'll end up obviously getting some gain or you'll end up getting some loss is that fine sir which fair value you will use again sum it up for me whether fair value of the asset given up or fair value of the asset acquired whichever is more clearly evident if both the assets got fair value if they've given in the problem and if they don't comment we'll always use fair value of the asset given up because that is our asset and we always prioritize fair value of our asset that's reason is that okay all right so it might just to be on the safer side I just tell you this okay in this case may you tell me sir you'll tell me the answer car we give away car we give away and we acquired what planted Miss we acquired one planted missionary and we did not give cash we give away car now is car and plant and missionary asset wise same or completely different the plant and missionary benefits and car benefits are completely different that means this transaction does not have commercial substance or has commercial substance this particular transaction action has a commercial substance if transaction has commercial substance can we use Book value or compulsorily fair value fair value is that okay so both the assets of fair value of given carrying amount of car is 10 lakh fair value of car is 11 lakh fair value of planted machiner is 12 now which asset is coming in plant and missionary so real account rules say what sir debit what comes in plant and missionary came in so we'll debit planted missionary what has it went out car so that means the journal entv will passes planted missionary account debit to car account currently we are already showing car what is the book value of the car 10 lakh is it there no more is it there or no more there no more there that means we need to cancel currently the car is shown at what value 10 lakh so we'll credit at what value 10 lakh that is okay that's fine but what about this planted missionary sir what about this planted missionary we can't record it at car Book value we have to use fair value whatever asset is coming in no has to be required at fair value who fair value fair value of the asset given up or acquir whichever is more clearly evident here both are given both both the fair values are given means we'll prioritize we'll use what asset given up fair value which asset did we give up car what is car fair value 11 lakh so planted missinary will be recorded at 11 LH like this manageable journal entry matching or there is a difference difference how much is the difference one L that is nothing but your profit or loss on Exchange which will be transferred off to P account it could be profit or doesn't matter it could be loss it will be transferred to pel so basically whenever you use fair value you'll end up booking some gain or loss but whenever you don't use fair value you'll not get any gain or loss that's what I'm trying to say done now this concept is not too much tested but it could be okay some of them will actually find this concept a little tricky so all of us got got the things clear no okay just quickly one summarize we'll do what do this transaction known as exchange exchange means one non-monetary item is coming in another non-monetary item is going out like that okay so as a thumb whenever this exchange transaction happens we have to record the asset coming in at Fair Val fair value need not be used under two circumstance one the transaction does not have commercial substance and when can you prove transaction does not have commercial substance asset wise cash flow also has to be same entity wise cash flow also has to be same if both are there we say transaction does not have or transaction lacks commercial substance or second circumstance both the asset fair value we cannot find out in those two cases may you need need not use fair value if you are not using fair value then what value you will use carrying amount okay D recognize whichever asset is going out credit that at carrying amount whichever asset is coming in credit that also at carrying amount basically no gain or loss will be coming in however if you use fair value then you will get some gain or you may get some loss that gain or loss and exchange will be transferred off to P account perfect okay then the last important concept is depreciation depreciation sir if you have an asset will be depreciate yes sir if you want to depreciate PP sir two condition has to be compulsorily satisfied one da should be positive another one useful life to be limited same concept is for amortization also okay learn as10 properly if you learn this properly as26 or intangible assd 40 to 50% of the concept between here and them are same that you can do FF F okay all right so if you want to charge depreciation what are the two rules one da should be positive and useful life to be limited okay so now one first maybe we'll discuss useful life sir land will you depreciate or no depreciation land depreciation no depreciation no depreciation why sir sir planted missionary life is 10 years how long will you depreciate it for 10 years Landa life how much unlimited if you don't know the life we cannot charge depreciation because for you to charge depreciation life has to be known it has to be limited but land has Unlimited useful life so if any asset has an unlimited useful life we cannot charge amortization or for that matter depreciation on it same concept for both tangible asset and intangible asset this is one okay now second one is Da should be positive da means depreciable amount da means depreciable amount so how do you get straight line method formula you tell me sir how do you calculate depreciation under straight line method usually the formula is original cost minus salvage value but I told in a class purpose always stick to carrying amount I told you the logic of that also okay so we'll use the same thing carrying amount minus salvage value or residual value yes that carrying amount minus residual value only we call it as depreciable amount carrying amount minus residual value only we call it as depreciable amount like here sir you bought an asset originally for 10 lakh Rupees its residual value is 1 lakh useful life is 9 years so can you tell me how will you calculate depreciation under straight line method one original cost because initially sir original cost and carrying amount are same if you bought it for 10 lakh means initially you will record it at 10 lakh so asset carrying amount is also 10 lakh that's the reason the formula says original cost but in reality it is carrying amount so we'll write the formula like this carrying amount minus residual life divided by life or remaining it is not total life it is the remaining useful life what is the carrying amount 10 lakh minus residual value how much 1 lakh okay now divided by when you bought the asset how much life is remaining 9 years so 10 lakus 9 lakh is how much sir 9 lakh correct sir this N9 lakh only we call it as da this 9 lakh only we call it as da da is in depreciable amount this n lakh Only what are you doing charging over 9 years this N9 lakh only you are charging over 9 years that is a definition of depreciation as per EST depreciation means depreciable amount has to be allocated on a systematic basis over the useful life of the asset meaning in my example this 9 lakh only has to to be depreciated over 9 years so ba basically depreciation means da we will get allocated over useful life that's all is a definition comfortable yes sir tomorrow also we will have a session but we'll have a morning session 10: to 4:30 or 5 maybe tomorrow and uh day after we will have same usual timings 10:00 in the morning we start ending time you leave it to me okay today ending time also you leave it to me I have a certain targets done asaru all right this is one all right so depreciation when will you start the day asset is ready to use sir or the day asset is put to use sir sir asset was ready to use from 1st March 2024 but the company no sir they started using only from 1st May 2024 asset was capable of using it was ready to use from 1 March but company you actually started using only from 1 May when will you start charging depreciation from the day asset is ready to use put to use is irrelevant that is only relevant for income tax from for I told you the logic of this also given you an iPhone example now I not going to everything everything if I take example this only will become two hours three hours okay for now I'll only tell whatever is important one so for for depreciation we charge what we look for is or we start depreciating from the day asset is ready to use put to use is absolutely Irrelevant for us someone saying today you do two to five sir yeah okay okay yeah any other request listen okay sir sir which method of depreciation should we follow sir because we have straight line method we have wdv method you have units of production like this we have many methods standard says you do whatever you want standard says you do whatever you want but one condition I'll put follow that one condition I'll put you fulfill that that is Select depreciation method based on pattern of economic benefit select depreciation method based on pattern of economic benefits whichever method reflects pattern of economic benefits select that particular method so the next question now to ask is what is this pattern of economic benefits sir if you are using having one asset means obviously you'll get some benefit let's say I have an planted missionary using planted missionary I am producing one product I'm producing one product every year I can produce use this machinery for five years for all the five years no sir I will get one one lakh units from this missionary every year how many units can you produce from this missionary one lakh differing or same every year the benefit that I'm getting from this missionary is varying every year or same every year so if the benefit that I'm getting from the asset is same every year which method of depreciation gives same depreciation every year straight line so if benefit is same every year means you will select straight line method okay like this so let's say I'm using planted machinary first year it gave one lakh unit using this missionary I was able to produce one lakh unit next year it gave me only 880,000 units because as missionary ages do you think Miss machiner will be same efficient or efficiency will reduce reduce second year I produced only 80,000 unit then 50,000 units then 30,000 units like this number of units produced is going on reduce now you tell me which method of depreciation is better wdv method because wdv method will give you higher depreciation in the initial years and then go on it'll go on reducing so if this is the case means if benefit reduces every year means wdv method of depreciation is better suited that's the reason that for most of the assets we use wdv method because most of the assets efficiency as in when you use goes on redu that's a reason even Income Tax Act also considers only wdv method but that's a different issue leave that comfortable but standard as10 gives you the leave select whatever method but the method you choose should reflect what sir pattern of economic benefit that's the one all right sir can I charge depreciation based on Revenue sir can I charge depreciation method based on Revenue no sir because no sir Revenue like right now here no sir excuse me we are giving coaching class that means we are generating Revenue in that Revenue ratio can I depreciate my laptop TV and all no because sir the sales for the Academy depends not just on the asset it depends on teachers depends on teaching quality price of the product competitor price competitor action demand condition yes or no due with co co time everybody wanted online class now most of them preferring offline class like this yes no so that means the is depreciation just because we are using High fund a laptop we are using nice ISC lot of students will attend our class no they will attend our class only if our teaching quality is good yes or no that's the reason numbers are dropping no my face no yeah like that just kidding all right sir that's the reason we say depreciation method should not be based on Revenue because as revenue is not influenced by the assets revenue is not influenced by PP alone it is influenced by the price of the product demand condition etc etc so hence charging depreciation based on Revenue method is not appropriate like that so can depreciation method be changed sir first your wdv method then straight line method like this can we change yeah uh yeah sir depreciation method is based on what pattern of economic benefits is this pattern of economic benefits shot number or estimated number it's an estimated number initially I thought I will get the same benefits then later on benefit started reducing so initially when I bought the asset I thought it will give same benefit means I would have been charging depreciation under which method straight line method after 2 years benefit it started falling now can I start you still use uh straight line method or have to shift shift to which method wdv method is it my mistake or just an estimate change estimate change so if pattern of economic benefits changes depreciation method also can be changed from straight line you can go to wdv or from wdv you can go to straight line all these are what sir policy changes or estimate changes all these are estimate Chang estimate changes are done retrospectively or prospectively estimate changes are always accounted prospectively so any change in the the residual value any change in the useful life any changes in the pattern of economic benefits meaning any changes in the depreciation method all these are accounting estimate changes and accounted only what sir prospectively like that okay and land and building sir if you purchased a land and Building Together on land will we calculate depreciation no because it has unlimited useful life on building will be calculate depreciation yes that means for accounting purpose you need to separate land portion if you paid 1 R to buy both land and building out of one CR you have to figure out how much is paid towards land how much is paid towards building separated on land portion don't depreciate on building portion charge depreciation that is the thing okay all right sir when will you stop charging depreciation sir as long as the asset is there depreciation also will be there if asset is derecognized means D recognition means cancellation if asset gets cancelled means depreciation also stops so when we get asset gets canceled if you sell an asset or if you have written off any asset or Feb stops Feb stops what is Feb future economic benefits so for you to show PP in balance sheet one of the recognition criteria is there should be some future economic benefits if benefits stop means you can't show PP that means depreciation also will stop that's the thing done now all right last one is retirement of pp retirement means asset is physically present mentally absent probably like you are yes yes sir all right is saying yes okay so retirement of pp means we have physically we have that asset but we have actively stopped using it okay so if you have such asset which has taken the retirement meaning if it is not used they have to be validate lower of two things carrying amount or realizable value whichever is lower let's say asset carrying amount is 8 lakh this asset it has taken retirement meaning we are not using it currently it Book value is 8 lakh but its realizable value is only 5 lakh so you have to show this asset at low low of the two value which is lower 5 LH but currently I'm showing it at 8 lakh from 8 lakh I have to bring it down to five so there will be a difference of three the difference of three lakh will go off to p and that's all disclosure is not that important fine s okay so let's go over and take up some questions from this particular topic first check this an entity a the purchased an asset on 1st January 20x 1 for how much value 1 lakh it the life was 10 years residual value zero on 1st January 20 X5 stop there sir you purchase the asset on 1st January 20x 1 now we are on 1st January 20x 5 so when they start the data in 1 January and if they don't give any information you always assume that the year starts from January and ends on December otherwise they clearly mention that the year will end on 31st March like that they will mention if nothing I think is mentioned if they start with January assume that we are following calendar year now check sir how many years is already over 20 X1 X2 X3 X4 we are on 1st January 20 X5 four years is already over if four years is already over means will we depreciate the asset yes sir sir you will depreciate the asset only if da is positive sir and useful life is limited sir here what is a useful life 10 years it is infinite or limited limited how about da Check how do you get da carrying amount initially original cost and carrying amount will be same how much is that one lakh what is the residual value zero that means what is Da posit correct so both the criteria is getting satisfied what will be the depreciation if you use this asset for four years so what is the depreciation for four years 1 lakh minus 0 divided divided by 10 every year depreciation is 10,000 you have used the asset for four years so depre is how much 40,000 you bought the asset for 1 lakh it is depreciated by 40,000 so what is the book value current on 1st January 20 X5 carrying amount of the asset is 60,000 okay so initially life was how how much years 10 years four years already over so life remaining should have been six correct but life is a PKA number or estimate number estimate can estimates change later on yeah check what happened now on 1st January 20 X5 directors review the life and decided asset will probably be have a useful life of only four years they're saying we can use this asset for a maximum period of four more years like life actually should have been how much six but there's an estimate now is it six anymore or it is four four four correct no so if life changes means the depreciation will be same every year or that will also change that will also change now tell me sir till now how much was a depreciation you're getting every year 10,000 every year for four years it was 40,000 correct now as long as the data is same straight line method of depreciation gives the same depreciation now the useful Life as a data is same or it got changed got changed so if any useful life residual value etc etc changes means depreciation also will change what do a carrying amount remaining 60,000 now how do you get depreciation under straight line method don't say original cost that's the reason I tell always what is the formula carrying amount minus residual value divided by total life divided by remaining useful life what is the carrying amount now 60,000 what is the resid value still zero divided by remaining useful life don't say six directors are telling it is not six anymore remaining life is only four so divide by four so how much is the depreciation now 15,000 now the depreciation for the next four years will be 15,000 since life changed depreciation also will change that is what they ask again two two marks me these sort of mcqs can come what is a revised depreciation revised depreciation is 15,000 per an okay so will classes be available after live not immediately after 2 3 days we'll make it available we'll merge and we'll upload it okay for now if you wanted immediately you cannot I'm also there you're also there both of us will have the party yeah know otherwise wait for 2 three days we'll merge and put it across now can I move on now this is over next question this one a property costing so whenever they use a word costing it means original cost okay initially if you bought the asset for 10 lakh means carrying amount and original cost both will be what 10 lakh it's all right bought in 20 X1 like physical life is 50 years physical life is 50 years but the company considers that it is likely to sell the property after 20 years stop there sir asset has a capability to be used for how many years 50 years but now all this when we say depreciation it is not when we say useful life here it is not total life of the asset when we say useful life it is management intended useful life always you have to find out useful life not from the capable not the total life is not his useful life you have to check how many years does the management is planning to use how many years management is planning to use 20 years that means for depreciation purpose you'll take the life as not 50 but only 20 years because useful life is is total life or management life management Life As for the manage okay now now calculate sir residual value in 20 years time they've given residual value is how much 10 LH so what is the carrying amount 10 lakh what is the residual value 10 lakh how do you get da carrying amount minus residual value in the first case resid Val da is how much sir zero that means will there be any depreciation no depreciation so in the first case no depre will come they've given another case where residual value is how much N9 lakh what is the carrying amount initially 10 lakh what is the residual value n lakh so what is Da sir one lakh this da only will will be depreciated over useful life total useful life or management life management life what is a management life 20 years so this one lakh only will be depreciated over 20 years so what is the depreciation you get every year 5,000 so in the first case no depreciation in the second case every year you'll depreciate the asset by 5,000 rupe done now all H any problem okay so to confuse you they will give you one more data they will say Sir uh original cost is 10 lakh fair value of the asset is 15 lakh company what is the depreciation the company should charge useful life let's say is uh maybe I'll give you one more data residual value still is let's say 1 lakh useful life is 9 years I've changed the data okay original cost is 10 lakh residual value is 1 lakh useful life is 9 years but fair value is 15 lakh will you charge depreciation or no depreciation will you charge depreciation or no depreciation he's saying charge depreciation how much one L perfect so depreciation will still be yes don't get confused with fair value as far as depreciation is concerned fair value is irrelevant depreciation you'll charge only when Da is positive useful like life is limited don't overthink here da is positive how do how do you calculate da carrying amount minus residual value how much is this 10 lakh minus 1 lakh which is n so that means da is positive and life is also 9 years which is finite that means will you depreciate yes how do you get depreciation same 10 lakh minus 1 lakh which is nothing but 9 lakh da divided by 9 years so 1 lakh will be depreciation every year so as far as depreciation is concerned fair value is irrelevant fair value is only relevant for revaluation model not for depreciation is that okay fair value could be more than carrying amount fair value could be less than carrying amount it will not affect your depreciation it will affect something called impairment which we'll talk about it later yes we take only management life perfect yes we not consider 50 here we'll only consider 20 awesome great next I told know this sort of question they will give you various cost you need to tell whether it can be added or ignored sir pre limited is installing one new plant in its production facility they've incurred many cost you need to tell Will this cost will be added to the cost of pp or whether it'll go off to Pendle cost of plant can you add the cost of the plant to PP yes initial delivery charges and handling charges this only we call it as daak can you add it yes cost of site preparation again is an example of what sir Dak meaning to install this planted missioner you have to level some land or you have to prepare some land maybe right now it is not suitable Okay so so can you add this yes because unless you incur this can you install the missionary no what is the cut off condition whenever you're getting confused always remember the cut off condition what is the cut off condition till the asset reaches management intended first present location and management intended usable condition till that time you can go on adding so what about consultant advice for acquisition of plan maybe this is a sophisticated plant okay that's the reason we have appointed on consultant and saying can we buy this missionary he's giving his op I that means this is also directly attributable cost because based on his advice only we will buy or we will not buy so is this necessary yes interest charges paid on a deferred credit interest charges will it will you capitalize or pnl this is p so do not add this will not be added estimated dismantling cost this only we call it as DSR can you add it yes total value or present value present value so if they don't give you any information they said only six lakh that means assume that the six lakh itself is present value and say what add sometimes they will give you future value present value separately in that case may you add only present value if they don't tell whether this is six lakh is present value or future value assume it as present value and add it up absence of information that's the reason operating losses before commercial production so normally sir I give you my own example I when I did final classes how many student was there I told one student do you think when one student I made profit or heavy loss heavy loss same thing goes here only first time when you use planted missionary let's say say planted machiner has a capability to produce One lakh units a planted machiner has a capacity to produce how many units One lakh units but I am new organization will I produce One lakh units and try to sell them or I will produce very less first year so I want to play it very safe so first year let's say I produced only 10,000 units first year I produced only 10,000 units so for me to break even I should produce how many units one lakh for me to operate at good level I should produce how many units one lakh but first I produced only 10,000 that means first year I'll make profit or heavy loss heavy loss this loss can I add it to the planted machiner cost no when confusion always read the cut off what is a cut off usable condition has asset already reached usable condition are you already using yes that's the reason you incurring loss no has asset already reached usable condition yes that means now has the cut off condition reached yes after cut off condition is reached any cost you're incurring will it come will it be added to the cost of pp or pnl P so all this will go off to pnl don't add it that's like the sum it up and give the total cost of pp like that okay so any possibility of postponement of exam absolutely no they already given the dates and all so no no more post Ms so don't keep your hopes on all that stuff people okay now the only thing is in your hands is another one month okay your preparation your stability your pressure handling capability Will D derive whether you will qualify this attempt or will you write the next it so don't think about external things exam will get postponed I will get extra L this so that and only do the things or worry about the things that is in your hands right now other things are all more Maya forget it now come back to question sh limited shushi has contracted with a supplier to purchase a missionary which has to be installed in a department in 3 months time okay special Foundation were required for missionary which is to be prepared in the lead some blah okay cost of site preparation can you add us sir sir yeah we'll take that they not we not worry about their story we don't have time also so cost of site preparation can you add yes sir okay these activities were supervised by technician during the entire period who's employed for 45,000 every month so obviously so can you is this necessary for installing planted Machinery yes but 45,000 per month how many months will it take three months so 453 how much sir 135 can you add 135 yes have they added 135 yes now they'll tell goalie the technician service were given by Department B to Department a which is built at a service of 49,500 per month adding 10% margin you're doing this somebody is doing installation no installation is done by a worker that worker is an external guy or an internal guy internal guy we hired an internal person who needs the missionary Department a who gave this technical service department B obviously each department is a profit Center Department B is telling Department a I will will not give the service at free of cost I will charge some profit actually the cost is how much 45,000 they are charging 45,000 or 10% more add 45,000 plus 10% you do in your calculator what are you getting 49500 this is internally generated profits all that cannot be added to the cost of pp what you can add it to the cost of pp is only the cost element what is the cost of the service not the actual service value what is the cost of the service 45,000 so profit element if they give means it should be eliminated so one department is giving service some installation service to other department and if they've charged any profit will you consider that profit element or you will not consider you not consider you'll consider only the cost element what is the cost element 45 okay and hence this information is irrelevant to us D okay the missionary was purchased at 1 58 lak 34,000 inclusive of GST at 12% on which input credit is available I mean this is a non-refundable taxes or refundable tax refundable so if it is un refundable tax can you add it to the cost of pp yes but however if it is refundable tax on which your ITC is available can you add it or it should not be added should not be added what did they say the purchase price is inclusive of GST that means that GST is already included here so what should we do should it be added no but have they already added yes so what should we do reduce it so it's like this if 100 rupees is the pp value means what will be the GST value at what rate are we paying GST 12% 100 12% is how much 12 rupees so increase of GST means what is the value 112 correct that means this 1 58 lakh 34,000 represents 112 yes no this 1 58 lakh 34,000 represents 112 we want 100 we want excluding GST exclusive GST means 100 rupees for 100 how much understood pration so excluding GST if this is 100 means including GST this will become 112 So This is 100 means this is 100 12 now this 1 58 lak 34,000 includes or excludes GST includes so if this is including GST means how much is excluding GST cross multiplication or in simple Layman language 1 58 lakh represents 112 we want 100 so divide by 112 and multiply by 100 how much is that 1 41 lakh 37500 multi multiple ways to present this first if you want you can find out how much is D GST and then exclude it or directly you can find out how much is excluding GST missionary value itself the way you want to present you do it okay that means what will be the missionary value we'll consider Now 1 41 lakh 37 that's the value we'll take we'll not take the GST amount because on this you can get the you can claim ITC n now yes people sir any doubt there is a transportation charges of 55 can you add it yes there is a architect was appointed 30,000 to supervise missionary installation there are some installation charges can you add it yes these are all DC that's all what is the final cost of pp this particular value the main fun over here is one is with respect to the GST and another one is with respect to if one department has given a service to another department always consider the cost price don't include the profit element that is the fun around this particular question so with this 10 gone gone yesah now can we do another standard swaha another related standard we will take that is as26 okay sir in as26 that talks about intangible asset sir again intangible assets definition is important based on that many things you can sort out sir if you want to call an a component as an intangible asset one it should be identifiable two it should be a non-monetary asset three it should not have physical substance four it should be used it should be held for use what are those four usage same as PP either to produce Goods or to render service or administrative purpose or rental purpose if all these are satisfied then we say a component has become intangible asset this you can't show intangible asset in balance sheet this is what sir this is the meaning of intangible asset okay what is it again first should be identifiable that if you want to call an item as intangible asset first it should be identifiable and when can you say it is identifiable sir if you want to call some component as an intangible asset you should be able to separate it and sell it you should be able to separate it and sell it sir I have a patent can I sell patent patent alone I don't want to sell my business I want to sell only a patent can I do it yes I have a license I don't want to sell all of my business I want to sell license alone can I sell it can I sell license alone I have have an alcohol license can I sell it I don't want to sell my business I want to sell license can I yeah correct so that means what they are all identifiable because you can separate it and sell it I have Goodwill of one do you want to buy I have a Goodwill of one CR you want to buy okay Goodwill of th000 rupees you want to buy maybe one is too much for my face value no 1,000 rupes good value Goodwill you want to buy a no sir Goodwill no cannot be sold separately so Goodwill fails which criteria identifiability criteria so that means Goodwill is not accounted as per as26 yeah Goodwill is accounted as per as 14 what is as 14 amalgamation amalgamation may we already found out purchase Method of amalgamation we get Goodwill so the Goodwill that you normally you get Goodwill only when you purchase somebody's business so that Goodwill is accounted as per as40 so you don't have to apply this standard for Goodwill because Goodwill treatment is recommended by as4 that is one understood sir because Goodwill generally fails your identifiability criteria that's one all other assets usually will pass Goodwill will fail second one is what non monetary asset you already know the meaning now monetary asset means value is fixed non-monetary asset means value fluctuate sry if I have a software I purchased it for 10 lakh Rupees I want to plan I'm planning to use for 5 years I purchased for 10 lakh and plan to use it for 5 years for all the five years its value of the software will be same or it will fluctuate it will fluctuate asset means sir I may get higher value or I may get lower value so that means this intangible assets value will be fixed or fluctuates fluctuate that's the reason we say intangible assets is a non-monetary asset meaning its value will fluctuate fluctuation means it could increase also or it could decrease also third one without a physical substance because that's what we say intangible as it means it should not be should not be able to touch it to see it to feel it that is what is captured in the third meaning which which is what sir without physical substance don't interpret this sentence literally without physical substance does not mean it should not have physical substance at all like you purchased a software but that software came in pendrive the software was delivered through pendrive pendrive can you see yeah correct so that means it is having physical substance because it came in pendrive when they what they mean by without physical substance means the value of physical substance is very insignificant suppose you pay 10 lakh rupes to buy a software okay it came in pend Drive pend Drive will cost you 10 lak Rupees sir pen pen drive May cost you about 100 rupees 200 rupees or maybe 500 Rupees at best that means you tell me which is the dominant element over here or what is the value of this pen drive is the value of the pen drive really material or immaterial immaterial that is what they mean by that when they say without physical substance they say the value if at all it has physical substance the value of the physical substance is very in insignificant or immaterial because you are paying you're paying 10 lakh Rupees not for the pen drive you paying 10 lakh Rupees for the software like that is that okay sir I bought a laptop sir then what I should I do sir because let's say you paid 1 lakh Rupees to buy a laptop now so laptop also will have some inbuilt software it has some MS office already installed Microsoft Office was already installed in this laptop now this one lakh what should I do sir I paid 1 lak rupees for the laptop but laptop already has some inbuilt softwares but software this laptop is a tangible asset meaning it is PP but however this MS Office software and all is an intangible asset so in this case may what you need to do sir sir if a transaction has both tangible as well as intangible item if an transaction or if a component has both tangible as well as intangible item you need to check which is the dominant element which is the dominant here what is dominant laptop is dominant or MS Office is dominant you want to buy what MS office or you want to buy laptop laptop so which is the dominant element laptop so that means the dominant element is tangible item then entire one lakh will be accounted as property planed equipment and accounting standard 10 will apply because who what is a dominant element tangible item or laptop being tangible item if it is dominant means entire one lakh will be you don't have to segregate entire one lakh will treated it as PP itself and accordingly apply which standard accounting standard 10 okay like in this example this also has a tangible and intangible element tangible element is pen drive intangible element is software which is a dominant element here which is a dominant element sir software that's the reason entire 10 lakh will be recorded as intangible asset and as26 will apply that is what I've written over here all right if asset has both tangible and intangible item check the dominant element if the dominant element is tangible item means book the entire thing as PP if the tangible element or if intangible element is in dominant element means book the whole thing as intangible element intangible accordingly respective standards will get accounted move on to the next yes sir okay so recognition criteria sir we already studied no no no no if you want to call a component as intangible as it three features or four features should be satisfied all right in fact this is the same thing yes fourth one should I have to discuss or you know it's already this intangible assage should be held for use and usage could be either to produce Goods or render a service or administrative purpose or rental purpose okay like we are we are using we have a Ru Pro app we are using that app to give a service so sometimes we earlier I think we now we have stopped it now earlier know we used to have attendance through one app yes normally you see in your college they have attendance through an app so that attendance app is used for what purpose not to give service but for administrative purpose okay like that so but it should be used for some some purpose it's not necessary it has to be used to produce Goods rendering service even if you have some intangible assets for administrative purpose even they are also considered as intangible assets only this is same as PP no sir think don't have to wait further here can I move forward what is the recognition criteria of pp recognition criteria of pp Feb and cost measurement here also same thing if you want to show intangible asset in balance sheet there should be some future economic benefits and cost of the intangible ass should be measured reliably same as PP next exchange transaction I'll not even bother same as PP you give me a recap let's see if you have exchanged meaning let's say software came in software came in license went out so both are intangible asset one intangible asset came in another intangible asset went out that means this this only we call it as exchange as a thumb rule normally for all exchange transaction we use fair value fair value need not be used under two circumstance what are those transaction lacks commercial substance when can you say transaction does not have or lacks commercial substance asset wise cash flow also same entity wise cash flow also same second criteria where fair value is not required if you cannot find out fair value of both asset coming in and asset given out both fair value if you cannot find out means fair value need not be used if you are not using fair value what will you use carrying amount carrying amount of what asset given out whatever asset that came in whatever asset that went out both the carrying amount will be recorded at same value meaning gain or loss will not be account that's what I've written same as 10 F now all right next cost also same cost also same initially all intangible assets are recorded at Cost what is the cost Purchase cost can you treat it as cost yes if you have any import Duty and other non-refundable taxes add it if you have any trade discount reduce it if you have any directly attributable cost to bring you you complete the sentence directly attributable cost means those cost incurred to bring the intangible asset to the present location better because intangible asset you can't see of the word location to make the intangible asset management ready to use till the intangible asset becomes management ready whatever cost you incurring you can add it to the cost of intangible asset like normally let's say we purchased a software but we don't want to use it as it is first we want to customize it and then use now normally when you buy some saps and all saps Oracle and all whole module you do don't want you want maybe one Finance module because sap and all is a huge Erp system they will have 101 things so you will customize it as customiz it as per as your requirement so if you are incurring any customization charges etc etc all that will become your Deb and when some patents and all you need to register only then you'll be able to use it so registration charges installation charges and all will become your DC for this purpose done so what about DSR sir so DSR is your repair cost so buildings missioner and all you will repair machinery and all softwares and all you'll repair it probably no so that means for them and all DSR cost will not arise that's the reason not bring brought it over here yes all right cost exclusion same as PP same as PP give me a breaker what and all what and all cost will be excluded uh one first you go General administrative overheads selling and distribution overheads operating losses relocation cost will not be there reorganization cost could be there okay then uh if you have any any promotion expenditure or any sort of initial promotion blah blah blah any marketing expenditure you're doing all this will go off to pend account also use training cost also cannot be added training cost to operate the asset also will not be added suppose I have a software GST software I have software is already ready to use but employee is not ready so I give him some training I gave him the training to and and told him how to use the GST software okay now this training cost of employee can you can I added to the soft cost of software no because software is already ready to use I mean software is already reached what condition management intended usable condition by providing training to the employee you are making employee ready to use asset is already ready to use hence training cost of employee cannot be added to the cost of the asset it'll go off to P it'll go off to Pendle account both both for PP also and for intangible asset also if you're giving any training Suppose there is an aircraft aircraft is intangible asset or tangible asset tangible asset you're giving some training to the pilot to use the aircraft okay by giving training pilot will become ready to use the aircraft aircraft is already ready so any training user training cost that you are giving both for tangible asset as well as intangible asset will not be capitalized but it will be transferred off to P account okay yes now in intangible asset acquired through government grant meaning we did not purchase intangible asset government is being so D of pru so that they gave us Grant they did not give us cash they gave us intangible asset some software they give it so in that P May check how have you received this grant at free of cost government gave us one software at free of cost in that case may record the intangible asset at nominal value nominal value could be one rupee 10 rupe 100 rupee whatever just show it because you have an asset no so that if you're having one asset and if you're using one asset it should come in your books so record the asset at nominal value when when you have received it at free of cost okay in another case let's say worth of that software is 10 lakh Rupees but government told you pay me 2 lakh that is good enough worth is 10 but government charged us only how much 2 lak rupees that means here we have received it at free of cost or concessional value concessional value so if you have received the intangible asset at concessional Value then record the asset at concessional Value itself what is the concessional value 2 lakh so you let's say you you purchase a software from the government at 2 lakh rupees so the journal interv will passes software account debit 2 lakh to bank account 2 lakh that's all okay that software you amortize usual principles now next is internally generated intangible assets you're not purchasing the intangible asset you are developing it on your own so whenever there is an internally generated intangible asset first you categorize them into two parts Goodwill and others internally generated Goodwill we have discussed this n number of times the Goodwill that you get in average profit method super profits method and all can you show in your books or you cannot show you cannot show internally generated good is not recognized only purchased Goodwill is recognized that to as for accounting standard 14 okay so Goodwill cannot be recognized other internally generated intangible assets you segregated into two parts research phase expenditure and development phase expenditure okay sir when whatever you're incurring under research phase expenditure transfer it off to pnl account research phase expenditure will not be shown as intangible asset entire expenditure that you have incurred under research phase will go off to pnl account why because at research phase no sir generally you cannot demonstrate two things one the very existence of intangible asset and two how much benefit you will give I used to give this as a covid vaccine example when covid hit many companies were doing research as to how to find covid vaccine everyone were doing research research when you're doing means can you do it at free of cost or you have to incur some money you have to incur some money every company who was doing research was successful or only few only few that means every company so if research is successful means you will get a patent correct no every company research was successful or no no that's the reason standard says any research phase expenditure you straightaway transfer of to pel account because at research phase you cannot say with certainty that there is intangible asset because you will have intangible asset only when the research is successful only then you can register the patent in your name correct so at research phase you cannot prove that intangible asset exist and also if at all you say intangible asset exist how much benefit it will generate also you'll not be able to save it certainty hence research phase expenditure fully will be transferred off to P account now sir if research is successful suppose one company was doing research for one two years after two years research their research was successful now what they'll do sir they will start developing now if the covid research is successful what did the company do after that they started developing covid vacine yes no so after research comes what sir development phase expenditure so development phase expenditure you can capitalize yes provided certain condition was satisfied name that what do we call what we used to call this in our exam as T FRC if Tif FRC is satisfied then development phas expenditure we can capitalize what does a tifc I mean stand for t means technical feasibility once I'll call it out t for technical feasibility I for intention to complete a for ability to use or sell f for future economic benefit R for financial Technical and other resources C for cost measurement if all these are satisfied then you can capitalize otherwise no okay technical feasibility means think logically sir if you're developing covid vaccine means you should have the necessary technical expertise yes because obviously to develop the vaccine you need scientist what composition may you should put what raw material chemical and all no that is what they mean by technical feasibility whether you have sufficient technical knowledge to develop this product that is one second one intention to complete now when you imagine covid vaccine and all cores of people you need to develop the vaccine that means can you develop entire vaccine in one day or this will only take a long time it took about 2 to three years to develop covid vaccine yes no that means development phase expenditure means it will not happen for only for two or three months even development may go on for 2 to three years so first to check whether you have the intention to complete because even development phase expenditure can go really long if it goes for 2 three years means you should check whether you you really have the intention maybe your intention was just to research and then that research outcome you want to sell it off because development is another headache sir because if you have to develop the product means you should buy the necessary Machinery it has to be as for the respective standard you're talking about health of people suppose people consume vaccine in swaha they did not go because of covid they went because of covid vaccine and you are also swaha only correct or that means development phase expenditure also has a lot of headache so you see as an organization whether you want to take that headache on you meaning whether you have the intention to complete prodct that is one a for ability to use the intangible asset so you may have the expertise to do the research but after research what will you do sir you'll have to sell the vaccine sir selling is a different marketing you may have the technical expertise to develop the product but selling is a different ball game now as a teachers we may be good but especially I I'm horrible at marketing because I'm never there on social media I don't like social media at all and these days social media is the way to go correct no the only the best way to Market these days is what sir social media insta Facebook YouTube whatever those are the modes but I'm never on that I don't like it at all I feel it's a time waste my my personal opinion okay all right so that means I'm so I may be a good teacher but am I a good marketer absolutely no many internally also many people scold me are horrible I'll accept it it's okay fine by me yeah because I don't want to Market I feel if you're doing your Justice people will automatically come it's like a movie that's what I keep telling if you like a movie means will you keep it to yourself or will you recommend you'll always hey MAA watch that like that you build you give too much of build up yes or no same thing goes for class also that's the reason I don't believe in too much of marketing okay just do your job if you if your job is good enough for the students they themselves will tell or if they don't tell means indirectly you have to improve your quality that's all do that don't PR okay now coming back to the topic all right what is that sir entity should have the ability to use developing the product in is one go marketing the product is another exercise check whether the entity has a necessary expertise to use the product or sell the product that is your a f for future economic benefits so if you want to show it as intangible asset one of the criteria is Feb and cost measurement so you should be able to prove that R for technical financial and other resources to develop also sir you need a lot of money power because you need to buy missionary hire a lot of scientist etc etc so see whether all the Technical Resources and Financial Resources can you arrange if you don't have it can you arrange so last is cost measurement so if all these are satisfied that only we call it as trfc if all this tirc is satisfied then the development phase expenditure you can capitalize meaning development phase expenditure you can show it as intangible asset even if one among this pales the entire development phase expenditure will go up to P account like that even if one fails entire development phase expenditure to P account and Sir This research phase and development phase expenditure is like tirupati hundi once you put the money into hundi can you get it back oy I wanted to put only 100 rupees by mistake I put 500 rupees can you take back or gone gone go gone gone go like that only once you have transferred an expenditure to pel suppose first year sir okay I transferred 10 lakh Rupees to pendl account second year in year two my research was successful my research was successful tirc also satisfied okay that means now can I capitalize the expenditure yeah let's say 2 lakh rupees I spent in second year can I capitalize can I capitalize yes you know what the company is saying sir I will capitalize 2 lakh no problem because tfrc is satisfied they are saying this 10 lakh I transferred previously no that tell I will capitalize Macha what do you need to tell that Macha now not possible ready once gone means gone forget about it once you have transferred those expenditures to pendl subsequently you cannot reverse and capitalize once gone gone that going that's what I've written in this particular Point move to the next okay amortization so nice see what I'll write same as accounting standard 10 substitute the word depreciation with amortization rest every concept is same okay now people all right I think I'll not go too much into this now residual value sir residual value means what sir SC scrap value salvage value okay all right not necessarily so not necessarily so so residual value means the value that you get at the end of asseta useful life residue value simply means the value that you get at the end of asseta useful life suppose original cost of the asset was 10 lakh original cost of the asset was 10 lakh and organization wants to use let's say they have a license they want to use this license for five years at the end of fifth year they want to sell this license so at the end of fifth year whatever value you get that only we call it as residual value let's say residual value is 30 lakh let's say residual value is 30 lakh sir is 30 lakh really residual value or wrong wrong correct correct don't be Miss led by the term resid value because one notion is already set in our head residual value means very very chinto value not necessarily so residual value could be big small whatever resid value simply means the value that you get at the end of asset useful life especially if it is liquor license and all especially if it is liquor license there is a heavy demand for it you might have got it for 10 lakh you may sell it for lot higher price so it's not necessary that residual value has to be lower than original cost it could be high low whatever resid value simply means the value that you get at the end of asset useful life it could be big small whatever all right next sir usually sir we take residual value of intangible assets to be zero usually for intangible assets we assume residual value to be zero all right usually if they don't mention we take it as zero standard says you can take residual value of intangible assets provided two conditions or provided one of the two parameters are there one third party guarantee is there to purchase intangible asset end of useful life all right so suppose I have a software one party came to me and told I will purchase your software I for one lakh Rupees at the end of third year I want to use the software only for three years one party came to me and told at the end of third year if you want you can sell this software to me and how much value 1 lakh rupees that one lakh itself you can take it as what sir thisal value why because a third party guarantee is there so if any third party guarantee is there means that guarante value itself becomes your residual value that is one or active Market is there active Market means active Market simply means where there are large number of buyers and sellers the large number of buyers and sellers we call it as active market like Bombay Stock Exchange is an active Market National Stock Exchange is an active Market OLX is an active Market whichever Market may you have large number of buyers and sellers we call it as active market so if any intangible asset has an active market and from that active Market if you can figure out the residual value if you can figure out by selling the intangible Assets in that market how much will you get that how much of value you you are expecting to get that can be taken as what sir resid value you feel there is a market for software from that market if I sell this software I will get 50,000 at the end of my asset useful life if I sell this software in the market how much I will get 50,000 then that 50,000 can be taken as what sir residue value like that one active Market should also be there and that active Market should be there till the asset usefully what is how many years am I planning to use the software for three years one active Market should be there now and that active Market should be there till the end of third year so if you are able to if you're if that condition is satisfied so using active Market you can take out the residual value okay so either one of the two are two things are there means you can take the residual value if none of the things are there means residual value of intangible assets we'll take it as zero done not d g okay next is D recognition of intangible asset D recognition means cancellation when will you cancel intangible asset sir when you have sold or when you have written off or when the Feb stops as long as you have Feb show the asset once Feb stops intangible asset also will stop okay now we'll quickly run through this question most of the questions here intangible asseta and as10 and as26 majority of the questions are similar just that there it is depreciation here it is am monetization okay look at this question this was an RTP May 2024 question they have clubbed it under as14 but it is more towards as26 question so we'll take it up here Nares limited acquired a running business of Sunil oh sir this is asset purchase or business purchased business purchase business purchase means you'll apply which standard accounting standard 40 correct and they said you acquired the running business did they say they acquired only 70% 60% 80% they said acquired business means how much percentage acquisition it is 100% business has been acquired agreed okay for how much value 10 lakh 80,000 what is this 10 lak 80,000 purchase consideration on 15th May that is a day you got the control the fair value of Sunil net asset was 5 lakh 16,000 this is your net asset value okay sir how do you find out Goodwill and the purchase Method sir compare net asset with PC okay net asset is 516 PC paid is 10 lakh 80,000 the worth of the business is only 5 lakh 16,000 but we paid how much 10 lakh 80,000 so you paid less or you paid more more if you're paying more only as14 says that higher value only we show it as what sir or that differential value only we call it as Goodwill so how much is Goodwill over here 10ak 80,000 minus 56,000 which is 5 lak 64,000 and we already learned this this Goodwill is accounted as per as 14 and what does as14 say this Goodwill that you get as per amalgamation should be amortized over 5 years I discussed with you when we did amalgamation topic also whatever Goodwill that you get on amalgamation should be amortised over 5 years okay so how much Goodwill is this 5 lakh 64,000 okay so first year what will be the amortization this you have to amortize it over 5 years and normally we take resid value of intangible assets to be zero so 5 lak 64,000 is a value minus residual value is zero divided by life we take it as what sir 5 years so 564 divided by 5 is how much 1ak 12,800 so the end of the year what is Goodwill C value 564 minus amortization it value will become 451 200 this question is that only they'll give you where is intangible asset at the end of the year what is the asset carrying amount is what they're asking so what is a Goodwill carrying amount at the end of the year 45100 like that okay all right what about liquor license as an example h on liquor license as an example you don't amortize you don't have to amortize liquor license like in my example you bought the liquor license for let's say 10 lakh if residual value is 30 lakh that means what sir da is positive or negative 10 lakh minus 30 lakh if you do you're getting da as a negative if da is negative will you amortize no no amortization will come in that case okay coming back to Second example Nar has taken a franchise on July to operate a restaurant franchise is it an intangible asset franchise right yes how much did you pay for this franchise rate 1 lakh 80,000 and at an annual fee of 10% of net revenue how much of sales you're generate rating of that 10% you need to give this is one extra expenditure sir if you have an asset means you'll have some maintenance expenditure yes or no so what is the franchise value 1 lakh 80,000 this 10% of net revenue whatever you paying you'll transfer it off to pel account that's your routine maintenance so franchise value is how much 1 lakh 80,000 the franchise expires after 6 years okay so have they given any residual value no resid value have they given anywhere here no so that means what is amortization on this franchise 1 80,000 minus 0 divided 6 how much is that sir 30,000 in fact sir you purchased in July no sir only 9 months depreciation no ideally it should be 9 months depreciation but the question says the day you acquire you you charge full year amortization the day you buy an intangible asset you charge full year amortization so will we question the question or just take it just take it since the question is asking us to take full year amortization we are also charging amortization for full year so the day you have purchased intangible asset for first year is irrelevant okay all right so what is the franchise intangible asset closing balance 150,000 so net revenue is 60,000 so what did the franchise Arrangement say how much of is your Revenue 10% of that you need to pay extra 60,000 10% is how much sir 6,000 60,000 10% is obviously 6,000 that 6,000 will you capitalize it as intangible asset or p p like one more they have given on 20th August Nar Inc Ur 240,000 to register the patent sir is registration charges a DAC can you add registration charges to the cost of patent yes how much did you incur 2 lak 40,000 Nares expects the patent life to be 8 years so patent other cost they've not given but they have given only one cost that means what will we do only add this so what is the cost of the patent now 2 lakh 40,000 will you amortize this yes because life is limited how much is a limited life 8 years resid value given no that means what is amortization 30,000 2 lakh divided by 240 divided by 8 which is 30,000 what is the closing balance of the payent 2 lak 10,000 that's what you need to calculate over here if you add up all this take your calculator Goodwill value is 564 Goodwill intangible asset value is 564 patent is 210,000 plus franchise is 150,000 if you add all of this how much you're getting 9 24,000 right or somewhere extra there 451 or somewhere extra they put everything there 4 l5100 and here it was 41 second here 4 lak 51200 was Goodwill no or amount was wrong right oh no oh amount I no sorry sir I told 564 I think we took opening balance closing balance we need to add basically they're saying as the balance sheet May what will you show intangible asset balance sheet may you show opening balance of intangible asset or closing balance closing balance I asked you to add 564 564 is opening balance what is a closing balance of Goodwill 4512 200 add that again 45100 plus 210,000 plus 150,000 closing balance only you had how much are you getting 8ak 11,200 that is a closing balance of intangible asset that you will show in your balance sheet they asked you to prepare balance sheet extract okay so balance sheet me you will have all assets all liability entire information is given or only one asset information one asset information they give charge that and show that that also another way these sort of questions can appear now all right and go for the next one one more we'll do maybe pinaki limited is engaged in research so the moment they say research expenditure what I have to do I have to worry about the amount the the amount of research could be one lakh or it could be 100 CR doesn't matter research phase expenditure will be going to pendl in one shot how much of a research expenditure you have incurred this year entire amount will be deferred or transferred immediately research phas EXP should be transferred to pendel immediately what is the research phase expenditure 10 lakh what will happen to that P account I only give the Crux in the interest of time that's be okay with you okay research phase expenditure is 10 lakh and that will be going off where pel account so you are doing the research for the first five months year starts on April so count April May June July August so for the first five months you were doing research and you spent 10 lakh which will go off to pendl so from September onwards the development has started so after if the research is successful what do you do you'll start developing so from 1 September onwards your development phase expenditure started from September up till March that is for the remaining 7 months how much have you incurred 8 lakh this is development phase expenditure can you add it don't blindly say yes you can add it provided trf FRC is satisfied if it is satisfied 8 lakh of development phase expenditure you can add otherwise this 8 lakh also will go to P check what are they saying some they must have told something ah here the development of process began on 1st September up to 31st March a sum of 8 lakh was incured which meets asset recognition criteria which meets asset recognition criteria means indirectly they're saying it satisfies TC if it satisfies tfrc can you capitalize 8 lakh yeah that means intangible asset value will be what sir 8 lakh rupees understood any problem okay next from 1st April 2014 onwards that is next year onwards the company has implemented a new process design and it expected that it will result in after tax savings savings means benefit no sir savings means benefit how much benefit you will get every year 2 lakh for the next five years so the company is saying due to this research no due to this development we will get some benefit how much benefit you will get two lakhs every year over how many years five years that means the 2 lakh into five if you do what are you going to get 10 lakh 10 lakh is a total benefit 10 lakh is the total benefit so this 10 lakh rupes is a present value or future value future value correct so now check what the line they saying cost of capital is 10% that is your discount Factor the present value of annuality factor for rupe 1 for 5 years at 10% is 3.79 08 sir actually is not intangible asset concept this is intangible asset and impairment concept together okay intangible asset and impairment together concept so in impairment we already found out value in use next standard is that only take it out once again value in use value in use means obviously sir if you have an asset you'll get the benefit from that asset correct now here from this particular intangible asset how much benefit you are expecting to receive 10 lakh that 10 lakh benefit you will receive immediately or in future future find out the present value of such benefit find out the present value of that benefit that only we call it as value in use to find out the present value obviously we need a discount Factor how much is a discount Factor here 10% how much is the savings every year sir 2 lakh either you can put up table 2 lakh is a benefit every year calculate the present value five times or since the 2 lak is a benefit which is same every year should we have to use PV if or PV AF we discuss all this in uh FM right if if you're getting same benefit every year you don't have to use every year a discount Factor rather you can add every year car discount factor that added number only we call it as PV AF so how much is PVF they only given in the question 3.79 08 multiply this sir 7 lakh 58 160 yes sir that is your recoverable amount that is your recoverable amount no you think logically currently you're showing that intangible ass at what value 8 LH but maximum you can recover obviously you going to use that asset by using the asset maximum how much benefit are you're getting in present value terms 758 160 so benefit is only so you have for recoverable amount we have two things one is value and use and another one is net selling price okay higher of the two is taken as recoverable amount all right you have studied this in as28 also next topic is that only I'll talk about it okay but here have they given any selling price here have they given any selling price because asset means sir name is saying what is this here recoverable amount there are two ways to recover from the asset what are those two ways one by using another by selling one by using another one selling by using how much benit you get we call it as value in use by selling how much benefit you get you're going to get net selling price all right so this development phase expenditure is that asset already ready or it is still under development still under development that means can you sell it easily or no only when it gets fully developed then only you'll be able to sell that means what is the NSP of this product not available that's the reason what did we do value news itself we adopted as recoverable that's what as28 also say if for any product if net selling price if it is not available if for any asset net selling price if it is not available then value news itself you can take it as recoverable for this intangible assets under development do you have net selling price no so value in use only becomes your recoverable amount how much is value in use 758 now think logically you can recover only 758 but currently you are showing the asset at 8 LH are you not overstating your asset are you not overstating your asset yes how much are you overstating your ass by what is the difference between these two 41 840 that you have to book it as something called impairment loss this is accounted as per as 28 this is as26 and as28 combo question okay yes as28 is applicable both for tangible as well as intangible ass correct done SG all right so what is the journal entry for depreciation depreciation to asset what is the journal entry for empowerment loss same confidence what is the entry impairment law account debit to asset what is asset over here intangible asset under development okay so how much is the impairment loss you are charging 41 840 so due to empowerment loss asset value will be same or it will reduce reduce so from 8 lakh its value will reduce by 41 840 so that means the Revis carrying amount of the asset will become 748 that is the intention of empowerment standard empowerment standard is there to make sure that asset is not overstated okay that is the thing and okay people that's that's all so Revis carrying amount will become this much so why why can't we call it as intangible asset sir why do we show it as intangible asset under development sir sir if you remember non-current Assets Now in balance sheet there are various categories under non-current assets first is PP then intangible assets then then Capital work in progress we say Capital work in progress means some building if it is still under construction building if it is still under construction we show it as capital work in progress so till the asset is ready you can't call it as PP till that building is ready we will not call it as PP we will show it as capital work in progress in balance sheet same thing like that if any intangible asset is under development there is a separate category called intangible assets under development you need to show and since is this intangible asset fully developed or still developing still developing hence we show it under intangible assets under development once it is fully developed that means from intangible assets under development you'll transfer it to intangible asset like that is a category shift okay I don't know I have not shown the balance sheet if you just check the balance sheet it's there in our notes balance sheet if you just check you'll be able to see the category I think I've shown this in regular class just saying schedule 3 balance sheet if you just check whatever I just said now intangible assets under development and intangible assets two separate categories are there those intangible assets which is already ready for use you show it under intangible asset if it is still ready means if it is still getting ready means we'll show it as intangible assets under development this asset is still under development that's the reason I'm not using the word intangible asset I'm using the word what sir intangible assets under development like that yes people yeah so with this intangible assets standard also we have completed thank you so much one more we'll do and take a break would that be fine with you yes impairment only the very related standard just now we discussed impairment okay that we'll do off online also everybody there going good okay the next standard we'll be taking up is or revising is accounting standard 28 which talks about impairment of assets so this particular impairment of asset is applicable for your tangible assets tangible assets means your property plant and Equipment as well as for your intangible assets so primarily this as28 is applicable for tangible assets and intangible assets that's the scope and this standard of empowerment or as28 will only come if one equation comes into picture only one equation come comes into picture as28 empowerment loss will get triggered what is that equation if a carrying amount if it is greater than recoverable amount only if carrying amount if it is greater than recoverable amount then only you will get something called impairment loss otherwise impairment loss Will Never Come okay now you think logically let's say carrying amount of the asset is 100 rupees but recoverable amount is only 80 recoverable amount is only 80 maximum you can recover is only 80 but currently you're showing the asset in your books at 100 are you not overstating your asset unnecessarily increasing the asset and showing you showing how much unnecessarily you have overstated 20 rupees so carrying amount minus recoverable amount you do how much you getting 20 that 20 only you will book it as what sir impairment loss so structure this equation what or when will the impairment loss come only if carrying amount if it is greater than recoverable in other cases and all it will not come done this is one so that means you have to find out recoverable amount every month every day every week no so because to do impairment check you need what sir to do empowerment check you need recoverable amount right so that means recoverable amount is a value that value could change daily also weekly also monthly also so every day we'll go on finding recoverable amount not necessary you have to find out recoverable amount only if there is an impairment indicator only if there is an impairment indicator then only you will find out recoverable amount otherwise not necessary so what does this empowerment indicator so empowerment indicator could be external or it could be internal it could be either be external or internal external indicator means sir you bought the asset after you purchased value has drastically Fallen you purchased a building for 50 lakh now the market value of the land has become or market value of the building has become 40 lakhs when you purchased it was 50 now Market condition has changed and its value has become now 40 so any decrease in the market value of the asset is an impowerment indicator okay or any adverse changes in technology law etc etc like let's say you are an alcohol industry you are producing some BR uh some sharabi I mean some alcoholics you're producing beer whiskey whatever that you are that you want huh we are we are producing that but unfortunately Sidra Maya government banned alcohol in Karnataka never happen sir just saying okay suppose in our state the state we are operating the company is operating in that state if alcohol is banned that means now you tell me to produce alcohol I have a machinary the machinary will be of use to me or its usage value will reduce drastically resarch value will reduce drastically why there is a favorable change in law or unfavorable change unfavorable so if in law May or technology May if there is any unfavorable change then the recoverable value of the asset May reduce drastically so that is an external empowerment indicator understood sir all right there could be some internal empowerment indicator also like sir an asset was there okay this this I this uh this laptop we are using this laptop so Jo Jo Jo Jo may push this laptop like this it's going on like this suddenly I push this laptop hopefully it doesn't happen somebody should not jinx it show me don't do okay Jo josma if I push this laptop means now sir I was using this laptop for let's say 7 hours every day before it was damaged now I damaged it now can I use it for seven seven hours or lesser less so if there is any physical damage cost to the asset that is also an impairment indicator should we look in the market for this indicator or I can see it here only that means what is this is this an external indicator or internal internal indicator like this so damage cost of the asset is an internal indicator okay or another word let's say Sir this laptop this particular laptop I was using for 10 hours initially now now I've started using it only for 5 hours from 10 hours every day I've started using it only for 5 hours that means my usage pattern is same or it has got changed my usage pattern same or it is changed changed changed in a higher way or in a lower way lower that is an empowerment indicator now you think suddenly why will I stop from 10 hours why will I stop using it only for 5 hours something has changed right meaning maybe that many courses we are not conducting that many classes we are not doing that's the reason our Revenue has fallen could be that or the asset is not able to sustain earlier it used to work smoothly for 10 hours after after now after 5 hours it makes weird no noise okay so now it started doing actually happens right all our laptops life is not more than two to three years because it will not sustain heavy processes we need especially to record classes and all okay so that means initially when you buy we'll use it more later on usage pattern will reduce so if usage value is reduced that is also an internal empowerment indicator done sir okay the next question is Sir where will this empowerment loss go to Sir Sir empowerment loss is loss where will it go to p and so but before that hang on impairment loss is a loss usually you transfer that to pend but before that check if this asset on which you are charging impairment was it revalued before now this asset is on this asset there is an impowerment loss let's say on this laptop we have got an impairment loss in this year this asset means on the asset I could follow either cost model or devaluation model check if this laptop the very same laptop on which I'm charging empowerment loss now was it revalued earlier and do we have any RR RR means revaluation result let's say this laptop was revalued before and there was a revaluation loss of 10,000 rupees there was a revaluation loss there was a revaluation reserve of 10,000 rupees meaning I had got a revaluation loss or revaluation gain revaluation gain this year or last year last year this year let's say I got an impairment loss of 15,000 this year I got an impairment loss of 15,000 so entire loss of 15,000 I will not transfer it to P how much RR I have 10,000 so 10,000 of empowerment loss I will adjust it with RR balance 5,000 empowerment loss only we'll transfer it off to P like this suppose if RR is not there means RR is not there means entire empowerment lost to P like that's what I've written over here next one all right the next one sir how do you find out recoverable amount so just now I told before this topic there are two ways to recover if you have an asset means there are two ways to recover one by using another one by selling if by using if you are recovering the amount we call it as value in use for a class purpose us we used to call this as viu by selling if you're recovering means we call it as net selling price we call it as NSP sorry it is not selling price the name is net selling price so how do you get net selling price name name itself is giveway net selling price so obviously L when you sell you may incur some selling cost so if there is any selling cost reduce it from the selling sale value if you reduce selling cost that number only we call it as what sir net selling price okay let's say I sold this laptop I can sell this laptop for 10,000 rupees but to sell this laptop I have to pay a commission of 5,000 that means what is my NSP my sale value is 1 lakh my selling cost is 5,000 my NSP is how much 95,000 that is okay so for NSP calculation sir if you have any Finance cost or income tax expense ignore it okay like normally to sell and all sometimes we go into Finance Arrangement so if you have any Finance cost like interest and all ignore it and if you have any tax expense you ignore it because empowerment test is a pre-tax activity empowerment test is a pre-tax activity so empowerment loss is also a loss empowerment loss is also a loss when will you pay tax to the government before paying all before deducting all the expenditure or after after deducting empowerment loss also is an expenditure yes so that's the reason it's all a pre-tax activity so if you have any tax expenditure ignore it all this not that important for exam just discuss it all right now how do we take NSP sir the first priority for NSP is binding sale agreement okay let's say I've made an agreement with VOD saying I'll sell this asset for 5 lakh rupees okay I made an agreement with him for how much value 5 lakh that 5 lakh itself becomes your NSP that five lakh itself becomes your NSP because I have a sale agreement with him okay if sale agreement is not there then where will I sell this product now where will I sell this asset in the active market so take active market price active Market means where there are large number of buyers and sellers so you can find out NSP using active Market if you have binding sale agreement first always take that if you don't have it take active market so if active Market is also not there means like if you intangible assets you may not have a market let's say one internally generated software internally generated software that means the software is uh known in the market or it's a new product new and that I only developed it so you may not have active market for it if you don't have active Market you can find out NSP using management based estimate standard says management can use their best estimate and find out NSP okay but in this today's Zano any asset will have a market okay if there is a buyer means obviously there will be a seller it's always like that but this is anyway standard excepts this also rare cases me you can find out NSP using your estimates also this is about NSP can I move on to the other one all right so recoverable amount means two things one by selling or by using by using if you're finding recoverable amount you call that as what sir value in use now that we already did in the previous topic how do you find out value in use by suppose we have a laptop by using laptop we will get benefits we will get all the benefits today or all the benefits are in future future so what do we do find out the present value of future benefits by continuous usage of the asset only by continuously using I'll get the benefit find out the present value of that so this laptop I'm planning to use it for 3 years this laptop I'm planning to use it for 3 years at the end of third year what will I do with this laptop I will keep it or I will sell it off sell it off that means I will sell it off and get some residual value consider residual value also for Value in use while calculation so value in use means what sir the present value of f future cash flows from continuous usage and by sale off of the asset sale means now or at the end of asset useful life sale here refers to the useful life and the when the asset reaches the end of useful life that time when you sell it that means what is the difference between this selling price and that selling price so this selling price is immediately if I sell the laptop immediately how much will I get that is NSP NSP is today today if I sell how much I will get this this sale means what sir this sale means what this sale is is at the end of asset useful basically this sale value means your residual value is that okay with you so value on use is nothing but present value of future cash flows that future cash flows will be both from continuous using and through sale when when the asset end of asset useful that means you need two components to find out value in use what are those two components one is the future cash flows and another one is the discount Factor because to find out present value we need what sir future cash flows and discount Factor how do you get the present value simply take the future cash flows and multiply the disc discount Factor okay if every year cash flow is same then we can use PB AF if every year cash flow if it is changing means each year cash flow you need to find out that only we call it as PV if so this is your shortcut method all right this is your long cut method okay all this we have done in FM maybe one or two questions here also I will tell in as9 also all this we have applied don't look at me like how and all we have done all this okay so basically to find out value and use we need future cash flows as well the less discount Factor so for few things on the cash flow side all this again may come as an McQ question I'm not expecting straightforward Theory as28 says future cash flow is there no now you tell me any company would they do they like to charge empowerment law would they like to charge impairment law no because any loss would they like to charge h no now sir to find out value in use you want future cash flows who will tell that future cash flows some astrologer will tell or company has to find out company has to find out that means this future cash flows is company estimate so company already has an intention to charge empowerment laws or not to charge empowerment laws not to charge so that means what will they say our future cash flow is super it is one it is a one CR that means what will they say they will always take a higher future cash flow so that empowerment loss will be zero because nobody would like to charge empowerment laws voluntarily yes no hence the standard says always take future cash flows to be five take the future cash flows only for 5 years don't take the cash flows Beyond 5 years because as an as28 as an estimate or as a thumb rule they are saying if you have any asset that asset benefit maximum will come for 5 years hence they are saying you take you restrict your future cash flows only for 5 years but company is saying sir I have a building that building will last for 10 years building will last for 10 years the standard says okay take MAA you take 10 years what is the thumb rule how much you should take five but are you taking five now or are you taking Beyond five Beyond if you're taking Beyond five justify give a disclosure in notes to accounts how did you take Beyond five on what basis are you telling that asset will last for more than 5 years the justification has to be given in notes to accounts if you can't justify take only five if you can justify take a higher number you can take more than five years only if you can justify it okay and few things are ignored for future cash flows calculation in detail maybe we done here just have a quick glance that's good enough may not be that important may come as an McQ one sir income tax receipts and payments if you are ignored okay normally when you sell an asset you may have to pay some income tax or you can also set off this income tax all that is also there no so all if you have income tax receipts and payments and all you ignore because I told empowerment is a after tax activity or pre-tax activity pre-tax activity so income tax receipts you ignore second one if you're planning to do any restructuring and due to restructuring if there is any cash inflows and outflows ignore it like sir I give you a 29 example I'm planning to close down a division that is a restructuring I'm planning to close down a product is that restructuring yes so one Division if I'm planning to close down means that division will have an asset that division will have an asset now if I'm planning to close down a division means that asset will be used the same or its value will reduce reduce sir I've already done restructuring or yet to do yet to do so if you are planning to do any restructuring in future ignore all that because we are testing the empowerment check with present condition we are doing the empowerment check on present condition the way the asset is right now on that condition you do the empowerment check in future may if you're planning to do something you can do the empowerment check in future for now don't have to worry all that here D all right if you're planning to enhance the capacity of the asset in future then that capacity enhancing cost as well as extra benefit both you you can ignore like let's say sir we have a factory our Factory currently has a capacity to produce One lakh units now I'm planning to expand the factory I'm planning to expand the factory and due to when my expansion plan is completed in future this same Factory can now produce how many units three lakh units I'm assuming that means is due to expansion I'm getting same benefit or extra benefit extra benefit so if I'm planning to expand Factory means the expansion will happen just like that or I have to incur some cost also I have to incur some cost also that means all this is already happened or will happen in future will happen in future so in future may if you planning to enhance any asset capacity and getting some extra benefit all that should we consider or ignore ignore why because we are doing the empowerment check with future activity or present condition present presently is a factory capable of producing three lakh or only one lakh units one L unit so you do the empowerment check at present level not considering the future hence all this should be ignored D all right next is a discount Factor so which discount Factor should be used so you're doing empowerment check for liability or ass imp you do empowerment check only for asset not for liability only for asset the whole intention of as28 is to make sure that assets are not overstated the whole background of as28 is to make sure that asset is not overstated not liability impairment we never charge on liabilities okay so you're doing it for asset no so which discount Factory you need to use sir asset a specific pre-tax rate has to be used like if you want to buy a missionary sometimes you can buy the missionary on higher purchase system and all the higher purchase system May will will you get it at free of cost or there will be an interest component interest component they will charge interest at a specific rate that rate you use at a as a discount Factor because that is specifically related to asset and empowerment is also related to a specific asset so if that rate is missing then you use borrowing rate because if you don't have money to buy an asset what will you do if you don't have money to buy the asset what will you do borrow the money so obviously on borrowing you'll have to pay loan to the you have to pay interest that interest rate you can take first priority is asset specific rate if that is missing you can go for borrowing rate all this no need to mug up just have a quick glance through in case if it comes as an McQ you should be able to answer so FF FF we are going hope it's manageable so what if I have what if my cash flows in foreign currency sir possible sometimes you may be having an asset deployed in your foreign country and you may get some inflows in foreign currency so if you have foreign currency inflows take the cash flow in foreign currency itself I'll do as 11 also with you not today maybe tomorrow same guidance it says first you take if your cash flows if your future cash flows if it is in foreign currency take the cash flows in foreign currency itself all that cash flow is on present value terms or future value terms future value how do you find out present value by multiplying discount Factor your cash flow is in Indian rupees or foreign currency let's say foreign currency is dollars foreign currency is dollars so take dollar discount rate don't take discount rate related to Indian rupees because your cash flows is in Indian rupees or dollars dollars so take dollar specific discount factor that they will give you in the question all this we have questions in CA final I've not seen it in CA intermediate but provision is there so I I've brought it in very easy can be asked also okay so if you have foreign currency cash flows take the cash flows in foreign currency itself take the discount Factor related to foreign currency itself that means when you multiply future cash flows by discount Factor what are you going to get present value that present value of cash flow only we call it as value in use now since both these are in dollars value in use also will be in dollars but can we book empowerment loss in dollars or we need it in Indian rupees that means from value in use in dollars you need to convert it into value value in use in rupees for this you need one rate so the day you are finding value in use that day a exchange rate to use normally we do empowerment check at the beginning of the year or end of the year at the end of the year we usually do the empowerment check so usually we use closing rate closing rate means when you close the books whatever exchange rate is there normally you close the books on 31st March so the exchange rate on 31st March becomes your closing rate that rate you use and convert value in use from dollars to Indian Rupees done a okay so let's do one thing sir maybe it's a little too much so let's stop here and take up some questions and again come back to this topic because this has a lot of Concepts but I feel all this was not there in your ca intermediate before it's newly brought in from CA final so for the first one or two attempts I feel the question from these will be pretty straightforward not too complex so I I'll do a thing so we'll just recap it the only one thing two things I needed for questions sir you empowerment uh this particular as28 imp deals with empowerment loss the empowerment law you'll only charge on asset not on liability that on what assets tangible assets and intangible assets on every tangible and intangible assets will you charge impairment loss or one equation only one equation comes impairment loss Will arise what is our equation if carrying amount if it is greater than recoverable amount then only empowerment loss Will arise and how do we find out recoverable amount two ways either by selling or by using by selling whatever value you get that you call it as net selling price so net selling price is nothing but sale value minus selling cost then value in use means present value of future cash flows derived by continuously using the asset and selling the asset at the end of asset useful like so which which one to take it recoverable amount is higher of recoverable amount is higher of NSP and value in use you have to find out NSP and you have to find out value in use both let's say NSP is 10 lakh value in use let's say is 11 lakh Which is higher sir Which is higher 11 that 11 lakh becomes your recoverable am so find out both higher of the two will become your recoverable amount now can we apply this in one of the questions or a few questions Maybe no maybe we'll take up this I'm expecting easy question there's there's a question in March MTP March 2024 X purchased property plan and Equipment four years ago four years ago so four years ago you already purchased but how much have you purchased it for 150 lakh what is this 150 lakh original cost that we have written so four years you have already utilized so stop there only four years you have you have utilized the asset means you would have depreciated the asset for 4 years so calculate depreciation and they only told and depreciates it at what rate 10% on slm method so 1 lakh into 50% or 150 lakh into 10% if you do you're going to get 15 lakh that is one yeari we want one year or four year four multiply four years how much are you going to get 60 lakh so what is the carrying amount of the asset 90 LH n till here good okay come back to the question at the end of fourth year it has revalued the asset not empowerment loss they have revalued the asset can you do revaluation yeah permitted how much is the revalued amount sir 75 lakh sad phase happy phase what phase so carrying amount of the asset is 90 lakh but its market value is only 75 lakh so revaluation gain or revaluation loss revaluation loss revalued amount is 15 lakh so you got revaluation loss so first time you did revaluation before because before this no other data is given first time you did revaluation and you got a loss where will this loss go to P that's what I've written here revaluation loss to P is how much 15 LHS any problem okay that means what will be the revised carrying carrying amount of the asset will be same no Revis carrying amount will become 75 LH because you will pass one journal entry here so there is you have to reduce the asset so what is the journal entry you will pass pendl account debit to asset account whatever I'll call it as PP how much you will pass it for 15 lakh carrying amount was 90 lakh you credited the asset by 15 and its revised carrying amount became 70 5 LS till here are you okay yes I'm conducting the class at Academy itself if anyone wants to attend offline class you can come provided we have a limited number you can come down okay if space is there all right otherwise attend online itself your choice okay now go further sir uh it has written of loss on revaluation to pnl account such nice problem they are only telling everything okay great however on the date of revaluation market price was 67.5 and it is expected disposal cost are 3 lakh rupees okay all right so that means what is the market price 67.5 okay this is your selling price all right but to sell this asset they're saying we'll incur a disposal cost how much 3 lakh that means what is NSP sir what is NSP can you tell me how do you get NSP selling price minus selling cost 67.5 minus 3 lakh how much is that 64.5 is your net selling price okay what will be the impairment loss they're asking that means this is this question is dealing with both with revaluation as well as empowerment what will be the empowerment loss on the basis that the fair value for revaluation purpose is determined by market value and value in use is 60 lakh so there are a couple of ways in which you do the fair value how to find out fa you might be wondering so how is the revalued amount 75 lakh here and 67.5 here correct there are ways to find out fair value many ways are there you will it's not there in your syllabus you'll study it as IND 113 okay when you say fair value not required too much of time not there I'll not go into that we'll study in indas 113 okay so that's the reason the value is differing so you don't have to worry about that for the time being so tell me sir what is the NSP of that asset 67.5 minus 3 lakh how much is that 64.5 have they given value in use yeah they only given value in use to be 60 lakh so both you have how do you find out recoverable amount lower of the two or higher of the two higher of the two higher of both is what sir 64.5 recoverable amount is only 64.5 but carrying amount revise carrying amount is how much 75 that means carrying amount is 75 recoverable amount is 64.5 means obviously carrying amount is greater than recoverable amount so will you get empowerment loss very much yes so what is the difference between these two 75 minus 64.5 if you do you're going to get 10.5 that is nothing but empowerment law sir empowerment law go to P sir ah don't be a j impowerment loss usually goes where to pend but if this asset was revalued before and if that asset has revaluation Reserve then empowerment loss can be adjusted with RR here have you done revaluation yes but did you get revaluation gain or revaluation loss revaluation loss that means do you have revaluation reserve for this asset no that means this empowerment loss also will go off to P that's a okay come you're always happy happy talk it come no problem if you want to come down come down come at the right time that's all this is the question understood all right so there's one more question corresponding question I would like to take it up I think I'll do off all the questions then maybe going for the remaining Concepts there are a lot of Concepts that they brought in in the standard but all the concepts we don't have any question at intermediate level we have a lot of questions though are all they are all big big questions important questions very good questions are there but they're only asking in see a final theory is there in intermediate questions are being tested in CA final so probably maybe the idea of IC is to just get used get you used to something called impairment loss now and develop the concepts as soon okay so that's the reason I just do the concepts for the mean problems I will do exam related problems concept I'll discuss everything easy only but it's okay we'll see this uh this one an I said does not meet the requirement of environmental loss one second an asset does not meet the requirement of environmental loss which has been recently enacted maybe we have a missionary okay or maybe we have an Factory that is emitting a lot of smoke so environmental law is saying you are emitting beyond what is accepted level so you need to shut down the factory or you need to stop using one asset maybe we don't the asset has to be destroyed as per the law asset is carried in the balance sheet at 6 lakh So currently the carrying amount of the asset is how much 6 lakh okay the estimated cost of destroying is 70,000 now sir now now the this law May there is a favorable change in law or unfavorable unfavorable so unfavorable changes in law means is there an impairment indicator yes whenever impairment indicator is there you need to find out recoverable amount and see whether there is impairment loss or not so let's find out empowerment loss so how do you find out recoverable amount higher of two things things value and use and NSP now sir you only first of all cannot use it can you can you sell the NSP means what sir selling price minus selling cost can you sell this asset h no that mean selling price is what zero because you have to destroy that asset you can't sell it because nobody can use this asset so selling price is how much zero but selling cost is your destruction cost here how much is destruction cost 70,000 selling price is zero selling cost is your destruction cost which is 70,000 that means what is your NSP positive negative 70,000 correct NSP value in use sir can you use this asset anymore or it is banned it banned that means what is value in use zero correct because it is banned as per the loss so value in your is zero so how do you get recoverable amount lower of the two or higher of the two higher - 70 or zero Which is higher zero so obviously what is recoverable amount zero so carrying amount to 6 lakh recoverable amount is zero so that means entire six lakh is what sir empowerment loss which will go off where they do not anything about revaluation Reserve so entire empowerment loss will go where to pay the luck that easy next question cost of the asset they've given so whenever they use the word cost it means original cost so we know the fun already for impairment loss we want original cost or we want carrying am carrying am this is goalie leave that okay current carrying amount yeah this is what we need current carrying amount is how much 27.3 such nice problem they only gave recoverable amount how much 12 lakhs so carrying amount is 27.3 recoverable amount is 12 LH so obviously again carrying amount is greater than recoverable amount so do we have empowerment loss yes 27 minus 12 you do how much is that 15.3 is impowerment loss okay where will this impowerment loss go first let's read the data there was upward revaluation done last year for 14 LH so upward revaluation means value of the is increased that means we have revaluation loss or revaluation gain revaluation gain means where will we transfer that to revaluation Reserve so do we have revaluation reserve for this asset which is impaired now yes how much RR we have 14 lakh how much empowerment loss we have now 15.3 entire 15.3 will you transfer it to pel no how much was there in RR so out of 15.3 lakh empowerment loss 14 lakh will be adjusted with RR revaluation Reserve balance will go off where P account so if you want the journal entry what is the journal entry for empowerment loss empowerment loss account debit to PP account entire empowerment loss will it be transferred to pnl no if you're transferring empowerment loss to P andl the transfer entry is pnl to empowerment loss entire empowerment law are you transferring or some you are adjusting with RR so the entry will be what sir revaluation Reserve account debit 14 pendl account debit 1.3 to empowerment loss 15.3 manageable now due to empowerment loss what did you do for the asset you credited so current carrying amount was how much 27.3 you again credited the asset by 15.3 when you credit the asset its balance will reduce obviously due to why are you charging impairment loss because asset was overstated to reduce asset only you charging empowerment loss correct no so the moment you charge empowerment loss asset value will reduce how much it will become 12 lakh rupees there's nothing but your recoverable amount done now so what is your Revis carrying amount then 1 lakh rupes check the require what are they saying they're asking it should not be current year depreciation there should have been typo according to me it should be next year depreciation because normally you do empowerment check when end of the year so that means current year depreciation is already charged so according to me it's a typo or the data should be you have done impowerment check on the beginning of the year you have done the impowerment check on the first day of the year if you have done impowerment on the first day of the year then current year depreciation you need to charge they have not given any date so we'll assume that the empowerment check was done on the beginning which is doubtful because normally we do it at year end but as for the standard you can do empowerment check whenever you want because what does the standard say do empowerment check when indicator comes indicator can come at the beginning year end year mid whenever it is is that okay with you no that means tell me sir do you think depreciation will be same or it will change change why sir earlier carrying amount was 27.3 due to empowerment law now carrying amount is still 27.3 or it changed so if there is any change in the carrying amount residual value useful life then the depreciation also will change so now we have to find out revise depreciation how do you find out Revis depreciation carrying amount minus residual value divided by life or remaining life divided by remaining useful life what is the revise carrying am 12 LH residual value nowhere I think they've told it a zero I think yeah residual value is zero divided by Life Check sir initially what was the life 10 years how many years in fact they only told what is the remaining useful life they've not given life past they told remaining useful life they only told remaining useful life is three so divided by three it is given that means a depreciation will be 4 lakh rupees in the current year current year onwards you'll charge a depreciation of four lakh over how many years three more years so current year 4 lakh next year 4 lakh next to next year 4 lakh so by the end of year three the asset will get fully depreciated like that manageable okay one more we will do I think we have similar this this one question number one Ergo Industries gives the following estimates of cash flows so the moment they give estimates of cash flows what should click to your mind for what do we need estimated cash flows to find out value in use because how do you find out value in use present value of future cash flows by continuous use and by selling so whenever you're finding out value news do not forget the future cash flows and more importantly do not forget the residual value usually resident value information they'll not give it in this table they'll give it somewhere at the end students will only take cash flow and say everything I did properly Institute is not giving marks only no value use means future cash flows and residual value be careful in that discount factor is given to find out present value we need discount Factor given as 15% so we are in which year now 31st December 20x 1 future means obviously it'll be two X2 onwards so future cash flows they've given all the numbers are in lacks so check sir every cash flow same or different different so if it is different can we use shortcut method no compulsory we have to use what method PV if as in present value interest Factor okay now what are all this these are only cash flows we only need this or also residual value residual check residual value at the end of 20 X6 is th000 do not forget this so that means all of this should be considered and then only you need to find out value and use so cash flow column they've considered all this more importantly is this n now all these are future cash flows how do you find out present value multiply discount Factor how do you find out discount Factor what is that Formula 1 / 1 + I power n so basically 1 divided by 1.15 you do first year how much 8695 we going to get they rounded it off to 870 then go on pressing equals to button you'll get the respective years discount Factor then if you want for last year instead of having two columns you can add add these two and make it as 5,000 like that also if you want you can press it take the future cash flows multiply discount Factor what are you going to get present value of future cash flows add all that how much are you going to get 19025 that is nothing but your what sir value in use done now let's look at the requirement what are all they asking find out the carrying amount at the end of 20x one but more importantly check the other information there property plan and Equipment has been purchased on 11 20xx something 20 x0 we know X1 we know X2 we know what is this xxo don't know right let's leave some information we purchased the asset for 40,000 lakhs useful life 8 years NSP they only given 20,000 check what have they told here the year 20xx that is what we are confused about year 20xx is immediate preceding year before 20 x zero so we are in which year now 20 x 1 1 one year before 20 X1 is what sir 20 x0 one year before that they are saying is 20x X I am not telling read the sentence once again the year 20 XX is immediate preceding year before x0 any year before x0 they're calling it as 20x X their presentation correct so we are in which year now 20x one that means how many years is already passer XX is your year 1 x0 is your year 2 X1 is your year three so so three years we are at the end of year three do you agree with me people so we purchased the asset at the beginning of XX now we are in X1 so that means we are at the end of year three because to calculate empowerment loss sir we want what we want original cost or we want carrying amount we want in fact carrying amount at the end of year third year no third year stands for 31st December 20x one we want carrying amount but what did they give in the question they give original cost that means first we need to depreciate the asset how many have you used the asset for 3 years so take the original cost reduce depreciation for 3 years how do you calculate depreciation carrying amount originally carrying amount and original cost are same so take 40,000 minus residual value is given how much 1,000 what is the life sir originally when you purchase life was 10 years 8 years rather so 40,000 minus 1,000 39,000 divided by 8 years you do you'll get one year depreciation how many years dep how many years have you already used 3 years so multiply three how much is a depre 14625 from original cost if you reduce accumul total depreciation for three years you going to get carrying amount 25 375 that is the first requirement easy okay come to the second requirement value in use we already found out that 19 025 value in already found out next they're asking recoverable amount how do you find out recoverable amount one is value and use 19025 and then we need net selling price net selling price is given in the question to be 20,000 so that means recoverable amount is higher of those two which is 20,000 that also we found out then they're asking empowerment loss sir carrying amount is 25 375 recoverable amount is only 20,000 do you have empowerment loss yeah carrying amount is greater than recoverable amount by how much value 5375 lakhs so empowerment loss is basically 5375 lakhs n now yes people okay then they're asking you what is the Revis carrying amount so after you charge empowerment loss Will carrying amount be same or it will get revised revised what is the existing carrying amount 25 375 carrying amount will reduce by 5375 due to impowerment so Revis carrying amount will become how much 20,000 rupees D that is rice carrying next they asked what sir depreciation charge for 20 X2 we are in X1 next year if carrying amount changes means next year will depreciation be same or it will change change so we canal Cal it here what is the Revis carrying amount Revis carrying amount is 20,000 okay how do you calculate depreciation minus resal value any change in residual value or still 1,000 only still 1,000 only sir check sir when you originally bought the asset how many years was was remaining eight how many years is already over now three years already over originally when you bought it life was 8 years three years is already over so life remaining is how much 5 years okay yes people that means depreciation will be 38 n now sir no sir this is for end of year four no sir so if you count from end of year four to end of year eight life remaining is only four years no sir why you took five sir for life no sir don't calculate the life from the end of the year life you always calculate from the beginning of the year like here when you buy the asset when you buy the asset let's say you bought the asset you're planning to use it for 8 years when you buy the asset you bought the asset in year one okay and you're planning to use the asset for how many years 8 years so you charge depreciation when so end of year sir so don't count from year one ending to year eight ending because if you count how much you're going to get year one ending to year eight ending if you count one year is already over 2 3 4 5 6 7 eight you'll get only seven years that means first time when you calculate depreciation will you consider seven or you can take eight eight so you should always take the life you should count not from year one ending you should count from year one beginning because you bought the asset at year one beginning from year one beginning the asset will last for year one ending now count how many years 1 2 3 4 5 6 7 8 like that you need to count the life done now so here we are calculating the depreciation for year four when will the depreciation asset get get over end of year eight so year four beginning to year year eight ending you count here will be what year four year five year six year seven year eight how many years life is remaining five years like that okay some of them had asked this doubt previously in the app so I remember that so I asked that okay don't count to find out remaining life don't count counted from the end of the year count always from the beginning of the year we charge depreciation at the end but we have used the asset from year four beginning no that's the reason you should count it from the year four beginning okay so these are the questions which has been asked or I feel is important from this particular topic so number wise we have done everything few concepts are there quickly we'll run them over and then we'll take a break much awaited break if you want it or if you don't want bra you can continue okay so next sir one concept is there of cash generating unit thank you thank you so much okay uh next there's a small concept of cash generating unit what is this is Sir to find how do you find out recoverable amounts either by selling or by us using by using how much benefit you will get by selling how much benefit you'll get get higher of the two you take it as recoverable amount now take this only our own Academy for instance we have laptop we have TV we have AC let's take uh probably TV as an example I want to know whether the TV is impa I want to know that that particular Smart TV is impa okay that means I need to find out the recoverable amount for that TV okay now you tell me how much benefit will I get from the TV because how do you get value news present value of future cash flows from continuous use and residual value residual value okay I can tell because I have an active Market somehow you can find out how much benefit I will get every year can I calculate that this TV this laptop this camera this AC can I find out individual benefits no because they don't generate individual benefits because the benefit is what sir class as a whole class if you conduct class Academy will get benefit that means to conduct class we need TV also we need laptop also we need camera also we need mic also that means only when I use all the assets together then only they will generate benefits individually will they generate benefits no only when they come together only when they are used together then only they will generate benefits that means if they don't generate individual benefits how will you find out value in use because for you to find out recoverable amount you need value news if they don't generate individual benefits that mean value news you cannot find out recoverable amount of the asset you cannot find out that means empowerment check you cannot do understood so that means there is a lock there locks in a scenario hence they introduced a small concept called Cash generating unit cash generating unit means they understood that there are many assets individually they will not generate benefits When when they are used together will they generate the benefits no that means now they are saying you do the empowerment check not at individual level you do it at group level you're saying you're getting getting benefits group of assets no do empowerment check at now group level that group only fancy name is given called Cash generating unit cash generating unit means smallest group of identifiable assets which can generate independent cash flows all right so you find out you do the empowerment check at cgu level now cgu means cash generating unit so drama is still the same how do you find out uh empowerment law you need carrying amount you need recoverable amount now you're doing carrying you're doing empowerment check at individual level or group level that group only we calling it as cgu that means now we need carrying amount of cgu we need recoverable amount of cgu if carrying amount if it is greater than recoverable amount then we say cgu is impaired individual assets cgu is impaired like this fine this is what we need to do so cgu means it'll have one assets or many many assets many assets that means let's say you got empowerment loss of 10 lakh you have a planted missioner also you have software also and you have an building also that means this cgu has three Assets Now how much is the empowerment loss you got it for group 10 lakh that means this 10 lakh has to be allocated to all the Assets in what ratio in their carrying amount ratio so if you find any uh impowerment laws related to cgu that you distributed all the assets in what ratio sir in their carrying amount ratio done now but one second before you do this a portion there there is one tricky guy called Goodwill there is one guy tricky guy called Goodwill now sir is Goodwill really an asset or a balancing figure it's really a balancing figure which as14 said account it as Goodwill you paid more why you paid more even you don't know even we don't know hence as14 is saying account it as Goodwill now you tell me I asked you the question I have a Goodwill of one will you buy it no sir no that means will Goodwill generate individual benefits no Goodwill empowerment check should always be tested at cgu level Goodwill never generate individual benefits that means Goodwill should always be tested Goodwill empowerment should always be done at what level CG level same goes for your corporate assets also corporate assets means like here sir we have a classroom let we are doing classes in this right let's say we have another corporate office which we have like that we don't have just an assumption we have a corporate office let's say in UB City in UB City one of the poshest buildings probably in Bangalore we we have taken a corporate office where our CEO CFOs and sit in chai Pani PK they take decision which teacher to hire which teacher to fire uh uh when we should conduct the class how much how we should charge the fees all this decision is taken in that head office building now we do we take any classes in that head office building no classes is done at the Academy Academy is there in Kora mangala right but head office building is there in another another another area now will that head office building give us any benefit to the academy no because benefit you'll get when you conduct class will I do any class in that head office building no that means that head office asset that is also asset let's say we have purchased it that means that is our asset will it generate individual benefits no that means even corporate assets should be tested for empowerment only at the cgu level there are two assets which should be compulsorily tested at cgu level one is Goodwill another one is Corporate assets okay for that first unit cuu means what sir cgu means group of assets so you should have only one group of assets or many many group of assets also you can have many group you have let's say we have two cgu cgu 1 cgu two we have two cash generating units sir we have Goodwill of five lakh now the question is Sir Goodwill we should allocate to cgu one or cgu 2 question will tell that so if Goodwill relates only to cgu one you allocated to cgu one alone or some problems may they will say Goodwill relates to both the cgus in that case may we allocate Goodwill to both the cgus so allocate and then do the empowerment check allocate Goodwill to the cgu and then do the empowerment check same allocation rule will hold good for what sir corporate assets also that is one all right now you tell me is Goodwill really an asset or dummy asset dummy asset hence what as28 Sayes if you find that any cgu is impaled if you find that any cgu is impaled maximum empowerment loss first you give it to this Goodwill Bud maximum first loss is allocated to which Budd good Goodwill suppose your cgu was imparted for 10 lakh Rupees Goodwill value is let's say 4 lakh that means out of this 10 lak empowerment loss how much empowerment loss will you give it to Goodwill the maximum possible how much is Goodwill balance four lakh so out of this 10 lakh of impowerment loss 4 lakh will be allocated to what sir Goodwill balance six lakh only you will give it to what other assets what are the other assets in the group I assumed planted machinary software and building so this is six lack will be allocated among planted machiner software and building in what ratio in their carrying amount ratio okay soel like this this is a fun understood this also may get asked I mean we these are all very very good questions but these are not to be learned theoretically these are to be learned with numbers but unfortunately at C intermediate we don't have any questions based on this hence I'm going at A Min surface level but an McQ question may be asked manageable give me a recap again what is this now C means what sir why first of all why there a cgu concept because some of the individual assets don't generate benefits so but when they come together when few assets come together they'll generate benefits so cgu means what sir that group of asset smallest largest smallest smallest c means the smallest group of asset which can generate individual benefits now you're doing the empowerment check at what level individual level or group level group level that means we want carrying amount of cgu we want recoverable amount of cgu that way you will get whether empowerment loss is there on cgu if at all any cgu is owed maximum possible loss first you give it to Goodwill because Goodwill is not really an asset it is a dummy asset accounted as per as4 after that if any balance empowerment loss is there means give it off to other assets okay in what ratio in their carrying amount ratio but one checkpoint they've given is Sir when you charge impairment laws we studied all this when you charge impairment laws what will happen to carrying am it'll be same or it'll reduce it'll reduce they said for reduction also they brought in a lower limit for reduction also they brought in a lower limmit they said after impair after charging impairment loss on CG don't make the asset value as negative like here sir now this six lakh empowerment law you are giving to three what are the three assets plant software and build okay let's say you allocated and you got the plant to be three lakh software to be let's say 2 lakh and building to be one lakh sir soft this is the empowerment loss you allocated correct sir carrying amount of planted machiner is 5 lakh any problem no carrying amount was 5 lakh empowerment wases three lakh no problem carrying amount of software was let's say only 1 lak 90,000 sir assumption carrying amount of software was only 1ak 90,000 how much empowerment loss are you giving 2 lakh that means now carrying amount will become negative this is not acceptable okay after you allocate empowerment loss any asset carrying amount should not become negative or in fact they have set a lower limit it should not come below three things one is zero it should not fall below zero meaning it should not fall below zero means it should not become negative or it should not fall below recoverable amount how do you find out recoverable amount value news and NSP so these are the three limits just remember this quickly very very very good good question you'll learn it in the next level or if they add it later on I will also cover till then I will also not bother F now so this can come as an easy McQ as a theoretical question so once again tell me sir after you allocate the empowerment loss to cgu cets cgu assets carrying amount should not fall below a lower limit what is that lower limit recoverable amount how do you find out recoverable amount NSP and value in those are the two limits then it should not fall below zero meaning it should not become negative like this done work this is one next sir can you reverse empowerment losses sir can you charge impairment loss yeah can you reverse impairment loss yeah so when did you charge impairment loss when there was an impairment indicator when impairment indicator came you charged impairment loss now that indicator if it is no more there or if its effect has reduced means impairment loss can also be reversed like earlier when covid happened due to covid was the company able to use their Factory and all to same extent or very less extent that means when covid happened it was an impairment indicator you would have booked empowerment loss later on when covid vaccine came what happened to the covid car effect was it same or reduced drastically so that means when covid vaccine was introduced that is what that is an indicator that impairment indicator has reversed so if impairment indicator is no more there or if its effect has reduced means whatever impairment loss you have charged earlier can also be reversed so charging impairment loss reversal of impairment loss both are acceptable like that comfortable law work sir now sir how will you reverse impairment law sir for that first you check whether are you charging did you charge impairment now you have two concepts whether are you charging impairment loss on individual assets or CG possible no when will you go for C when will you go for individual asset when will you go for cgu tell me sir when will you charge empowerment loss on individual if individual assets are generating independent benefits means charge empowerment loss on individual basis if they are not generating independent benefits means charge it at CG level like that so earlier if we had charged empowerment law on individual assets earlier if you had charged empowerment loss on individual assets where you would have charged empowerment loss to per first either you would have adjusted with RR or if RR was not there means P so if impairment loss was initially adjusted through RR means reversal also should happen through RR reversal means Ulta no earlier if you have adjusted with RR means now empowerment reversal also you should adjust with RR like that earlier if you transferred empowerment lost to pendel means reversal also will happen through pend like that whatever you had done you need to undo if you transferred through RR now also reversal through RR if you transferred empowerment loss to p means reversal also through P like that D sir sir when you charged empowerment loss what happened to the carrying amount when you charged impairment loss carrying amount of asset will reduce when you reverse impairment loss carrying amount will increase so for charging impairment loss there was a lower limit what was that lower limit again for C what was the lower limit Val value news NSP and zero that was a lower limit for reversal also there is a lower or upper limit there's an upper limit because when you reverse impairment loss carrying amount will increase hence they said there is an upper limit for that also what is the upper limit is if you had not charged impowerment loss from the beginning what would have been the carrying amount up to that level you can bring the new carrying amount beyond that it cannot increase okay now let's say the carrying amount is 10 lakh Rupees okay you want to reverse impairment loss of 5 lakh rupees that means what will become the Revis carrying amount sir existing carrying amount is 10 lakh now you want to charge impairment loss or you want to reverse empowerment loss reverse sir when you reverse empowerment loss carrying amount will reduce or it will increase increase that means what will be the RIS carrying amount 15 LH but blindly can you write or there is an upper limit upper limit what that upper limit standard says is so initially have charged impairment loss no so you rework if impairment loss was not charged at all if from the beginning if impowerment loss was not there at all means what would have been the carrying amount if empowerment loss if you had never charged in your life what would have been the carrying amount let's say if impowerment loss was never charged means carrying amount will be 15 lakh assump uh carrying amount is 13 lakh assumption what the standard now say is this what is this 13 lakh upper limit this 13 lakh is a upper limit that means a revised carrying amount maximum will be what sir 13 lakh 13 lakh meaning you cannot take the carrying amount Beyond 13 LH maximum you can bring it up to how much 13 lakh so how much is the how much is the empowerment loss 5 lakh that means entire 5 lakh can you reverse no from 10 lakh your Revis carrying amount maximum can become 13 lakh that means maximum reversal of empowerment loss is only three lakh how much impairment loss have you charged before five L entire empowerment loss cannot be charged cannot be reversed because there is an upper limit like this understood what did you understand tell me in one line word I know uh in one sentence probably so can you reverse empowerment loss yes when can you reverse if indicator has reversed then empowerment loss charged earlier also can be reversed so full amount can be reburst no no no no there is an upper limit what is that upper limit if you had not charged empowerment loss from the beginning then what would have been the carrying amount up to that extent only your revised carrying amount can reach not beyond that here existing carrying amount is how much 10 if you had not charged empowerment loss what would have been the carrying amount 13 lakh that means from 10 lakh you can bring it up to not beyond that that means how much can you reverse 3 lakh but how much empowerment laws have you charged earlier 5 you have charged 5 lakh but you can reverse only 3 lakh because of the upper limit restriction understood okay this is for what sir individual assets but you can also charge impairment laws on cgu okay so if you have charged empowerment laws on cgu that means reversal also rules should be there for cgu okay so now come back and tell me sir if you if cgu was impaired first you give impairment loss to what do it if your cgu was impaired means first impairment loss you give it to Goodwill then to the other Assets in carrying amount ratio reversal means order should be Ulta so can you when you R the reversal of empowerment loss reversal will be first given to what other Assets in their carrying amount ratio and Goodwill at the end in fact reversal of Goodwill is not permitted as per indas as per as it is permissible under two exceptional circumstance which I'll come to it in a bit okay so first you will reverse through to which to which assets other assets and then finally if required to the Goodwill now when you charged empowerment loss carrying should not fall below certain three things that only we said lower limit tell me once again what is the lower limit value News Net selling price zero right that means when you reverse empowerment loss also there should be an upper limit upper limit also same sir one upper limit you already know tell me what is the carrying amount or what would have been the carrying amount if you not charged empowerment loss at all that is one and recoverable find out both of them lower of the two will become your upper limmit find out both let's say recoverable amount of the asset is 1 lakh if impairment loss was not charged at all carrying amount would have been 80,000 which is the lower of the two 80,000 that means Revis carrying amount can only become 80,000 it cannot go beyond that okay this is one extra fitting here recoverable amount okay because what happens why have they bringen recoverable amount is some methods like here to give you a small example so let's say we have two planted missionary planted missionary number one planted missionary number two sir planted missionary number one sir it can generate independent benefits it can generate independent benefits meaning how much benefit you are getting from planted missionary one clearly you can tell that means do we need to do empowerment check of planted missionary level at cgu level or individual level individual level but plant in missionary number to M it is does not generate independent benefits okay that is the thing all right now you tell me sir what is a drama this plant and missionary one can generate independent benefit but can it generate this can generate independent benefits or no that means these two will become cgu okay now sir do you know the recoverable amount of this planted Machinery yes do you know the recoverable value of this m Machinery no that's the reason both the limits are there for CG that's the reason two limits for reversal do you understand so what are the two upper limits recoverable amount or carrying amount if empowerment loss was not chared from the beginning like that lower of the two will become your upper limit that's a reason because this combination would work okay that means what sir here both the assets will be treated as one cgu and you will do the empowerment check only at cgu level even though planted Machinery number one can generate independent benefits because of planted machiner number two culprit both will become one okay very good question is there based on this CF potential 10 to 15 Mark lot of working not will all right to part two will be given part don't worry about part two we will upload part two again once the video all the session is completed we'll merge everything and we'll make it one part so that you don't ask us part two part three part four that question only we will eliminate and we'll make it only one video One video of 25 hours or whatever it is we'll merge it and upload it but give us some time for that all the session should be over by Friday I'm expecting that that video should be available okay right now if you want it means watch this video okay on a real time basis this is available I like that okay saru this is one one last one is that then we'll take a break what is that sir uh continue sir sir Goodwill no sir Goodwill I told can it generate independent benefits no what you have to do Goodwill you have to allocate okay so check whether Goodwill can be allocated to cgu problema will specify this first check can Goodwill be allocated to cgu if Goodwill can be allocated to cgu means we do only one empowerment check we call that as bottom up test not Bottoms Up only bottom up test if Goodwill can be allocated to cgu we do only one test called what sir bottom up test bottom up test means can you allocate Goodwill to cgu yeah only that CG empowerment you or that c empowerment check you only that c empowerment check you do that that only we call it as what sir bottom up test clear sometimes in the problem they will say Goodwill we cannot allocate to the cgus Goodwill cannot be allocated to the cgu if that is the case means you need to perform bottom of test also top down test also you need to perform bottom up and top down test bottom up test means what sir checking whether cgu is only empired or not to check whether cgu is empired or not only that if you are checking means we call that as a bottom up test top down means sir now here this is a company this is a company and under company only you have cgu main company under company only you will have cgu who comes at the top company who comes at the down cgu if you're doing bottom up test means you are doing the empowerment check only for cgu if you're doing top down top up test means what sir if you're doing top down test means we are doing the test for overall company so we are trying to do if overall company itself is impaired that's the thing you will do the stop down test when if Goodwill cannot be allocated if Goodwill can be allocated means you do the empowerment check only for cgu and that a test we call it as bottom up test if Goodwill cannot be allocated you have to do a test at overall company level you have to check whether cgu is impa as well as overall company is impact I mean you need to do bottom up test also top down test also we done one question in our regular class that was an example in study material I don't see much relevance of this so I not do that there okay regular class may you have done that problem okay s g yeah this is overall about yes you know just about the meaning I feel bottom of test it may come I don't know okay right now it's revision so I can't cover every question I can only tell the meaning okay if you want regular class if you want everything means I think you should not be looking at revision video should be buying regular class like that okay so now so with this I think all the question relating I think maybe one more I told you sir normally reversal of impairment loss is not allowed normally reversal of impairment loss is not allowed but under exceptional circumstance impairment loss on Goodwill you can reverse why it is is so suppose Goodwill is 1 lakh rupees okay now you charged empowerment loss of 1 lakh so what is the carrying amount of Goodwill what is the carrying amount of good will Zero okay now let's say you want to reverse impairment loss let's say you do a reversal of impairment loss of 50,000 in that case may what will be the carrying amount of Goodwill sir it'll become 50,000 now sir this Goodwill of one lakh came as part of as14 business purchase now this 50,000 what you are adding did you do any business combination did you do any business purchase no that means this amounts to what Goodwill self-generated Goodwill so so should you account to this no hence IND C final says never I will never allow you to reverse that's what who says ca final IND we are in which stage CA in inter stage you know what our accounting standard says I will allow I will allow only under rare circumstance so they have given two circumstance that is a rare circumstance under rare circumstance may I will allow you to reverse what is the rare circumstance one the empowerment loss should be due to an exceptional EXT internal event like Co the empowerment loss only came due to once in a blue moon activity so rarest of rarest event example could be Co now reversal May subsequent events have occurred which reverses previous event effect you can reverse empowerment loss provided subsequent events have occurred which will reverse previous event effect now when covid came people were scared now when covid vaccine came they're walking on each other full bye- bye bye bye ah full yes no obviously that fear went off correct or not so when covid vaccine came what about the covid effect is it same or gone gone so in this case may this is very exceptional event no rare event in this case may reversal of empowerment laws accounting standard 28 permits don't write c a final answer when you come to c a final write c a final answer okay I give you a little bit of clarity in my opinion it should not have been allowed at all but forget about what I think our mother body what they think is important and what does our mother body say can you reverse yeah only under a rare circumstance okay that so write the same answer okay G awesome G session completed G so we'll take about uh 15 minutes break okay then we will resume I have another two three more standards to be covered today so 15 good let's take about 15 minutes break and then come back people thank you yes people welcome back after that short break so next we'll be taking up accounting standard 11 which talks about effects of changes in foreign exchange rate or in Lon terms if you have done any transaction in a foreign currency if you have done any sort of a transaction in foreign currency how to account them ASL will basically give the guidance that's all is the scope of ASL for Indian currency transaction you don't need ASL only for foreign currency transaction you need ASL gu so before you go into the conversion line first you need to identify what sort of a component things are meaning whether the item that you're dealing with is a monetary item or a non-monetary item monetary item we already know monetary item means those components whose value is fixed that is our language standard uses monetary item means those items whose value is expressable in fixed denominations of currency any any item who expressible in fixed denomination of currency meaning in lmon terms value is fixed and it need not be fixed in Indian rupees only value could be fixed in any currency mon monetary item means value fixed in any currency is what we refer to as monetary item or value does not change as in value is fixed like if I have th000 rupes cash the value of that is what 1,000 rupees only yes that means value is fixed so if you have 10,000 rupes at bank will that money change or same same Al so cash in hand cash at bank datar if I have to receive one lakh rupees from my datar datar will pay me one lakh only so the datar value credit our value is fixed loan taken loan given all these are examples of monetary item so how loan sir on loan you will pay interest no sir no when we talking about loan no sir what you will show in balance sheet the princi principal value of the loan if you have taken principal of 10 lakh from the bank how much principle you will repay 10 lakh only that means the principal value of the loan is fixed so hence the loan taken loan given also we classify it as a monetary item non-monetary item means those items whose value fluctuates meaning value changes the examples could be your property plan and Equipment if I buy a laptop for 1 lakh rupees forever its value will be one lakh or it may change usually value reduces or sometimes rare cases may it may also increase but basically value fluctuates so PP intangible assets inventory investment in equity shares all these are non-monetary items so why do we need to do this okay they're saying 10 to 4 is comfortable okay fine I will just discuss on this at the end first let's cover of this for the time being okay all right so first you need to know whether it is a monetary item or a non-monetary item that is one all right now sir doesn't matter whether it is monetary or non-monetary item initially all foreign currency transaction are recorded at transaction date spot rate initially whatever transaction you're doing whether it is a monetary or a non-monetary initially all transactions are recorded tdsr tdsr means transaction date spot rate all settlements doesn't matter whether it is monetary set item settlement or non-monetary item all settlements are done at settlement datea spot rate or sdsr in between this transaction and settlement if foreign currency items has a balance then that balance needs to be converted like just to give you an example uh let's say on first March 2024 you sold Goods to datar sold Goods to datar worth $10,000 okay so this is a transaction so transaction you don't have to worry if a transaction has happened means all the transactions are recorded initially at what rate tdsr as in transaction rate spot rate let's say on this rate on 1st March $1 was equal to Let's say 880 rupees then $10,000 you'll convert it into Indian rupees by multiplying it as 80 that is it is that okay now let's say on 1st May 2024 you'll receive money from your datar because you sold it you received $10,000 $10,000 received this is a settlement settlements will be recorded at settlement datea spot rate let's say settlement datea sdsr as in settlement de spot rate was $1 is equal to 82 rupees set settlements will be done at that value now in between this transaction and settlement check one important date is there can 7 poter what is that yeah on 31st March 2024 your year has ends and have you collected money from your datar or still outstanding so datar is still outstanding correct no that means this foreign currency item has a balance right how should that foreign currency item be shown in the balance sheet if at all it has a balance that is a whole drama all transaction at tdsr settlement at sdsr between between this transaction and settlement if any foreign currency item has any balance at what value should they be shown in balance sheet is a whole Crux but for that first you need to check whether that foreign currency item balance is a monetary item or non-monetary item now here you tell me datar has a balance datar is what sort of item monetary item so what as1 says is all monetary items should be shown in your balance sheet using closing rate all monetary items should be shown in your balance sheet using closing rate closing rate means when are you closing your books 31st March the exchange rate on 31st March because what we refer to as closing rate let's say exchange rate was 81 exchange rate was 81 sir initially when you converted this no when you passed the journal entry you converted at what value transaction was recorded at 80 that means currently the datar is shown at what value 80 datar is currently converted at 80 and it's being reflected in Indian rupees correct no but what does as1 say all foreign currency items which which a monetary item which has a balance should be shown in your balance sheet using closing rate that means the datar should be shown by converting at what rate 801 but you have currently converted it at 80 that means there will be some gain or there will be some loss yes or no that exchange gain or loss on monetary item standard says transfer it off to P account I'll take you through one full-fledged question also don't worry about this fine now understood the meaning okay this is a foreign currency balance relating to what item monetary item however if you have any non-monetary item means non item means it could be your property planed equipment or your inventory etc etc so first to check how is this non-monetary item value for valuation of non-monetary item will you apply as1 or respective standards respective standard like PP is valued under as 10 inventory under as2 first check how is this valued under and as per as2 for PP either you can go for cost model or revaluation model same inventory is valued at cost or NRV whichever is lower first first check how is that non-monetary item valued at if at all you say it is valued at Cost then on the transaction you already converted into Indian rupees no further remeasurement is necessary on the transaction you already converted into Indian rupees same value of the asset you show in balance sheet and depreciation all is normal item is that okay no further conversion is necessary already you have converted same thing show in your balance sheet that will be applicable for those monetary item value that cost however if these non-monetary item if it is valued at any other basis like fair value value or NRV then when will you usually find out the fair value or net realizable value at the year ending so the day you found out this fair value or NRV that data exchange rate you use and reconvert that data exchange rate you you you use and reconvert meaning here in this case may remeasurement was not necessary but here may remeasurement is required is that okay and when will you remeasure or which exchange rate will you use the exchange rate you will use is the day you found out fair value that a exchange rate has to be used and usually fair value NRV and all will be found using what rate at what what date year ending so basically here what exchange rate will be usually used closing rate is that okay that means you will get some gain or loss because tdsr may be something else this exchange rate may be something else possible sir exchange fluctuates so you'll get gain or loss the gain or loss should be as per respective as the gain or loss should be as per respective accounting standard like what does accounting standard say when you get revaluation gain where will you transfer revaluation gain to revaluation Reserve that means here also reev here exchange gain also should be transferred to revaluation Reserve in case of inventory inventory if inventory is valued net realizable value that loss will be transferred to PN that means any exchange gain or loss on inventory will be transferred to PN that's what we mean by respective as this is not tested much in our intermediate you may you will find some problems in CF finding for now we don't have any one I don't I'm not seeing any question one question also in this in the IC study material on this concept but easy only okay no sir this is about monetary and non-monetary item one quick summary what is this now all transaction doesn't matter whether it is monetary or non-monetary item initially at transaction date cost spot rate as in tdsr all settlements of monetary and non-monetary item at settlement date cost spot rate sdsr in between transaction and settlement if mon if components have balance then you need to check whether those components are monetary item or non-m monitary it monitary item will be restated using closing rate meaning you will get some gain or loss which will trans be trans off to PN non-monetary item if it is valued at cost no further remeasurement is necessary because you already converted using tdsr initially let that continue however if it is Valu at any other basis like fair value or NRV the day that fair value or NRV was determined that data exchange rate you use and reconvert meaning remeasure meaning you will get some extra gain or loss that will be as per respective accounting standard okay now let's do a thing let's quickly apply this whatever we have learned in one or two questions then we'll go for the other parts that way it's easier you are required to assertain gain or loss to be recognized in the financial year 20 X1 and 31st March 20 X2 two years again they're asking as per accounting standard level Goods purchased on 1st January for us doar 15,000 and that day exchange of 75 okay sir when you purchase the goods what's the journal entry because payment is made on 7th July you purchased on 1st Jan and payment is made on 7th July so what kind of a purchase obviously it's a credit purchase what's the journal entry for credit purchase sir purchase account debit to credit our account this is a transaction all transaction should be recorded at what rate transaction date spot rate how much is a dollars $115,000 and $1 was equal to how many Rupees 75 so if you confused whether to multiply or divide some students have that whether should be multiply or divide what you can do is use the X method okay like here dollar and here INR so they said $1 exchange rate per dollar so $1 is equal to 75 rupees not me they telling yes no Exchange rate per dollar so $1 is equal to 75 rupees how many dollars have you purchased it for $115,000 so $155,000 how much what how do you get X here 15,000 into 75 that means exchange rate we have to divide or multiply multiply like this one if you do you'll automatically get to know that everywhere we have to multiply so what's the journal entry for credit purchase purchase account debit to creditor 15,000 into 75 why 75 or what is the 75 tdsr transaction dat qu rate so we converted this that's what I've written here also TDS done now correct people okay now when are you paying this amount 7th July so that means this is your settlement settlement will be recorded at settlement date spot rate but between transaction and settlement are you getting year ending date yeah year is ending on what date 31st March 20 X1 and what does the standard say all monetary item should be shown in the balance sheet at the closing rate when are you closing your books 31st March on 31st March what is the exchange rate 74 happy phase or sad phase happy phase or sad phas sad phas uh-huh happy face happy face not asking your personal modood I'm asking in this scenario happy or sad happy happy sir why happy sir so you purchase the goods that means you have to pay the Creditor you have to pay it in dollars if you have to pay it in dollar means first you need to purchase dollars and then only pay so on the day you did transaction to buy $1 you had to give away 75 Rupees to purchase $1 how much of Gandhi note you had to give 75 rupees now on the year ending date that is on 31st March to buy $1 you need to just pay 74 you don't have to pay 75 only 74 that means you're paying more or less less less means obviously we'll have a happy face so it's a gain correct all right so now sir or one more way if you want to look at it credit R should be credit R is a monetary item this credit R is a monetary item monary item should be shown in the balance sheet using closing rate that means it should be shown in our books at closing rate meaning it should be converted at 74 but we have converted at 75 that means credit R is shown less or more initially we have converted at 75 but it should be converted at 74 that means credit R is currently shown more which we need to reduce like that so credit R has credit balance how do you reduce it debited so the journal entry will passes credit ours account debit you have converted it at 75 but required is only 70 four that means how much extra one one for how many dollars $15,000 so multiply 15 you're going to get how much $15,000 15,000 rupees this is is that okay all right or you know that exchange gain exchange gain means you will gain means income no sir nominal account rule says income should be debited or credited credited so obviously exchange gain your credit means what will you debit the residual value which is credit like that also you can visualize one component if you get other one you can get it as a balancing figure so the journal ENT is credit ours account debit to exchange gain and that exchange gain where it will go off to P how so sir why can't we write bank and all we can't write bank and all because are you receiving this gain or bookish gain bookish gain because standard is asking us to show the monetary item at closing rate on reconversion you are getting some gain or loss this is a bookish gain or loss to be transferred off to p and account like this and we have that's what I've written here CR C stands for closing rate because monetary item should be shown in a balance sheet at closing rate that's the reason done or if you want another way if you don't want all this drama so credit R should be shown at closing rate what is closing rate 74 74 into 15,000 you how much is that 74,000 or 74 into 15 is how much that means currently credit R should be shown in balance sheet at 11 lakh 10,000 currently it is shown at what value 11 lakh 25,000 it has to be shown at 11 lak1 but currently you are showing it at 11 lakh 25 that means you have shown more by 15 reduce credit RS credit balance to reduce you will debit so the entry will be credit RS to exchange G that easy okay so that means closing rate is done next did you do any settlement yeah 7th July may you did a settlement meaning you paid any payment any settlement for all settlements doesn't matter whether your monetary item you are settling non-monetary item all settlements are recorded at settlement date spot rate how many how many dollars you need to pay 15,000 and what is settlement dat C part rate 73 still more happiness why now we can purchase $1 just by paying 703 what's the journal entry for credit RS paid credit account debit to bank account currently what is my balance in credit 11 lakh 10,000 so that means the journal entry is credit ours account debit 11 lakh 10 yes to bank account to bank account how many dollars I need to pay $5,000 but to purchase $115,000 how much money will be deducted from my bank account to one to buy $1 we have to give 73 Rupees to buy $15,000 how much you going to pay 10 lak9 5,000 yes sir we thought we have to pay 11 lak 10,000 ultimately the payment came to only 10 lak 95 we paid less because creditor gave a discount or exchange gain exchange gain so balance is due to exchange gain that will be transferred again where sir to P there's a settlement settlement recorded at settlement date spot that's sir what about this purchases sir so you purchased Goods Goods is an inventory inventory is a monetary or a non monetary item no inventory inventory inventory you'll always sell it at confused means think inventory you'll always sell it at same value no that depends on the market condition if the market condition is good we will put topy to the customers or we ourself will become bakra like that okay so it is all depending so inventory value whatever we sell depends on the market condition that means value of the inventory fluctuates so inventory is an example of what item non-monetary item and what does the standard say non- monetary item check if it is valued at cost or NRV here have they told inventory is valued at NRV no that means it is valued at cost if it is valued cost means is there any further remeasurement necessary no further remeasurement is necessary because I've already converted to 112,000 no this is what 112,000 is dollars or rupees rupees you already converted so further conversion is not necessary like this so only monetary item further conversion drama comes into picture non-monetary no such drama next question question okay all right so now you think due to exchange exchange difference company could end up paying more or they could end up paying less now you would tell me that is a risk big risk only correct because many companies know sir they will they are like 100% export oriented units they don't sell their products in India at all they only sell it in abroad that means sir if Forex Forex G fluctuates too much either they will be very very very happy or very very very very sad that means what sir for no mistake of of that they may get more money or very less money do you think companies would like to take such a risk business risk people take whether I will be able to sell the goods or not is a risk we can accept like I'm doing coaching now whether people will like my classes whether they will attend my classes or buy my classes is a business risk which I'm ready to assume okay but this is business risk or exchange risk exchange risk other than this business risk we would like to take exchange risk no hence what the companies do is they get into some contract to hedge to mitigate this risk to reduce this risk they get into some contract that we call it as forward contract we enter into something called forward contract through which this risk can be minimized you know what if we do in forward contract we'll go to a banker and say exchange rate can become anything 80 85 90 I don't want that headache freeze one rate for me meaning fix one rate for me you'll tell the banker fix one rate for me okay whether it is high or low I don't care you I want you to fix it okay Banker will say no problem I'll fix it that means now exchange gain or loss headache whom did you pass it on to Bank as far as you are concerned let's say you freeze the rate at 85 you freeze the rate at 85 whether the dollar rate becomes 8 4 you care or you don't care you don't care because you will always B get how much on $1 either you will pay 85 rupees or on $1 you always get 85 rupees it may because forward contract you can make it to purchase the dollars or sell it okay so like this your rate is already fixed which is what sir 85 like this who is taking the risk now banker and Banker main function is to give out this foreign currency loans also so they have necessary expertise to mitigate this now le why they do that and all that's one of the main business of banks they do that but think logically will Bank do this at free of cost or they will also keep some Commission in there Commission in there okay so means bank will also do you think if market May if the rate is going at 86 they will give you at 86 only or no they will give it to you at a lesser rate if you want to sell means they will give you more rate or lesser rate let's say okay I'll do a thing so okay no problem forget about that it's fine so let's look at it this way basically will Banker give you the market rate of dollar or little more or little less little more or little less because Banker also wants to make some profit more or less depends on whether you're purchasing dollars or whether you're selling so come to this example so basically the whole funai is what we don't want the Forex risk that's the reason we enter into some contract known as what sir forward contract basically forward contract is entered to mitigate the risk okay now check this particular case study raal limited purchased a plant for $1 lakh on 1st February 20 X1 so they purchased a plant but did they buy it in INR or they import it probably they import it that's the reason the billing is in dollars that means ra limited has to settle this money in rupees or dollars so they have to buy dollars and pay that particular foreign company how many dollars they need to purchase $1 lakh okay now sir okay and this is payable after how they they purchased it on 1 February but they have to they have to pay the money after 3 months after three months dollar could rate could be anything it may increase it may reduce we don't hence what did the company do ra limited what did they do company ra entered into a forward contract forward contract is a rate through which is a contract through which what did you do you freeze the rate so that you don't want to take that exchange risk a headache so they enter into a forward contract for three months at what value 4915 so they've entered into a forward contract with the bank saying no matter what after 3 months I will buy dollars on to one to buy $1 how much we will pay as a company 49 rupes 15 p $1 we will purchase by paying 49 rupees 15 P exchange rate may be 50 40 45 anything doesn't matter we will buy $1 just by paying 49.1 understood the exchange rate on 1st February the day we made it enter into forward contract what was the market rate of dollar sir to buy $1 you had to just pay 4885 to buy on the day you made forward contract to buy $1 you have to just pay 4885 but the banker give you 4 8.85 or he charged more charged more because difference is Banker commission for Banker it's an income for you it's a loss like this so that is the only loss you will suffer in forward contract exchange gain loss will not come because for you the exchange rate is already fixed which is what $1 is equal to 4915 but for you there will be one loss the loss that you enter into to get into a forward contract you have to pay some money to the banker that is Banker commission which is his income for you it's a loss understood so okay fine how will you recognize the loss on forward contract is what they're asking so can you tell me on $1 how much is a forward contract loss market rate of the dollar was only 48185 to buy purchase $1 you had to pay just 48.8539483 five so how much extra the banker is charging on $1 30 P 30 p is charging on $1 this contract is for $1 so $1 lakh for $1 the loss is 30 P for $1 lakh how much 1 lakh into 0.3 how much is that 30,000 R this is what sir commission for the banker income for the or commission income for the banker loss for the company so 30,000 is a loss for us correct logically sir entire loss can you book it now only sir this is a forward contract after forward contract for how many months three months because you have to pay this money now to your foreign company or after 3 months that means this is what is this forward contract a period 3 months this loss has come due to forward contract this forward contract a term is how much 3 months so the forward contract a term is 3 months means entire loss also has to be booked over 3 months understood all why is this important is Sir when did you enter into a for contract first February okay February March and April so February March two months of this forward contract comes in the current year one month of this forward contract falls in the next year so entire 30,000 loss you cannot book it in the current year only February March falls in the current year so calculate 30,000 is a loss for three months how much for two months 30,000 divided by 3 into two how much is that out of this 30,000 loss only 20,000 you'll book it in the current year rest 10,000 you'll book it in the next year like this this is one popular question which has come quite a few times from this topic in the examination not that I'm saying it will come has come a few times Okay g easy know very very easy just compare forward contract rate with spot rate you'll get the loss on $1 multiply by the contract value you'll get the total loss the total loss do remember has to be booked over the contract term the forward contract duration you need to book it in this case it is 3 months okay this is one type of question next one this is also a little popular here hardly we have three four questions next me IND 21 May you'll learn a lot more extra exciting things for now chinto topic only one more extra we will go through what is this is Sir Sir you have taken a foreign currency loan you have taken a foreign currency foreign currency loan sir loan taken what sort of an item non-monetary item or monetary item loan taken is a basically a monetary item because if you take a loan of $1 lakh how much you need to repay $1 lakh principal value is always fixed and what did I say monetary item means value can be fixed in any currency not necessarily in India if you're taking $1 lakh princip IP loan means how much dollar you'll repay one lakh that is fixed it may not be fixed in Indian rupees because due to exchange rate fluctuation amount will vary but is it fixed in dollars yes so it could be fixed in any currency that we call it as monetary item now coming back to the example so if you have any uh excuse me if you have any long-term foreign currency loan if you have any long-term foreign currency loan long-term foreign currency loan is a monetary item monetary item should be shown in our balance sheet using closing rate you should be shown in the balance sheet using closing rate and any exchange gain or loss you get on monetary adem should be transferred to PN normal provision says this any exchange gain loss and monetary item should go to P but sir what happened is during many many years back okay people started suffering huge exchange gain exchange losses especially because exchange rate was fluctuating too much hence one exemption was introduced that we call it as par 4646 a exemption I written I don't know okay leave it may be there next I'll write it there some an exemption was introduced that we call it as what par here it is para 46 46a exemption what that said was there's an option if company wants they can utilize this exemption or normal exchange gain loss where it will go to PN transfer it off to PN they can utilize this exemption and do something else or they can treat it as a normal way and transfer gain or loss on monitary item to P basically the choices with the company what choice this par 46 or 46a exemption G us they checked check if you have any long-term foreign currency item like a loan first check for what purpose is this loan utilized for for what purpose did you utilize the loan if the loan is to buy a depreciable asset if the loan was utilized to buy a depreciable asset I think I show you to the Chart maybe it's little better okay if the loan was utilized to buy a depreciable asset then exchange gain loss will not be transferred to pnl rather it will be trans it will be capitalized meaning instead of transferring exchange loss to P andl you can add it to the cost of the asset instead of transferring exchange loss to P andl you can add it to the cost of the asset when can you add when that law loan is used to buy a depreciable ass so when you because when you buy a loan you'll utilize it for some purpose no that loan say if that loan is to buy some depreciable asset like planted Machinery uh software intangible assets whatever if you're buying if it's used to buy depreciable asset then instead of transferring gain loss to pnl you will capitalize meaning you'll add that loss to the cost of the asset gain also similarly you can deduct but nobody likes to do like to do this so that's fine all right so what if it is used for other purpose meaning we took a loan and we bought a land land is a depreciable asset or not a depreciable asset so if you have used this foreign currency item not for other purposes then you can park whatever exchange loss you are getting no you can park it in one Reserve called fcmd foreign currency monetary item translation difference some books also will call this as fcmi foreign currency monetary item translation Reserve I think our books refers to as fcmi TD foreign currency monetary item translation difference so whatever exchange loss you're getting no park it in this Reserve you don't have to transfer it to pendl park it in one Reserve that means it will stay there ever sir no from fcmd it will be transferred to Pendle over the loan duration obviously loan means it'll have a duration maybe four let's say loan duration is 5 years that means you will transfer from fcmi td2 pel over how many years over five years because loan C duration is 5 that is the thing this is compulsory or optional optional if company wants they can utilize this because if if you transfer no to exchange loss to pendl account many companies pendl was suffering heavy losses because exchange rate was fluctuating too much hence this exemption was introduced okay that many years back I think Reliance was a culprit for this particular exemption if my memory serves right okay all right so again one quick drama what is this now same thing we'll apply it in one question so what did we discuss if you have any long-term foreign currency monetary item first check for what purpose it is utilized for to buy depreciable assets or other purpose if it is utilized to buy depreciable asset then exchange loss on monetary item instead of transferring it to pendl you can add it to the cost of the asset itself like that however if it is used for other purpose then then whatever exchange loss is there no park it in one Reserve called fcmi TD and from fcmi DD it will be transferred to Pendle over the contract duration or that loan duration okay now come back to one question now question number six is there in study material also a limited purchased fixed asset costing rupees 3,000 rupees only no okay on 1st January 20 X1 and the same was fully financed by foreign currency loan oh they first took a loan they've converted this loan into rupees and then they purchased a fix said worth 3,000 lakhs that means ideally the money came in rupees or dollars dollars when did you buy 1st January 20 X1 and this loan means you have to pay repay the loan they're saying it is repayable in three equal annual installments the exchange rate on rate was $1 is equal to 40 42.5 on 1st January and 31st December so since I've given 1 January probably here the year will end on 31st December meaning probably calendar year is probably followed here so on 1st January what was the exchange rate sir $40 is here so this is your can I say say tdsr transaction date the spot rate because you did a transaction on the first day only what about this 42.5 there's a rate on end of the year so that means this is your closing rate okay first installment was paid on 31st December 20 X1 because you have to pay three installment no year beginning you took a loan you have to repay the loan in three installment so first installment was due at the end of first year which you have paid okay the entire exchange difference was capitalized meaning did they transfer the exchange difference to pnl or capitalized capitalized okay State how the transaction should be accounted for first sir if it is as1 means we want a rupe value or dollar value dollar value so when did you take a loan 1 January okay so on 1st January how much was the dollar value $1 is equal to 40 rupees again just if you're confused what to do always put it on so $1 is equal to 40 Rupees is what they're telling correct they gave the value in dollars or rupees rupees How much rupees $3,000 lakhs 3,000 lakhs means how many dollars so how much is 3,000 into 1 by 40 basically you have to divide so can I say it is $75 lakh so basically you have taken a foreign currency loan for $75 lakh D okay so what's the journal entry for loan taken sir bank account debit to bank loan so there's a foreign currency loan so the journal entry will be bank account debit to foreign currency Loan account how much loan you took $75 lakh but can you account it in dollars or Indian rupees rupees so on the on this transaction date what was the spot rate4 $1 is equal to 40 so 75 into 40 is how much 3,000 lakhs this is your tdsr transaction dat spot rate okay that is one all right next sir at the end of the year did you repay the loan at the end of the year did you repay the loan no you can do it any which way but did you repay is what I'm asking not entire loan a part of the loan did you repay yeah H so sir how much is the total dollar value sir total loan value $75 lakhar you'll repay this entire Loan in one go on three install that means how much you have to pay at the end of first year 2 $25 lakh you have to repay at the end of first year correct for repayment for when you take the loan the journal entry is bank to bank loan means when you repay the journal entry will be Loan account debit to bank account we calling it as foreign currency loan So currently loan is shown at what value sir 3,000 r 3,000 lakh rupees entire loan did you repay or only one3 because one3 one/ third one third you have to repay three installments may you have to repay this 3,000 so 3,000 divided by 3 is what sir 1,000 correct sir to bank can I repay, lakh rupees or there's a settlement settlement settlement should be recorded at settlement date spot rate when did you do settlement 31st December on 31st December what was the rate $1 is equal to 42.5 I mean means how much money will come out of your bank account $25 lakh you need to repay and $1 is equal to 42.5 so how much money will be deducted Indian rupes how much will be deducted from your bank account 10 62.5 $75 lakh you're repaying $1 at 42.5 that means 1062 you thought you will pay th000 but you ended up paying 1062 did you get any gain or loss you thought you'll pay th000 you'll pay 1,62 lakhs so you paid more means it's an exchange loss exchange l loss means it will be credit it debit it nominal account rules is what all the expense and losses will be debited so this loss no I'm calling it as foreign exchange difference account or simply you can call it as exchange loss account debit how much 62.5 easy any problem this is settlement date spot rate correct sir but ironically here settlement is also happening on the last day okay on the last day entire loan is repaid or only oneir is repaid one thir is repaid that means 2/3 of the loan is still pending and loan is what item monetary item and what does as1 say all monetary items should be shown in your balance sheet using closing rate so how much loan is still pending check this in 75 me here check $75 lakh is the total value of the loan in that $25 lakh you have repaid so how much is the remaining $50 lakh is still repaying correct $50 lakh is still pending so there is the loan this loan has to be shown in your books using closing rate what is a closing rate 42.5 that means the loan should be shown in your balance sheet by getting converted at 42.5 but originally you have converted at 40 you have converted the loan at 40 but it has to be converted at 42.5 that means now loan balance you have to increase because you have converted at 40 now you have to convert it at 42.5 so loan balance will increase how much loan balance the remaining how much remaining loan balance is there $50 lakh so 42.5 minus 40 you do how much extra you need to give 2.5 lakh for $1 for $50 lakh how much 125 lakhs d a g so $125 lakh you need to pay more actually paid or bookish bookish that means uh this The Exchange loss because loan value you have to increase loan loan has a credit balance how do you increase it loan has a credit balance you have to increase it again so what do you have to do credit it again what will you debit The Exchange loss that only we calling it as foreign exchange difference you can call it as foreign exchange difference or simply exchange loss account debit okay now so that means the total what what what what is this basically this is monetary item shown in your balance sheet using closing okay now all right now check sir you got two exchange difference how much is that 62.5 and 125 that means totally how much is a loss for you 187.5 now the company has two options at 187.5 there's a loss exchange loss relating to monetary item exchange loss relating to monetary item you can ignore para 4 6 a or 46 and 46a exemption you can ignore and do it normally what is the normal provision say entire exchange difference transfer it to pendl account so if you're transferring it to pendl means the entry will be pendl account debit to Foreign Exchange difference account so the foreign exchange difference will fully get nullified here and all you have debited here you credit it balance will become zero this is a normal provis or another option is there which is what FC you check what purpose is the loan utilized for the loan was used to buy a fixed asset they told yes sir okay usually fixed assets we assume as depreciable asset so if it is a depreciable asset what do you do sir exchange G exchange loss instead of transferring it to p and you can add it to the cost of asset so instead of debiting p and you can debit PP account this is what we mean by exchange loss can be capitalized to credit will be given to exchange loss account or foreign exchange difference account what has the company done they said exchange loss has been capitalized that means they have gone for which option this particular option par 46 46 a exemption have they done anything wrong or valid only valid so you simply have to write call out this and say what is the treatment given by the company is absolutely good we can move on to the next one Asama okay these are the numerical sums which are kind of important another few bits are there which may not be tested here but may be tested in your branch accounting but nonetheless quickly we'll cover it off here so next you need to know something known as foreign operations foreign operation means if you have any branch if you you have any subsidiary company or associate company or joint venture company outside India main entity is in India if you have any branch associate company joint venture or subsidiary outside India that outside Indian entity only we call it as what foreign operations okay that is the thing all right uh now sir Whenever there is foreign operation you need to check whether it's an integral foreign operation as an ifo or non-integral foreign operation as a Neo whether it is EO or Neo so how do you find out sir in fact in my class example I used to give that restaurant exam this one2 okay now for now I'll just skip to this one so for non- integral foreign operation basically integral foreign operations means Indian entity and foreign operations are very closely related Indian entity and foreign operations are very related okay let's say enforces India enforces in India and enforces us both are coming together and developing one software both are working together to develop only one software first 60% of the work Indian will do balance 40% of the work us infosis us will do now you tell me US entity and Indian entity are they completely unrelated to each other or they have to work very closely work very closely that means now that us operation we call it as integral foreign operation because they are very dependent or work closely with they are like an extension it's just like for the name sake they are outside India but they as good as what it is an extension of head office because both of them have to work closely together such thing we call it as what sir integral foreign operation now all this you can't write in exams there'll be some parameters or conditions how you to find out whether it is EO or Neo for non-integral foreign operations sir they've given some indicators how to find out whether it is non- integral foreign operation they've given some indicators may not be that important but just in case it comes know it one is non- integral foreign operations means sir that foreign operation is run autonomously meaning they don't care about Indian entity they will say give me the authority whatever I want to do I will do just like you tell your parents no sh I'll write my exam whenever I want okay leave that to me yeah like that so foreign operation runs autonomously okay that's one if foreign operation is run autonomously it becomes what sir non integral foreign operations second indicator is reporting entity reporting entity means the one which is there in India and foreign operations have very less transaction because obviously they don't like each other much okay all right even though Indian entity only owns them Indian entity and foreign operations are not transacting much one's in a blue moon little bit transaction they do not much transaction is there if that is there means that is one of the indicator of non-integral foreign operation and foreign operation of funding is enough to run their operation whatever money the the way they're doing no they have enough funds to run their own operations even if they feel they have fund shortage they will not call Indian entity they will say I will raise money from my local borrowings they'll raise their money in their local country itself they are not dependent on reporting entity for funds they raise their own funds or already they have their own funds like that that is one of the indicator and foreign operation C sales will be usually in foreign if you want to call it as a Neo all their sales will be mostly in foreign currency it will not be in Indian rupees it will be in foreign currency and all their majority of their cost also will be in foreign currency so these are indicators not condition okay all right so these are keeping these parameters in mind we find out whether it is a Neo or a ifo okay so why is this important because exchange rate is different sir so if you have a foreign branch and branch is yours only when you prepare company financial statement can you take only Indian entity data or even foreign Branch data you need to take foreign BR Branch data also you need to take and merge yes no so that means but Indian entity data is in rupees foreign operation data is probably in pounds Euro or dollars whatever you can't straight away add unfortunately we have not reach that zone where we can say $1 is equal to 1 rupee hopefully we'll get there one day yeah fingers crossed sooner than expected all right but right now we have not gone there right $1 is lot lot lot lot more higher than Indian rupees that means we need to convert yeah 2040 50 whatever day hopefully we live till then you you are gty people yeah me okay let's see okay EO and Neo why we need to find out whether it is EO or Neo is you have to convert that foreign currency data into Indian rupees that means you need exchange rate if it is integral foreign operation one data is recommended one exchange rate is recommended if it is non- integral foreign operation another set of exchange rate is utilized so what is that if it is integral foreign operation if that foreign branch is an EO then all monetary item will be converted using closing rate non-monetary item save as 3c2 3c2 means if non-monetary item is valued at cost no remeasurement necessary if it is valued at fair value or NRV use the exchange rate you found out on the fair value or iner like that okay all income and expenses use average rate and any Exchange gain or loss foreign currency trial balance you need to convert it into Indian rupees so when you convert the trial balance the trial balance will not match you'll get a balancing figure that is nothing but exchange gain or loss in case of integral foreign operation transfer that exchange gain loss to p and this is the thing this is more relevant for your branch accounting you need to remember this they also ask foreign Branch questions in exam okay all right however if it's a non forign non- integral foreign operation non-integral foreign operation means sir is an Indian entity really interested in that non-integral foreign operation not much because do they care what we say or they do their own thing they do do they do their own thing that's the reason standard says whether it is monetary item or non monitary item everything converted at closing rate everything converted at closing rate or income and expense we need Aver date of trans transaction date rate that will be not given so most probably you'll be using only average rate for income and expense also you use you use average rate only so when you convert the trial balance into Indian rupees trial balance obviously again will not match there will be a difference that difference you park it in fct as in foreign currency translation Reserve foreign currency translation Reserve from fct it will be transferred to pel when will this fctr go to P fctr also will go to P there is a foreign branch no let's say after two years you sold foreign Branch after two years you sold foreign branch that means after two years from fctr it'll be transferred off to pel or the day that foreign operation gets sold that day this fctr will be transferred off to pel till then fct will have a buy okay this is important for your conversion Branch accounting when I do again I'll come back to this this simple thing this will carry about this conversion will carry about two to three marks simply you need to remember these dat these rates are given in as1 but it's a chapter applicable of Branch account like that okay yeah this is about as1 overall fun thank you so [Music] much so how much more sir I decide we'll do as2 and then maybe reass okay everybody in the online are saying we'll do 10 to 4 tomorrow okay we will listen to them tomorrow we'll do 10 to 4 day after tomorrow I'll listen to you shareholder 10% majority is there in onl okay no problem tomorrow maybe we'll stick to 10 to 4 no issues I've also not spoken to them about logistics 10:00 to 4: maybe a little more not sure okay starting time 10 okay that is PKA ending time I'll take a call all right so tomorrow we'll start at 10 to4 day after we'll take a call I I'll confirm with to you tomorrow day after tomorrow time Wednesday we'll finish off the session that's the plan okay for now can we finish off this standard uh finished tata bye so the next standard that we are revising is accounting Standard 12 which talks about government grants so basically nor uh especially during the financial crisis time and all government will help the companies by giving some incentives or subsidies like it happened primarily during covid time almost every government central government state government gave a lot of incentives to the companies and individuals and all so that means uh many companies may receive these in incentives from the government so if such incentives are received how to account them is the overall scope scope of accounting Standard 12 every company need not receive it if at all you have received it how to account is what we are studying in as2 okay all right so first thing is s okay all right so the next fun is Chennai May Chennai Branch class ends at 1:30 p.m. sir so take class from 2:00 to 7:30 oh my God okay know it's just like there's a punch line no no come back only for this now what do I say yeah but what about the others who said 10 to 4 we'll ignore them now okay you put me in a spot there leave first I'll finish of this let me not worry about that instead of this I should not forget about this now okay sir broadly know sir whenever you have receive government grant they are broadly accounted under two approaches whenever you receive government grant there are two broad-based accounting approaches when we say is capital approach and another one is income approach Capital approach is very simple they say whatever Grant you say put it in capital rece whatever Grant you have received put it in capital receive so how to know whether it is capital approach sir they say Grant received in the nature of promoters contribution Any Grant this is a keyword this is what you need to remember and call it out in case study if it all it comes any grants received which are in the nature of promoter's contribution is a capital Grant and it should be transferred to capital reserve sir I didn't understand sir sir you are setting up a factory you are setting up a factory so you need funds government is so happy with your initiative they told take 10 lakh Rupees take 10 lakh Rupees because you are setting up a factory in a remote area government is saying you're developing that remote area I'm well happy with your efforts take 10 lakh Rupees now that 10 lakh is like a fund received 10 lakh is fund received to set up a Factory sir who gives the funds generally for the business to start promoter promoters is the one who gives the funds to the company to start you want to start a factory and government is putting the fund means isn't this grant in the is isn't it like a capital contribution from the government isn't it like a capital which the government is giving you yes so hence such Grant we call it as what it's a capital Grant to be accounted under what capital reserve because these grants are in the nature of promoters contribution so to set up some factory Land on all and generally they will use this term okay if such grants are received means they are capital grants to be transferred off a capital reserve so all other grants so if you're one there are only two broad approaches capital and income if you know how to whe if you are able to figure out that there is a capital if it is not a capital Grant then automatically what sort of a grant is it it's an income Grant all income Grant will be transferred off to p and all income Grant will be transferred off to pel account the only question is whether it'll go to p immediately or after few years it may go to P immediately or after few years so when will it go to immediately government told 10 lakh Rupees you take Tata byebye that's all is there any condition attached or no condition attached government did not put any condition they gave it and they left now means if it is an unconditional Grant or if the condition if it is already fulfilled then entire 10 lakh will be transfer to P now government gave you 10 lakh Rupees they told start a factory that factory should not be shut for four years if it shut snow just take back my money okay they gave you 10 lakh Rupees and they put some condition what is that run it for a minimum four years that means entire 10 lakh can you transfer to one year P or four years P four years P because there are some conditions like that okay s so where to show in P sir this grant is an income either show it under other income one is that or reduce it from related expense I'll show you in one problem where that accounting works either you can show it on the income side or to fulfill the conditions you have to incur some cost you have to incur some expense the grant you can reduce it from the expense one problem I'll take it up and show you this okay this are the broad-based approaches H great next recognition criteria sir when can we recognize the grant sir sir there are two conditions should be fulfilled for you to recognize government grant one generally government grants comes with some conditions government grants usually come with some conditions The Entity should have a reasonable assurance that they will fulfill the condition they should have a reasonable Assurance it's not necessary condition should have already been fulfilled not necessary they should have a reasonable assurance that they will fulfill this condition in the future that is one and also reasonable assurance that they will receive the grant it should not be election promise I will give you star moo Jupiter neptuno not that okay should have a reasonable assurance that you also election time I should not tell this also later it will come on me only no no good government every government super oh okay so you should have a reasonable assurance that you will receive the grant also maybe you look for a mail confirmation State central government has given you a mail saying you have been awarded a grant of 10 lakh Rupees that's a good enough confirmation you can so you don't have to wait till the time you receive the grant the day these two conditions are satisfied that day you can go ahead and recognize the grant itself that is a recognition criter done G work sir will you cover questions also sir love from Dubai neilf thank you just for the name sake you're building up actually from the place we'll be covering some questions not everything some of them okay Concepts fully questions some of them for practice how how is my first class sir how much did you cover sir 99% over yeah some we almost 60% we have covered another 40% is spending okay next is non-monetary Grant received non monetary Grant receive sir if you receive cash or check from the government what is that cash or check monetary it here are we talking about monetary Grant or non-monetary Grant some non-monetary Grant itself you receive from government meaning some land you got from got it from government some Machinery you got it from government some software you got it from government all this property planted equipment intangible assets and all are monetary item or non-monetary item that monetary or that non that asset itself you receive from the government that non-monetary asset itself government gave you so in that case how to do the accounting sir sir first check whether you have received it at free of cost government told you I'm so happy take this missionary pre if you have received non-monetary granted free of cost record it at nominal value nominal value could be 1 rupe 10 rupe 100 just for the sake of accounting show it required at nominal value you don't have to do anything further just show it because you have got it no you using it right so the users of financial statement should know that you have an asset so because of that you record the asset at nominal value like that yes sir however government became not so much dalalu also they told I will give it to you at concessional Value let's say the market value of the let's say one software government gave you the market value of the software is 1 CR government told you give me 20 lakhs that is sufficient market value is how much 1 CR but government is asking how much price from you 20 lakh that means you have received it at a concessional value at a discounted price so if you have received any non-monetary Grant at concessional Value then how much did you pay 20 lakh so you record it at 20 lakh itself meaning that Grant you record it at concessional Value itself in my example you'll record this non- monetary Grant at 20 LH software account debit 20 lakhs to bank account 20 lakhs D okay and that software usual amortization and all same drum this is about non-monetary Grant receive next one monetary Grant receive monetary Grant receive means either you have received some cash or you have received some Bank through check check basically all the grants will not be awarded in cash they will put it in your bank only non monetary Grant you have received for a specific fixed asset you have received the Grant in check cash or check only but it is related to specific fixed asset like let's say you purchased a planted missionary government you wanted to do some wanted to produce some product okay that product you want to export and government has an incentive to promote exports of that product okay government has an initiative to promote exports of that product now you you purchased a planted missioner or you have imported a planted missioner with an intention to produce that product and Export government told yes that's what we were looking for you come under our initiative since you have purchased the Machinery worth 50 lakhs I will give you a grant of 1 lakh rupees the company purchased fixed asset by how much by paying 50 lakh so because they purchased this planted Machinery government gave a grant of 1 lakh rupes in their bank account so that means this grant is specifically related to one fixer asset so if this is a case means how to account the grant there are two acceptable methods one is asset cost deduction method and another one is deferred income method okay deferred government grant method you can call okay asset main name itself is saying asset cost deduction method asset cost deduction method means or I have one problem I'll take you through end to end accounting for this for Now quickly I'll run through this question if you're following asset cost reduction method name it faing asset cost reduction so the moment you receive the Grant no asset cost will reduce since the cost of the asset is reducing depreciation also will reduce this is one so government grants usually come with some conditions let's say you did not fulfill the condition if you don't fulfill the condition government will take back the grant meaning we have to refund the grant when you receive the grant cost of the asset reduced depreciation also reduced when the grant gets refunded Ulta Grant will or cost of the asset will increase so depreciation also will increase that is your first method or there is another method called deferred income method under deferred income method cost and depreciation will not be affected whatever Grant you receive no you'll park it in one dummy account called deferred income account or deferred government grant account okay you'll park it in one income account like that the Deferred Grant account will also be transferred to pnd that deferred income will also be transferred to P over the useful life of the ass because this grant you have received for asset no this grant you have received for asset if the asset is going to be in your business for 5 years means that means from that deferred income will be transferred to pel over a period of 5 years like that okay and on refund of Grant on refund of Grant first you will adjust the refund with deferred government grant account balancing figure you will trans take it to pnl I think this is better learned with one question we'll do directly take one question or it's better come to I think maybe we'll do this first I think this we have already covered Santos limited has received a grant of 8 crores from the government for setting up of a fact Factory stop there only for setting up a factory government gave a grant so income Grant or Capital Grant Capital Grant all capital Grant should be shown in your balance sheet under where capital reserve but out of this grant company what did our brhaspati company do out of this grant company distributed two CR as Sir they gave Grant to set up a factory you are full oying by the paying of dividend acceptable not acceptable if Grant is given for a specific purpose it has to be used for purpose only if you you can't violate that that means treatment given by the company is correct or not correct not correct not correct that is one also Santos limited receiv received land at free of cost but it has not recorded at all they received land land is a monetary asset or a non-monetary asset a non-monetary asset non-monetary asset they received at free of cost if you receive any non-monetary asset at free of cost what do you have to do record it at nominal value what did this company do they did not record it all that means both the things what they've done is cor or not correct not correct I think the same question was there in RTP and MTP just a tip okay it's there in our study material also but same thing is there here okay now next question number eight we will go for we discuss now asset cost reduction method and deferred income method that we will see end to end accounting with the help of this question a purchased a machiner for 40 lakh useful life four years residual value government grant received is 16 lakh show the journal entry to be passed at the time of refund of Grant in third year some condition probably was not fulfilled so government is asking back their money did they say they they are asking refund of only 5 lakh 8 lakh like that no they simply said entry to be passed as a refund of Grant if they don't tell the amount what will you assume entire Grant is refunded so you have to give the treatment only journal entry for refund they're asking under Grant is credited to fixed asset account Grant is credited to fixed asset means the grant is adjusted from the cost of the asset so first first method is this second when the grant is credited to Def and both the methods they're asking you the journal entry only for refund but we will do it from the beginning as I think the same problem we did it like from the beginning to end in the regular class also we'll do it here also I me I have it over here we'll run through okay H what ex no in exam you do what is asked for here I'm explaining concept now so it's easier to learn it fully okay first what is the journal entry for asset purchased plant missionary account debit to I think I wrote that I know no I know no brain freeze moment for me planted missionary account debit to bank how much you purchased it for sir 40 40 lakhs so this is the journal entry for missionary purchased okay sir we are following the first first method first method is what Grant is credited to fixed asset so you purchase the asset what happened later on you received a government grant how much government grant you received 16h so method itself is saying asset is credited to fixed ass you received a government grant so the journal entry will be bank account debit 16 lakh you'll credit which account asset account what is the name of the asset planted missionary so when you receive the grant the journal entry will be bank account debit to PP account here the pp name is plant and missionary that's the thing okay now asset asset if you have used one year means you have to depreciate the asset what is the cost of the asset is it really 40 lakh no 40 lakh minus 16 lakh because whatever Grant you received you reduce it from the cost of the asset no so 40 lakh minus 16 lakh how do you calculate depreciation cost is 40 - 16 which is 24 lakh is there any residual value yeah residual value is how much 8 lakh reduce that what is the life four years so minus 8 divided by four years you do what is the de pre four lakh four lakh first two years no drama because refund came only in the third year so yeah this is the entry fine this depreciation you'll transfer it off to P account first two years easy entries now third year what happened sir some condition probably got violated and you have to refund the grant yes that's what they're saying sir when you received the grant what entry you passed when you received the grant bank account debit to missionary account when it is refunded missionary account debit to bank account yes no reversal entry and you're refunding the grand only the third year so this is the entry you pass so that means now in the third year is the carrying amount of the asset same or changed changed if carrying amount changed means will depreciation be same for the third year or it will vary vary so let's calculate that first let's calculate depreciation uh what is the carrying amount at the beginning of year three you bought the asset for 40 lakh you received the grant so cost reduced by 16 lakh so 40 - 16 how much is that 24 lakh first year you depreciated by four next year again four so reduce 4 4 how much is that this you purchase for this is for the grant this is for first year depri this is for second year depri so carrying amount at the beginning of year three is how much 16 lakh okay now third year beginning what happened you refunded the grant when you refunded what entry you passed planted missionary to bank so planted missionary you debited so carrying amount of the asset will be same or it will increase so when you refund the grant carrying amount will increase so by 16 lakh what is the Revis carrying amount 32 lakhs fine H what is the residual value any change in residual value or still same same when you bought the asset life was four years two years is already over what is the remaining life two years so this 32 lakh so calculate depro 32 lakh minus residual value divided by remaining use for life 2 years how much will be depr 12 lakhs correct so third year depreciation will be thir lakhs f s okay this depreciation you'll transfer to pay so what did they ask in the question they asked you only refund entry what is the entry they're asking this this and this only they asked in the question at the time of refund what entry will you pass when you receive the grant asset asset value will reduce when you refund the grant asset value will increase this is the requirement of the question planted missionary to bank 16 lakh that's all you had to do but for us for our understanding we did it from the beginning till end Okay g in exam check the requirement just because you know don't write everything ask check what is the requirement and do it because sometimes sir when we see a familiar question no we start off but last May requirement would be completely different has happened so AR say little patience then it's good to maintain writing speed But first you should know the requirements okay in the name of writing speed Left Right Center you can't write anything and everything okay someone is saying sir what if monetary Grant is received for purchase of land sir it has unlimited useful life sir how it will be treated sir we discussed this in regular class no sir maybe you're not our regular student okay uh uh sir uh or maybe one minute hang on first I'll finish this and take up your query again it may be relevant we have discussed this no issues so first method over second method is what sir deferred deferred Grant method or deferred income method So when you buy an asset what is a journal entry planted missionary to bank after purchase what happened you received Grant here are you adjusting with cost of the asset or not adjusting so whatever Grant you received you park it in one dummy account called deferred Grant or or deferred government or deferred income whatever you can call it call it so when you receive the grant the journal entry will be bank account debit to deferred government grant 16 L yes sir all right asset means you have to depreciate so 40 lakh is the cost of the asset what is the residual value 8 lakh what is the life four years okay that means the depreciation for all the three years will be 8 lakh because here no sir are you when you receive the grant did you touch fixed asset Ledger No so at the time of refund will you touch fixed asset Ledger no okay that means the depreciation will be same through depreciation will not get affected under this method done now that's the reason for all the three years we put up now this asset sir this grant is related to which asset this grant is related to planted missionary planted missionary will be there in your business forever or only for four years four years that means this grant also will be transferred to pnl over four years since the fixed asset will last or this PP will be there in your business for four years Grant income also you'll transfer to P over four years this grant deferred Grant account you have credited to transfer to P what will be the entry debit account so deferred government grant account debit to pnl how much Grant you received 16 LH amorti it over four years so first year third year you're refunding so only do it for two years first year how much will you transfer 4 lakh second year how much four lakh stop there okay now comfortable so third year what happened third year beginning Grant got refund so refund means whatever you have done before you need to do Ulta when you receive the grant what entry you passed bank account debit to deferred government grant when it's refunded deferred government grant to bank account correct how much Grant you have to refund 16 LH so Brank you will credit to the extent of 16 lakh but deferred government grant no you can't debit by 16 lakh why sir here check deferred government grant here you credited by how much 16 LH here you debited deferred government grant by how much 4 lakh again here you debited by 4 lakh so 4 lakh here debit again 4 lakh here debit so means what is the balance 16 lakh credit four and four debit so what is the balance in deferred government grant 8 lakh so if deferred government grant has only credit balance of 8 lakh you can only debit to the extent of 8 LH is that okay so first whenever the grant gets refunded here no first adjust with what first you always adjust with defer government grant how much ever balance is there first adjust that first utilize that journal entry matching or balancing figure balancing figure what is that balancing Figure 8 lakh where did this 8 lakh go where did this 8 lakh go from deferred government grant where it go where it went P end that means for that balancing figure you'll use what P like this is a journal this is what is the requirement of the question you have to pass this in is here all right everyone okay and this depreciation is an expense it will be transferred off to pay so that is what I've written here now see the words in chart is it making sense under asset cost reduction method under asset cost reduction method when you receive the grant cost of the asset will reduce depreciation will reduce when it is refunded cost will increase depre also will increase however under deferred income method cost and depreciation will not get affected because whatever Grant sir you are parking in which account deferred Grant account and this will that money stay in deferred Grant forever or it will be transferred to P it'll be transferred to P over what over the useful life of the asset so when the gr on refund what will you do first you'll adjust the balance to which what first you will use deferred government grant account so the journal entry will be deferred government grant account debit to whatever balance is available to bank account balancing figure you will utilize PN basically on refund will the carrying amount of the asset and depreciation will change or not change not change that's what I written here now comfortable okay now asking our quad z i don't is that your actual name quad Z or some name so one valid question that came is or maybe I'll look at at this method and give you an analysis first so here check under first method how much depreciation you charged 4 lakh okay that means how much is going to pendl depreciation is an expense which will go to pnl how much 4 and second method how much is depreciation 8 lakh so that means how much expense is going to P 8 lakh that mean second method is giving you extra expense H yeah but also check how much did you credit pnl by four lakh because this grant as an income also you're transferring to P one here under first method no only expense is transferred to pnl to the extent of 4 lakh here no sir expense is getting expense is getting transferred to the P to the extent of 8 lakh but deferred income also deferred government grant is an income no income is also transferred to pnl every year how much extent 4 lakh so in the second method income also you're transferring to the extent of 4 lakh so what is a net effect 8 lakh expense four lakh income means what is the net effect expense four lakh last method how much 4 that means whether you follow method number one or method number two final answer or final impact on P is same no change there now taking up the question so what if you receive any uh monetary Grant towards a non- depreciable assets like land like company purchased a land and they received a grant of let's say they purchased a land of 10 lakh and they received a grant in the in the through in the bank account to the extend of 1 LH this grant is specifically related to an asset when the grant is specifically related to an asset what is the method we follow reduce it from the cost of the asset or deferred income method yes no sir but here no sir you can't follow this the reason is if you follow asset cost reduction method tell me what will happen asset cost reduction method what you'll do whatever Grant you received you adjust it or you reduce it from the cost of the asset that means if you follow method number one the land cost sir from 10 lakh it it'll be reduced by 1 lakh and it will stay at 9 anything else will happen or that's all that's all because land is not depreciated correct no but however if you follow method number two what is Method number two deferred income method yes no that means you'll say bank account debit to deferred income or bank account debit to deferred government grant how much one L this deferred income should be transferred to pendl over the useful life of Lando which is unlimited what to do first he say first year only you do why are you Bing so much of H transfer everything first year only know what the standard says is don't if if you have received any Grant towards non- depreciable assets don't follow method number one don't follow method number one follow method number two meaning whatever Grant you received you park it in defer government grant account sir for how long sir so normally even though this grant is received towards land government will put some conditions the condition may be like government is telling okay since you purchased a land I'm giving you grant but on this land you should construct the factory and operate the factory for 5 years on this land you should construct the factory and operate it for 5 years that means condition will last for how many years five years this deferred government grant you transfer to P over 5 like this so don't follow asset cost reduction method for monetary Grant received towards non depreciable asset all this we have discussed in regular classroom okay h all right okay one last maybe will maybe one question I will take off what there quy no more there okay but quad's question was good all right Alps limited has received following grants you need to tell the treatment 120 lakhs received from subsidy from central government for setting up a industry antic for setting up some Factory or industry or receiving Grant means what is the nature of Grant the these grants are in the nature of promoters contribution basically these are capital Grant to be transferred to capital reserve perfect 15 lakh Grant received from central government for installation of affluent treatment plant so affluent treatment plant is a planted missionary for you have received did you receive plant and missionary as a grant no no no since you installed plant and missionary government gave you 15 lakh rupees Grant so you have received what a monetary Grant related to a specific spefic depreciable asset if a grant monetary Grant relates to a depreciable asset to acceptable treatment what is that either you can reduce Grant from the cost of the asset or treat Grant as a deferred income and transfer this deferred income to pandle over the useful life of planted Mission that's both any of the things can be followed by the company 25 lakh received from state government for providing medical facilities to workmen during pandemic any conditions or not conditions our condition is already fulfilled because company gave some medical facility to to its Workman during pandemic government told take 25 lakhs any extra conditions or no conditions no condition that means what condition is already fulfilled or there are no conditions right sir you have since you give medical facilities to work when you receive this grant workmen means you're your employees some benefit you give it to your employees so government is giving you grant this is what benefit you give it to the employees is what once in a blue moon or recurring recurring item so this is a capital Grant or an income Grant income Grant so that means what should you do for this 25 lakh it's not a capital Grant it's an income Grant so immediately you transfer it to PN why because there are no conditions like that okay saru now where will you show this in pnl either you can show it under other income or you can reduce it from related expense we learned in chart now sir to workmen you are paying salary to workmen you are paying salary you have receive Grant of 25 lakh no that 25 lakh show it as a separate income or reduce it from salary cost ready it from salary cost that salary cost in our Pendle schedule if you just check we don't call it as salary we call it as employee benefit expenditure so you can reduce 25 LH directly from employment benefit expense one either show it as other income or reduce it from related expense whatever company wants they can follow one among the two next same thing one more question company X runs a charitable Hospital oh it incurs salary of doctor staff Etc to the extent of 30 lakhs per an as a support local government local government grants a lumpsum payment of 90 lakhs to meet salary expense did they stop there for a next 5 years unconditional or condition is that so they saying take 90 lakh but you have to pay salary to employees for next 5 years Last Problem unconditional here condition is there not there or there condition is there so entire 90 lakh can you transfer it to P immediately or over five years five years okay is this grant related to any specific asset no that means what do you do you whatever Grant you have received immediately you can't transfer it to pnd so temporarily you park it in one deferred income account and from deferred income you transfer it to pnl over a period of five years so first what is the journal entry for Grant received bank account debit to deferred income 90 lakhs 90 lakhs okay in fact they're asking you to pass journal entry under two circumstance when the grant is separately shown as an other income in pendl or second case when it is deducted from salary cost both are acceptable one you can show it as other income or reduce it from the related expense here related expense is salary both the method treatment with journal entry you need to pass so when you receive the grant this journal entry you're paying salary what is the journal entry how much salary are you paying every year 30 lakhs what's the entry for salary paid salary account debit to bank account yes so now the salary will go off to P account what is the journal entry to transfer pnl uh salary to P pnl account debit to salary this grant also first method is what sir Grant you're showing separately as other income okay so entire 90 lakh can you transfer it to pnl this year or over 5 years so from deferred income it will be transferred to other income or P you can write how much 90 lakh divided by five so current year how much will you transfer 18 lakhs done that means how much is Balan in deferred government grant account 90 lakh credit 18 lakh debit the balance is 72 lakhs that balance will be there that balance will be closed by the end of fth year so where will you show that sir in balance sheet non-current liability s because this this account will get Clos immediately or the next four years four years actually that is also not entirely correct the part should part of this is current and part is non-current let's not dive into so much not required okay now all right so far good this is the case of what sir other income second case where the grant is deducted against salary cost First same entry first when you receive the grant what is the journal entry Bank to defer income when you pay the salary what is the journal entry salary to bank study material has done some you write this now it's okay okay so salary to bank that's the entry for salary paid now entire deferred income can you transfer it to pnl or only 18 lakh 18h but is a company transferring it as other income or reducing it from salary so what is the journal entry for deferred income transferred to pnl like here last deferred income to pendl instead of passing deferred income to pendl adjust it with salary because what what are we doing which method are we following Grant we are reducing from related expense so instead of instead of passing deferred income to P pass it as deferred income to salary same amount how much is that 18 lakh why 18 lakh 90 90 lakh you have to amortize over five years hence this is 15 LH done now yes sir so that means your salary debit how much 30 lakh salary credit how much 18 lakh that means the salary expense that you book in pel is not 30 lakh but only 12 lakhs okay so that means how much salary will be transferred to P andl 12 P andl to salary will be the transfer theyve done a little bit of Cho some mistake is going on I mean it's wrong there so you pass it like this so this is the treatment comfortable I believe yeah so with this uh as12 also we have completed and today okay so tomorrow what do we do now all right since they said chenai Branch ends at 1:30 so tomorrow maybe let's do a thing we'll we'll start at 2 it's okay I think valid re yeah let them also attend some Papa they want to attend why why but if the DS fellow no if I don't see you tomorrow no di punch you only come because of you I'm starting at 2:00 okay so yes tomorrow we'll start at 2: and probably go up till 7 7:30ish take care see you thank you for your patience bye-bye yes hello everyone so welcome to the new day and to the new revision topic and today we'll be starting with accounting standard 16 borrowing cost revision so what does borrowing cost mean borrowing cost means your interest that you pay on your loan interest that you pay on your debentures some processing charges that you pay on your loan all that interest charges we call it as borrowing cost usually all those interest charges where it will go sir to P andl account okay but what as16 says is if this borrowing cost like interest if it is related to qualifying asset if it is related to qualifying asset then that interest cost will not be transferred to pnl but rather it will be added to the cost of the asset meaning it'll get capitalized all other borrowing cost which is not related to qualifying asset that will be transferred off to pend account like your routine golden approach while problem okay only the interest charges if it is related to qualifying asset it will get capitalized otherwise all other interest cost will be transferred off to pendel account so the next question is so what is this qualifying asset so qualifying asset means those assets which take substantial period of time to get ready for management intended use so asset which is not yet ready but it will take some time to get ready like this laptop will it take substantial period of time to get ready or already ready already ready AC TV iPad all this will take some time or already ready already ready so already ready assets are not qualifying assets so suppose I'm constructing a building I'm constructing a building will that building be ready within one day today or it will take some time it will take some time so that means building is an example of what qualifying sir what is that substantial period of time sir usually accounting standard 16 assumes that 12 months is considered as a substantial period of time so any asset which takes 12 months or more to get ready for man basically management ready that asset is a qualifying asset all all that asset interest cost normally when you're constructing a building you may not you may not have money so now what does the company do they'll borrow the money and utilize to construct a building so on that loan you will have to pay interest to the banker this loan has come only because of building that means this loan and loan interest is directly related with what qualifying asset that's that means indirectly it becomes a DAC that's the reason what do we do for this borrowing cost you will not transfer it to pendl but rather you'll add it to the cost of building itself that's all is whole fun about your as6 all right so what is what are the examples of qualifying assets sir property planed equipment is a qualifying asset intangible assets can also be qualifying asset like you're developing one software you're developing a software even software development may take more than one year you're doing one research covid vaccine research okay so to what if the research is successful you have to develop it so that development phase expenditure may go on for more than 12 months so for that if you have incurred any interest that will be capitalized so even intangible asset can be a qualifying asset sir can inventory be qualifying asset yes provided inventory takes a substantial period of time to get ready all right so what is the inventory what is such inventory sir sir if you are developing an aircraft you are an aircraft manufacturer what is the business of an aircraft manufacturer he will manufacture the aircraft and he will sell it will the aircraft be ready within one or two months or it may take more than 12 months may take more than 12 months so if you are a ship manufacturer or aircraft manufacturer then inventory can also be a qualifying asset sir is datar a qualifying asset no is will datar take substantial period of time to get ready no so that means the dataro investment to all these are not qualifying assets okay SG okay next is Sir there are two types of borrowings as far as this standard is concerned there are two types of borrowings they are General borrowing and specific borrowing so specific borrowing means name itself is saying specific borrowing that means it is clearly related for what purpose the loan is utilized you can clearly tell like to construct a building I took a 10% loan I took a Term Loan to construct a building what is the loan value 50 lakh now means this loan C what purpose is this loan utilized for it is fully utilized to construct a building can you clearly find out for what purpose this loan is utilized for yes such a loan we call it as what sir specific borrowing so if you have specific borrowing treatment is very very simple this loan is there now you took a loan only to construct a building okay how much is the loan amount we are assuming 50 LH that means what will be the interest on this 50 lakh or 10% is how much 5 lakh that 5 lakh borrowing cost will not be transferred to pnl but rather it'll be added to the cost of building because building you did not purchase you are constructing so building is a qualifying asset is that okay that is one but one more pointer you need to keep in mind as per a specific borrowing is Sir you took a loan of 50 lakh this loan may be utilized for constructing a building but entire 50 lakh will be utilized in one go or in installments installments maybe first you will utilize 10 lakh then 15 lakh then 20 like this you may utilize this 50 lakh in stages sir you have already taken a loan but you don't need entire 50 lakh now you need it later means will the company keep the idle money with themselves or will they make an investment they'll make an investment maybe for one month one week two weeks so that they will get some income so if you have earned any temporary investment income on this loan amount invested on this loan amount invested that you need to deduct so let's say in this particular example interest cost is how much 5 lakh but since you did not need that 50 lakh in one go you made a temporary investment maybe for one week two weeks one month whatever and you earn some temporary investment income of how much sir 50,000 if that is a case means you will not capitalize entire five lak as borrowing cost whatever temporary investment income is there first reduce that how much is the balance 450,000 only that will be capitalized this may come as an exra fitting in the adjustment watch out sometimes they give this sometimes they don't give it so always watch out for that okay so basically every interest on borrowing cost relating to specific borrowing will be added but if there is any temporary investment income reduce it and after reduction whatever amount is there that only you add it to the cost of qualifying asset is that okay sir that is with respect to specific borrowing next is General borrowing General borrowing means name itself is saying General borrowing in case of a general borrowing we have multiple loans which are used for multiple purposes we have multiple loans used for multiple purposes like you want to construct a building now to construct this building how much money you need 50 lakh sir you have three loans first loan carries an interest rate of 10% and loan amount is 20 lakh another is 12% debentures issued for 40 lakh another 11% loan issued for 30 lakh now sir how much is a total loan amount if you add all this that's about 90 lakhs but how much you need for constructing the building 50 lakh that means this 50 lakh came from which loan it might have come from first loan second loan or third loan and the problem here is what does as6 say borrowing cost should be capitalized this all the three loan has same interest rate or different different interest rate different different interest rate that means unless you can tell unless you can tell this 50 lakh came from which loan you'll not be able to find out the interest amount unless you know the interest amount you cannot capitalize that means a problem correct no so H standard is saying if you have multiple loans which are used for multiple purpose don't bother breaking your head in identifying this amount of 50 lakh came from which loan like that don't break your head if it is General borrowing simply find out something called capitalization rate you find something called one average rate you find something called average rate that standard uses the term called capitalization rate you use that for your capitalization so you don't have to use 10% 11% or 12% at all find out something called weighted average rate and use that rate for your capitalization is that fine you will find out capitalization rate only in case of General borrowing you will not have all this problem in case of specific borrowing because you have only mean clearly you are able to identify the purpose so this capitalization drama capitalization rate drama comes only in case of General borrowing not in other cases yes sir all this we apply in the problem but quickly we'll run through first H okay next is Sir when when will I commence the capitalization sir when will I start adding the borrowing cost to the PPA cost or inventory cost meaning basically when will you start capitalization standard says there are about three condition the day three conditions are satisfied that day you can go ahead and capitalize borrowing cost those three are first is borrowing cost should be incurred borrowing cost should be incurred meaning on these you should be incurring some interest you should have is taken a loan or issued some debentures on that you should have already started paying a interest that is the first condition borrowing cost should have been incurred second one expenditure on qualifying assets should have been incurred expenditure on qualifying asset should have been incurred meaning if you're constructing a building means construction expenditure should have started third one activities relating to qualifying assets should have begun activities relating to qualifying assets should have begun activity here does not mean physical activities building means obviously you'll do the physical construction but for this purpose activities include your planning administrative activities also excuse me because like s when you're constructing a building a sophisticated building especially initially only you will not start off first you need to do a plan an architect will do the plan do you do you think he'll come to the site and do the plan or he'll load from his place probably he'll do it from his office so that planning activities are also considered as activities for this purpose so the day all these conditions are satisfied all the three should be satisfied on that day you can start capitalization okay zaru all right so what is it again borrowing cost should be incurred expenditure on qualifying assets should have been incurred activities relating to qualifying assets should have begun so that day you can start capitalization okay next is suspension of capitalization to suspend something means what sir temporarily stop not full stop temporarily stop capitalization so that's what we mean by the word suspension so when will you suspend the capitalization sir if the work on qualifying assets if it has got interrupted if the active development on qualifying asss if it has got interrupted let's say you were constructing the building h a Kashmir example okay all right I not remember everything now whatever comes to my mind at that point of time I would have given some examples it's fine if you remember and that awesome for you yeah I'll give something else now yeah all right sir suppose uh you're constructing a building you're constructing a building that building a construction stopped because fund shortage that building of construction stopped due to fund shortage so that is an example of suspension of capitalization because work on that qualifying assets is it going on now or it has stopped it has stopped let's say it stopped for two months the work stopped for two months due to fund shortage that means that two months interest can you tell the banker now my building construction has stopped to Ma I will not pay you interest what will the banker say that is your headache get out of my office and pay yes or no correct that means this two months interest should you pay to the banker yes but is the work on qualifying I said going on or suspended suspended that means this two months interest cost you will not capitalize but transfer it to pended meaning suspended period interest will not be capitalized but it will be transferred to pend is that okay so if work is stopped due to fund shortage labor strike some earthquake fire flood like this natural calamities that period interest cost that period suspended period interest cost you not capitalize but transfer to P however if there is a temporary delay however if there is a temporary delay then you need not suspend the capitalization Let It Go on as usual let's say you're constructing a building one week workers took off because of yugadi Raman Christmas Thea okay they went to their Hometown that means that one week of interest you will transfer it to P Anda no so all these are what sir expected delay yes no so if there is a temporary delay you don't have to stop the capitalization let the capitalization continue only if the delay looks like a permanent delay if the work active work has got interrupted they will use that term the examination okay especially if you see this that's the reason I brought out this so if construction has got stopped fire flood fund shortage and all directly transfer that period interest cost to P however if they use the term this delay is temporary delay then will you transfer borrowing cost to pendl or capitalize still capitalization still will continue that's about suspension okay last period is cessation cessation means finally when will you put the full stop because sometimes what can happen is loan cut term let's say is 5 years you have taken a loan to construct a building the loan will go on for 5 years but building construction gets completed within 2 years to construct a building you need only two years first of all is building a qualifying asset in this case yes because it is taking more than one year so is it a qualifying asset yes but construction time is only 2 years but loan term is 5 years that means for how many years you need to pay interest to the banker 5 years entire five years interest can you add it to the cost of building no because building is is constructed or substantially complete within how many years 2 years that means only out of this 5 years interest 2 years interest you shall capitalize balance three years interest you'll transfer it to P account like this is that okay sir that's about suspension so you'll finally stop capitalization when the asset is substantially complete when the asset is substantially not fully complete sard is not using the term 100% complete because when you're constructing a building no sir small smallart work will still be pending suppose you are constructing a building for office one electrical S one switch electrical switch is not installed that means you will tell no no no once that is installed then only I will move in will you do that no I mean what will you think it's okay we will move in and we will later install that switch so what the standard says is when the asset is substantially complete then capitalization will stop if small small work is still going on that is fine that you will ignore it for capitalization purpose so the work is the standard name is not 100% complete but it is substantially complete the day qualif asset is substantially complete that day you will stop the capitalization once you stop the capitalization after that if you are incurring any interest all that interest cost will be transferred where sir to P account like this okay next disclosure is not that important it's fine so let's run through few questions uh we'll go through RTP question itself H MTP released today ah okay they will release all that don't worry about questions okay sir again the point is some of the students get sir even one new question if they see there will be like suddenly booku don't worry okay in every attempt may you will get something new that is the way of Chartered accountancy okay in your paper also you will get new question doesn't matter how much ever you prepare from whom you take the coaching there is an examiner team whose main job is to make sure that 15 to 20 marks is totally new minimum so every attempt you will get something new so don't freak out by new questions and all that stuff that is part and parcel of your course because you have taken one of the toughest course in India so you also needs to be tested a little bit just like that you'll not get one degree so I'll talk about all that later on the last day remind me we'll talk about that tips okay but the point is it's all right new questions will come here also in exam also everywhere also all right so don't worry about the things you worry about the things that you are aware of and trite that okay and to pass the exam you don't need 100 on 100 50 is good enough in aggregate also but ideally you should aim for 65 to 70 okay all right now I'll become when I become examiner I'll ask easy question he's telling this later when he becomes examiner now he will give full Ultra dialog why struggled so much why should our Junior struggle this much he'll probably make more T only goalie fellow okay awesome thank you thank you so much uh come back to the question now this RTP made 2024 question H limited began construction of a new building on 1 April 2022 it obtained a special loan of 6 lakh on 1st April 2022 at the interest rate of uh 12% to construct the building to construct this building only they have taken a loan so what kind of a loan is this General borrowing specific borrowing what borrowing specific borrowing specific borrowing is there any drama no whatever interest you pay on specific borrowing should be capitalized but if there is any temporary investment income redu that's all okay I means how much is the loan on this 6 lakh 12% how much is that sir 6 lakh is the loan and interest rate is 12% that means total is how much 72,000 6 12 are 72 no so 72,000 is the interest this will be capitalized however if there's any temporary investment income we will reduce okay the companies to other outstanding non-specific loan when when they're using the word non-specific loan what do they mean it is GB as in general borrowing so yeah 30 lakh and 54 lakh both of these loans have a same interest rate or different different rate now am I interested in these two rates or I have to find out another rate another rate what is that another rate capitalization rate okay expenditure incurred on the building project is as follows obviously sir if you're constructing a building entire expenditure you need in one go or in stages stages first you have incurred the expenditure on May then July then October and March this much expenditure so total if you do you're going to get about 61 lakh 20,000 that's the thing all right so the building was completed by 31st March 2020 3 so you started on April 2022 and construction is getting over on 31st March 2023 when it's taking about one year so he's building a qualifying asset yes so all you need to tell is the treatment all you have to tell is the treatment okay so the way we'll do it is first do we have General borrowing yes two general borrowings are there that means Whenever there is a general borrowing we have to put a working note to find out capitalization rate so that is nothing but first working mode so how do you find out capitalization rate it's simply one average rate simply average rate so how much is this now maybe I'll tell it in one lineer over here first and then I will correct myself first take this sir 30 lakh is a loan amount multiplied by 14% do that 30 into 14% how much is that 4 this is 4 lakh 20,000 54 lakh into 16% how much is that okay I'll only do 54 lakh into 16% how much is that do huh 8 lakh 64,000 so total interest is how much 4.2 + 8.64 if you calculate that will be 12 lh8 4,000 correct so to Total interest is 12 lakh 84,000 what is the total loan amount 84 lakh so 12 lakh 84,000 interest you are paying on a loan of 84 lakh what is the average interest rate your on 84 lakh loan amount you paying an interest rate of you paying an interest of 12 lakh 84,000 how do you get that 12 lakh 84,000 divided by 84 lakh into 100 do that how much is that sir so you're paying how much sir 15.29 % can I round it off too so on an average you are paying about 15. no9 per is that fine sir this is nothing but your capitalization rate now tell me in Formula how do you get capitalization rate what is a numerator what is a numerator total interest divided by total loan amount into 100 is that okay so that's all total interest divided by total loan amount into 100 but one thing you need to keep in mind here is here no people this loan both the loans were outstanding from the beginning sometimes they say the loan was issued during the year the loans may not be issued from the beginning it may be issued during the year so here when they say weighted average this is the weighted average rate no the weight should be given in terms of time the weight should be given in terms of time so here no sir this loan was outstanding from the beginning so even if you don't give the weightage here it's there for 12 months no you have to do everywhere 12 x 12 12 x 12 like EPS calculation but here that means weightage has significance or no significance no significance but in some problems it is not tested much in your see intermediate borrowing cost is a very good chapter in CF final where lot of weightage will come okay in fact uh some suddenly they may decide to test this in inter also that's the reason calling it out right now I've not seen it but it may come so if the loan suppose was issued only for 7 months if the loan was issued only for 7 months then what do you have to do into 7 by2 you need to do hence the formula of slight slightly tweet instead of borrowing cost borrowing cost nothing but interest you only told the formula is what interest amount divided by loan amount instead of Interest amount I'm calling it as time weighted borrowing cost borrowing cost is nothing but interest instead of blindly interest you call it as time weighted borrowing cost what is this time weightage if you have issued the loan only for 7 months you will pay the interest only on also 7 months if you have issued the loan only for eight months you'll pay the interest on it only for 8 months so instead of taking total borrowing cost in the numerator take it as time weighted borrowing cost remember like this it will help there is not tested much here but if you learn it like this next level one problem easy for you one concept over for you like that okay divided by denominator May what will you say total borrowing or time weighted borrowing time weighted borrowing so how do you get assigned weights over here in Goodwill in your 11th and 12th grade and all you used to give Goodwill used to calculate Goodwill super profits method there the weightage was given in years here the weightage you will give it in months is that okay now how do you calculate that first on first loan amount sir 30 lakh into 14% you correct no and here when you have to assign weights you'll write 12 by 12 why 12 x 12 because this particular loan was there for the entire year so in this problem whether you multiply or don't multiply it doesn't make any difference suppose this loan was issued only for8 months then in that case what will you write into 8 by 12 this is on the first loan interest correct now we want only first loan interest or total interest total interest so they do the same drama for second loan how much is the second loan amount 54 lakh what is the interest rate 6 % into do not forget into 12 by 12 by doing this you will get what sir you'll get time weighted borrowing cost divided by total borrowing no time waited borrowing what is the first loan 30 lakh this loan wasn't there from the beginning till the end yes that means you'll assign how much weightage full weightage that means you'll give a weightage of what 12 x 12 suppose this issued this loan was issued only for 5 months then what you'll write 30 lakh into 5 by2 this loan was issued for 11 months then you'll write 30 lakh into 11 by2 since this loan was there from the beginning till end you'll write 12 by 12 what about the second loan 54 lakh was it outstanding was it was it that from the beginning till the end yes that means what is the weightage you'll do 54 lakh into 12 x 12 so in this problem this weightage is irrelevant you'll get the same answer but always learn it like that so that in case any new adjustment comes you'll be able to tackle understood everybody now okay all right yes you can watch the revision classes later also for the time being live streaming it will be available right now then we will take it off and upload everything by Friday or Saturday everything again will be uploaded don't worry it'll be available in paid version also in YouTube also everywhere it'll be available okay if you wanted immediately attend live class otherwise wait till Friday you'll get access to every class from the day one till day five whatever we have done everything will be merged okay all right what discover you you check ma all right I don't have much time now I'll not waste into all that stuff you can check the videos okay all right uh next so so far are we good with this so this way you will get what sir capital ization rate that is one all right now check have a quick look through all the expenditure now the what is the overall takeaway did you learn from the previous expense the capitalization is always based on weights capitalization is always based on weights now check over here and here weights are given in what years or in months months check the first expenditure when did you incur first May how much expenditure 12 lakh that means this 12 lakh was there for entire 12 months or only 11 months 11 months correct why because year starts on April but this expenditure you incurred on 1 May from 1 May count till end of the year end of the year is 31st March 2023 if you count obviously it is how many months 12 months that means expenditure also you need to prate so mean second working no is weighted average expenditure you find out okay so how many months this expenditure was incurred 11 months so what you'll do over here 12 lakh into 11 by 12 how much are you going to get 11 lakh like this you do it for all the expenditure that you've incurred now this expenditure came in which day July from July count till end of the year that is 31st March 2023 so July August September October November December January February March how many months 9 months so that means what you'll do into 9 by 12 so 15 lakh into 9 by2 how much you going to get 11 lak 25,000 for this 27 lakh how many how much weightage you will assign it came in October year ends on March that means you'll give a weightage of only 6x2 so 27 lakh into 6X 12 is how much sir 13 LH 50,000 last one 1 March it came and year ends on MAR 31st March that means you'll assign a weightage of only one by one month that means you'll write 1 by 12 so 720,000 into 1 by 12 is how much 60,000 so the time weighted expenditure total is how much 36 35,000 time waited expenditure is how much 36 lakh 35,000 so to construct the building you need expenditure no yes that expenditure also has to be expressed in time okay how much time waited expenditure you have incurred 36 lakh 35,000 is that okay with you now this 36 lakh 35,000 should have either come from a general borrowing or specific borrowing this 36 35,000 will either come from a specific borrowing or general borrowing now you think logically sir if you want to use any expenditure first you'll use General borrowing or first specific borrowing first specific borrowing because that loan is specifically issued for construction so out of this 36 lak 35,000 6 lakh will come from specific borrowing how 6 lakh because 6 lakh is the value of specific borrowing so how much came from General borrowing how much came from I'll write it over here SB and GB out of this 36 lakh 35,000 6 lakh came from specific borrowing how much is the remaining 3635 minus 30 if you do you're going to get 30 lakh 35,000 are we comfortable so only 30 lakh 35,000 came from General borrowing okay now what is this an actual expenditure or time weighted expenditure time weighted expenditure is that okay sir all right sir this is your loan amount now this is your loan loan amount now this 30 lakh 25,000 where it came from General borrowing on General borrowing should we have to worry about this 14% 16% or we have another rate another rate what is another rate capitalization rate what is that capitalization rate sir 15.29% so multiply 15.29% on this now so don't try it again 6x2 and all this is already this 30 25,000 already we have given the weights so we don't have to assign weights once again here so 30 25,000 into 15.29% if you means you're going to get 4 lakh 64052 this is the interest cost relating to General borrowing actual interest cost or time weighted interest cost time weighted interest cost are we okay sir this much will be capitalized okay this is relating to what general borrowing for specific borrowing we have all this headache or very very simple specific borrowing what is the loan amount 6 lakh what is the interest rate 12% so 6 12 are how much 72,000 entire 72,000 will get capitalized because do we have any temporary investment income here no make it a practice to remind yourself that so in this case temporary investment income is not there so entire 72,000 of specific borrowing borrowing cost will be capitalized so on specific borrowing you'll capitalize this much on General borrowing you'll capitalize this much if you sum it up how much are you going to get 5 lakh 36 these two addition is what 5 lakh 36 052 that is the total borrowing cost you will capitalize is this the actual one or after assigning weights after assigning weights so here all the working is after the weightage okay when you have to assign the weights only when there is a drum of General borrowing is that okay with you sir so this much will be capitalized so how much uh totally you incurred for constructing the building actually how much did you incur 61 lakh 20,000 building cost only will be 612,000 or even borrowing cost will be capitalized even borrowing cost will be capitalized how much will capitalize 5 lak 36 052 so add this 612,000 plus 61 lak2 ,000 plus 5 lakh 36 052 you add how much are you going to get 66 lakh 56052 that will be the revised cost of the building understood they asked the journal entry also in this problem so what is the journal entry building account debit to bank they asked only one journal entry okay actually this can't be building account why so is this building already completed or under construction I already discussed with you whenever a PP is under construction can we show it as PP or we have another category we have category called Capital work in progress yes for intangible asset we have intangible asset under development for PP we have PP under or Capital uh Capital work in progress but they're not testing so much and question was very clear pass only one journal entry so don't write build Capital work in progress and all directly write this is study material solution only same question is there in study material also directly write building account debit to bank account is that okay with you sir fair enough everyone so follow like this only in fact I showed you another method in class okay that is giving you a small round of error so do it like this only to be on the safer side for exam so once I'll quickly give a recap of this so all this drama will come only if you have what sir General borrowing whenever you have General borrowing the very first thing that should click in your mind is to find out capitalization rate how do you find out capitalization rate will you take borrowing cost divided by total borrowing no you will take time weighted borrowing cost divided by time weighted borrowings and how do you give that time weights now in months okay calculate that in this problem was that necessary no because both the loan was there from the beginning till the end so even if you want to assign the weights you'll always write everywhere 12 x 12 12 x 12 12 x 12 so hence it will not make any significance that is one second sir expenditure on building was incurred in one go or in stages stages that means you have to this is your actual expenditure will we take actual expenditure or time weighted expenditure time weighted expenditure so assign weights to this also how sir check what on what day is this expenditure incurred 1 May from the date of expenditure till the end of the year you account in this first case it will be 11 months so 12 LH into 11 by 12 like that you find out time weighted expenditure how much does time weighted expenditure total come to 36 lak 35,000 so you have to capitalize so like it's it's like thinking for this 35 lakh 35,000 you need a loan expenditure of building is only 36 lakh 35,000 so you don't have this 36 lak 35,000 means what you'll do you'll take a loan so out of this 36 lak 35,000 first money will always come from specific borrowing because specific borrowing is specifically related to building so out of this 36 L 35,000 6 lakh will be specifically from specific borrowing so how much came from General borrowing 30 lakh 25,000 okay that 30 30 L 25,000 is actual expenditure or time weighted expenditure time weighted expenditure on General borrowing will we use actual interest rate or capitalization rate capitalization rate so time take this time Ved expenditure multiply by Capital capitalization rate you will get how much borrowing cost to be capitalized this is for General borrowing for specific borrowing no such drama is whatever you have incurred that much you can capitalize how much is the actual interest you paid on specific borrowing 72,000 that can be added because there is no temporary investment income that's all Summit up you'll get the total borrowing cost okay now then there has one entry also the entry will be building account debit to bank account normally when you pay the interest the journal entry will be interest to bank okay normally the the entry for interest is interest account debit to bank account and then you'll write pnl account debit to interest yes no so inst of debiting P here you will debit what sir PP is that okay so they asked only one journal entry so that's the reason we are not rooting it all this we are rooting passing one journal entry as what sir PP account or building account debit to bank account that's all is the whole drama about this this question is one popular question from this particular topic so watch out for this okay revise this once just to be on the safer side so that you don't do the mistakes fine we have a couple of questions like this in study material also follow this method only don't follow the one I've shown in class because I've tried out using this that also right according to me but because this is 15.29 is actual or we are rounding it off rounding off so that method is giving you some round off error of 300 400 and I don't want you to lose you to lose marks because of my ego that's the reason I myself have changed this method follow this only is that okay because the end of the day you passing examination is more important method is not important okay doesn't matter who teaches this if somebody else teaches you better method than me follow that because for you at the end of the day what is important is exam and marks that is important teacher is not important marks and exam that is what your ultimate focus will be because some of them have that lethargy no no no sir you are only best sir other ones I'll ignore sir best is the one best is the method best is not the teacher whatever you connect with for many topics you may connect with me one or two topics you may connect with somebody else blindly follow what connects with you okay you have to be absolutely selfish when it comes to all this priority is always clearing examination okay later on you give me the credit I take it okay all right so this is about the whole fund up yeah okay awesome uh great uh this is over then what else sir now this is one more popular question that generally comes from this particular topic sir amazing construction limited super they have taken a loan off 32 that is the total value of the loan they have taken that loan no sir is utilized for few purposes that one loan has been utilized for multiple purpose one you have used that loan to construct a c link C Bridge you are constructing we have no in Bombay the famous one yeah all right though you constructing one C link across two cities that is one a portion of the loan was utilized for constructing a ceiling and another portion was used for purchase of equipments then for some working capital purchase a vehicle advanc technical no like this and all sir One loan is utilized for multiple purpose specific borrowing General borrowing what borrowing uhuh the moment multiple purpose comes your mind will say General borrowing no think logically specific borrowing means for what purpose you are able to for what purpose the loan is utilized you should be able to identify for what purpose the loan is utilized you should be able to identify is it necessary it has to be utilized loan has to be utilized just for one purpose No loan can be utilized even for 10 purpose as long as you are able to identify that out of this loan this much you have utilized for purpose number one this much for purpose number five this much much for purpose number nine like that if you able to identify it is still what kind of a loan specific borrowing only General borrowing means we have multiple loans multiple purpose for what loan it used for what purpose we are not able to identify here one loan is used for six purpose means still it is what purpose still it is what loan specific borrowing only is that okay that means do we have to worry about that capitalization rate or blah blah blah blah No One Rate okay now one we have to worry here the problem here is you need to identify they given various expenditure no you need to identify whether all of them are qualifying assets or not so let's read the final treatment they're asking give the treatment of Interest by Construction Company total interest charged by the bank is how much sir for the year for this year is 80 lakh so you have taken a loan of 32 CR and totally you are paying an interest of 80 laks this is the total loan amount and this is the total interest so on this and all no they've not given breakup what does a16 say qualifying assets are those assets which takes substantial period of time and all ordinarily that substantial period of time is assumed to be 12 months or more first let's let's look at the construction of ceiling in fact they've not given any data here this is a little dicey in my opinion you can assume now logic senses you're constructing a Sea Bridge do you think that c bridge and all will be completed within one or two months or do you think it'll take some time it'll take some time so what is a though they have not given what is a more logical or a rational assumption that this particular ceiling is a qualifying asset is that okay sir okay in bracket what what they told work was held up totally for one month during the year due to high water levels sir if you're constructing a SE link means obviously the due to currents the way sometimes will be during the rainy season and all maybe we will get about 10 ft hi waves that time can you do the construction or you have to compulsorily stop this is out of the blue or expected expected that means this is what sir active development is suspended or this look like a permanent delay or a temporary delay this was an expected one this this is not something which has came out of the blue we expected this that means will you suspend that one month interest cost and transfer it to P or you'll continue continue you don't have to suspend that one month interest will still be capitalized okay now what about equipments and all that have they told anything they only told purchase of equipments usually when you purchase the equipment you did not construct you just only purchased so if you purchase an equipment will it take substantial period of time to get ready or most of them will already be ready most of them will already be ready so qualifying asset or not a qualifying asset not a working capital working capital means is it an asset or sir no it's for your day-to-day expense to pay the credit or electricity bill and all you have utilized so is there any asset there no working capital is definitely not a qualifying asset what about Vehicles you do not construct you purchased that means more or less it should be ready that means is it a qualifying asset no what about advance for tools and cranes they have given some Advance have they told this tools and cranes again is constructed we don't know that means here they're assuming it as it is not a qualifying asset but if you want in my opinion you can assume this to be a qualifying asset also because you have given an advance why you have given an advance maybe the tool is getting constructed that crane is getting constructed if it is getting constructed means it may take a substantial period of time but data is given no so in my opinion even if you write an assumption if you want to assume this as qualifying asset and write an opinion you should get marks but this is in uh I think this is one a previous year paper they have assumed it as not a qualifying guet if you want you can be in sync that also because lack of data is that okay any assumption according to me is valid all right okay now next is purchase of technical knowhow technical knowhow means it's a basically how to produce a product some process now you want to start a business like Coca-Cola you want to produce a drink like Coca-Cola anybody can produce a drink like Coca-Cola or there is a specific formula how when you have to do what process you need to do how much raw material you need to insert where you need to store them exactly there is a Formula that we call it as technical Kno how how to develop a product you have one patent this basically a patent okay how to develop a product you have developed a process that process you bought it or you it's your own your own means obviously it's an intangible asset for you that instead of patent they're calling it as technical knoow technical knoow is nothing but an intangible asset you are developing intangible asset or they told it's purchased purchased a purchased intang intangible asset will it take substantial period of time or mostly already ready already ready that means is this a qualifying asset no that means all these are what not a qualifying asset the only one component which is a qualifying asset here is the ca link or the cab Bridge okay that means entire 80 LH interest can you capitalize no no no no because entire loan amount did you utilize to construct SE seab Bridge or only 25 CR so you need to Pro rate for 32 CR loan amount total loan amount was 32 here now how much is the total interest you paid 80 LH for a 32 CR loan amount you paid a total interest of 80 lakh was entire 32 lakh was used for cab Bridge or only 25 only 25 was used for s bridge for 25 lakh loan how much is a loan Pro rate that how much are you going to get if you Pro rate you're going to get 62 lakh 50,000 that is your interest cost relating to cinka construction and cinka construction is a qualifying asset yes yes that means what will happen to this 62.5 will it be transferred to P or capitalized capitalized so a 62.5 will be capitalized rest everything is a qualifying asset or not a qualifying asset so in about 80 lakh 62.5 if you capitalizing means balance will be what 17 lakh 50,000 all that interest cost will be transferred off to P account they found it out for each component how much but in my opinion not required because Any Which Way all of these are qualifying asset or not a qualifying asset not a qualifying asset that means their interest cost will definitely go to P but I suggest present the solution in the same format better why to take a chance there because everyone who is correcting I told you know he's a ched accountant but he's not a accounts teacher all right what they'll simply do is check the suggested answer and see whether what you have done match with them if it matches full marks it doesn't match one or two marks cut so why to take a chance present this in the same format like this okay this is the final solution so whenever these sort of problem comes you put up a ni table like this calculated you know in your deep down that entire 75 lakh you can write it in one liner but don't do it present it fully because all this also sometimes comes for four to five marks so calculate each of them separately okay all right great so can I go for the next one I think yeah with this all the concept relating to as6 we have fully revised okay next we'll take up as 17 sir okay next one is accounting standard 17 which talks about segment reporting segment reporting so segment segment reporting simply means you are giving some additional data you're giving some additional data that additional data may be given product wise or location wise okay basically you're giving some extra data why is that is let's take I used to give the same example I think in class so suppose you have 10 lakh Rupees with you you have 10 lakh Rupees with you you want to invest okay you want to invest in that company which is producing which is which are into electric cars whichever company is producing more and more electric cars that particular company may you want to invest because you feel electric cars are the future all petrol and diesel cars will be wiped out and more more everyone will start using electric cars so your intention is you want to invest in that companies which are producing more electric cars now you finalize two companies Tata Motors and maruti Suzuki Now tataa Motors you see obviously you you want to know you have to base your decision based on sales now tataa motor pnl account you checked will they give you product wise sales or total sales in pnl account you'll get total sales okay but your intention is to invest based on total sales or electric car sales electric car sales will you get that electric car electric car sales using by checking Pendle no so if this data is given to you how much sales is from Petrol Vehicles how much from diesel vehicles how much from Electric Car Sales if that information is given to you can you take your decision better yes so that is all segment reporting all about your pnl will give you full information your balance sheet will give you information at overall company level but it will not give you the data product wise or location wise hence segment reporting came into picture segment reporting means simply you're giving some additional data okay so that is what is a scope of or overview of this particular standard all right okay so how do you give the segment wise data sir first you need to check sir if the risk and D reward of a company is driven by products if the company risk and reward is driven by products then you will give the data product tce you will give the data product TSE if company a majority of the returns and risk if it is associated with products or service then you will give the segment data or segment reporting you will do it product wise that we call it as business segment if you give the data product wise or service wise we say you're following business segment approach however if your risk and reward is driven by the location it's not driven by the product it's driven by the location then you will give the data location wise that location wise data we call it as geographical segments like I've have given you a small example let's say there is one company X limited they're operating only in Bangalore they make the sales only in Bangalore so they have three products product a product B and product C now you tell me this company risk and reward is driven by the location or product product that means this company has to give the segment reporting product wise that means that data only we call it as business segment Suppose there is another company y limited they are dealing with only one product they're dealing with only one product okay that product they sell it in India also they tell they sell it in us also they sell it in UK also now you tell me sir risk and reward is driv by product or service or location location now in this case may company will have to give the data not product wise but location wise that location wise data only we call it as geographical segment is that fine sir okay that is one so which all segments to report sir which all segments to report because if you imagine a company like tatas or Hindustan un Li they have one product or they have thousands of products thousands of product especially Reliance to Crazy you name it they're there correct or not every everywhere they put their hands correct or not that means now sir if they have thousand products will we give data thousand product if you give it nobody will bother reading also annual report only will be this pick correct no so you should you should give information but you should also not overb now I call you for marathon and if I do 50 hours Marathon will anybody sit crazy fellow okay revision means you should do it like revision he's doing like full story will that help ah no this only I feel I'm doing is more okay deep down I'm scared because little more normally I have to finish within 18 to 20 hours but somehow I feel 5 six hours m is exceeding but I feel at the end of the day required initially I thought I only do concepts I will not do questions because I wanted to reduce and bring it up to 17 18 hours but then I realized without question just discussing concept may not help so that's the reason I've changed this and apologies if I exceeded a little ass okay all right okay now come back to the concept what the concept is all about so now sir if you have thousands of products you can't give the data thousands of product twise you have to identify which segment data you need to give for this as 17 says there are about three test there are about three test conduct three test whichever segment satisfies at least one of the test it need not be it's not necessary to satisfy all the three at least one of the test is satisfied that becomes your reportable segment okay those three test are Revenue test result test as test all are 10% test hence we call them as 10% threshold test okay first we'll take up this Revenue test what does revenue test SES first find out external revenue and internal revenue of all the segments take external revenue and internal revenue of all the segments external Revenue means what sir the sale made to the outside customer Internal Revenue means Suppose there is a division one and there is a division two can division one sell the goods instead of selling it to outside customer can they sell it to other division yeah so if one division is selling the goods to other division we call that as an internal sale we call that as an internal sale however if this division sells Goods to an outsider called customer then becomes your external sales okay sir so for the first test what you have to do is first find out external sales and internal sales of all the segments suppose that comes to 100 rupees assumption calculate 10% of this 100 10% is how much 10 Rupees so any segment that has a revenue any segment that has a revenue doesn't matter whether it is internal revenue or external Revenue if a segment has a total revenue of 10 or more we say that particular segment has passed a 10% Revenue test and you need to report I'll apply this in one question also quickly discussing okay that's one 10% asset test is also same thing first find out all the segments or total assets of all the segments you do let's say that is uh 200 rupes total assets of all the segments is 200 rupees so calculate 10% of that 10% of how much is this 20 any segment which has a total assets of 20 or more is a reportable segment because this 10% test will pass okay that is your result uh your asset test third one is your result test so result means what for us it is pass or fail okay but for company it is profit or loss they did not say profit test or lost loss test they use the word result test okay so result means it includes both profit as well as loss so here what you have to do is first find out all all those segments which reported only profit maybe it's possible that if you have 10 division some of seven of them may made make may have reported profit three of them may have reported loss first to find out only those segments which have made profit and add them up only those profits which are made profit reporting segments you add up let's say profit made by all the segment is 500 assumption okay then find out those segments which reported only loss add all of them okay let's assume I have assume that to be some 00 so total profit reported by all segment is how much 500 loss reported by all segment is how much 700 what you have to do is profit or loss you have to compare ignoring the signs 500 or 700 ignore the sign don't bother about positive or negative just compare ignoring the signs this we call it as absolute number have to compare in absolute number 500 or 700 Which is higher leave the sign out 500 or 700 Which is higher 700 so that means you will take the higher of the two you'll take it in absolute number meaning ignoring the signs so calculate how much you going to get 700 right 700 10% you calculate how much it will be 70 so any segment which has either a profit of 70 or more or any segment which has a loss of 70 or more has passed this 10% result test and it has to be and it has to be reported like this is that okay so it includes this uh result includes both profit making segments and loss making because even loss is important sir because if you if you're if any segment is reporting loss that you have to you need more data about it correct no because things are going bad means w you want to know more about that yeah hence that's the reason we capture both profit and loss making into this particular test okay so after doing 10% test you will get all those segments which are reportable okay I'll take you through one question as well after this no sir there is one more test called 75% threshold test there is a 75% threshold test this 75% threshold test what you have to do is first you have apply 10% test yeah identify all the segments let's say there were three segments or there are let's say five segments a b c d e in that only a and C passed the test the 10% test was there now all the three test you conducted only which segment all the five segment passed only two segments two segments which is what I've assumed A and C what you have to do is this is what is this sir this is this is a reportable segment no so what 75% threshold test says is the external revenue of reportable segments the external revenue of reportable segments should at least be 75% of the total revenue of the company the external revenue of reportable segment should at least be 75% of the total revenue of the company if it is not then company has to identify other additional segments and report it I will apply this in one of the question little better understood there are we comfortable sir so basically we have two test one is 10% test and another one is 75% threshold test immediately can we apply it in one other question and see uh yeah thank you thank you so much uh come back to question number one now this is a study material question the chief accountant of sports limited has given the following data relating to six segments and all the numbers are in lacks okay they've given you segment asset segment result and segment Revenue so have they given you external and internal revenue or just Revenue just Revenue means both external as well as internal or just assume that Internal Revenue is not there it's fine because we don't know about that okay sometimes they give you external and internal revenue break up okay if they've given you only Revenue always take it as external Revenue only okay because maybe Internal Revenue is not there okay now can we apply that 10% test okay first you have to apply 10% test first test we shall apply that is 10% Revenue test in Revenue test me what do you do sir take the total revenue of all the segments both internal as well as external that breakup is given here or not given not given but they have only given the total how much is that 1,200 so the total revenue of all the segment is 1,200 calculate 10% of that 10% of 1,200 is how much 120 whichever segment has a revenue of 120 or more when when we talk about revenue of segment revenue of a segment means both internal as well as external Revenue so whichever segment has a revenue and internal revenue and external revenue of 120 and more the total revenue whichever segments got total revenue is 120 or more is a reportable segments so check which segment has revenue of 120 or more one is M and another one is n so that means as per this test which are the segment that passed this test M and N so M and NR reportable segment as per 10% Revenue test okay next one is 10% result test in result test me what do you do find out all those segments which reported only profit which segments reported profit M Mo so take your calculator only those segments which reported profit you add 50 + 10 + 10 + 30 so 700 no only those segments which reported profit if you add you're going to get 100 so these are all the segments which reported profit that is one second you have to find out all those segments which reported only loss which are the loss making segments n and or n and q add both 190 loss here 10 loss there so total loss will be how much 200 okay so this is your 200 now what you have to do compare profit or loss in absolute number ignoring the signs if you ignore the signs you have to take a higher number in absolute number so ignore the signs 200 or 100 Which is higher 200 so you will take 200 okay now 200 10% you calculate which will be what 20 okay so this is the number so any segment which has either a profit of 20 or more or loss of 20 or more are reportable segments so check which has 20 or more does m have yes n have yes how about r r also has that means which in all satisfi this test MN and R so as for this test M and R R are reportable segments this about second one third one will be asset test asset test me what do you do find out the total assets of all the segments how much is the total of all the assets 200 so calculate 200 10% how much it will be 20 whichever segment has an asset of 20 or more is a reportable segments which segment has 20 or more does m have yes n has oh yes o yes P 20 or more 20 is also included 20 or more P has yes Q has yes r no means which satisfied all this m n o PQ so these M oq are reportable segments so now sir is it necessary a segment has to satisfy all the three test or one is good enough one is good enough so M MN has passed any of the test yeah o yeah o passed uh asset test P yeah P also passed asset test Q also passed asset test which is that means what sir every segment at least satisfied one of the segment one of the test correct no even R also if you just check R are satisfied result test that means every segment is at least satisfying one other the test that means what is the final conclusion all the segments are reportable segments what does our opinion saying the chief accountant is saying he will only report M and N should we keep him or throw him out throw him out is he justified in his view absolutely wrong he's saying I'll only report M and N he's wrong he we have to report all the segments got it as for this test done G this is about 10% test so sir what about 75% test not required only why sir entire segment data you are reporting entire segment Revenue if you add that will be 75% or 100% 100% that means that 75% test becomes irrelevant here because all the segments any which way you are reporting if you're not reporting few segments then only you have to test that you have to make that 75% threshold test I'll take you through one problem in this but 75% test we will do it here excuse me identify notable segments from the following data of Z they've given you external revenue and Internal Revenue breakup is given over here if they don't give the breakup assume that entire revenue is external if they give you breakup take it accordingly okay so what what you have to do if you just check they have given you the result information and asset information or only Revenue information Revenue information that means you will be able to conclude only by doing Revenue test not other test you can't do because absence of information okay first to do Revenue test what do you need sir total internal revenue and total external revenue of all the segments so add up this does your internal and external they only added so if you add all of this they only give the number as what sir 100 so the internal and external revenue of all the segments is 100 100 10% you calculate how much is that 10 lakhs correct now whichever segment has a total revenue of 10 or more whichever segment has a total revenue of 10 or more is reportable does a have 10 or more yes B no C 10 or more 9.59 10 or more so that means the D has yes so as per this uh Revenue test which passed only A and D are reportable segments because it only passed your Revenue test this is 10% test another one is what sir 75% threshold test what does 75% threshold test says is you have to find out only the external revenue of reportable segments you have to find out only the external revenue of reportable segments external revenue of reportable segments should at least be 75% of the total revenue of the company the external revenue of reportable segment should at least be 75% of the total revenue of the company when we say total revenue we are only talking about external Revenue okay or if you want instead of total revenue you can write it as total external revenue of the company inter Internal Revenue means what sir One Division has made a sales to another division that means for one division it's a purchase for another division it's a sale both will get eliminated because both the division belong to the same company so when we talk when we say revenue of the company it always means external revenue or if you are a confusing kind don't write total revenue write it as total external revenue of the company like that you can rephrase your equation yes H okay first find out sir what is we want reportable segments external Revenue which is reportable segments A and D what is the external revenue of a 30 what is the external revenue of D 35 so the total external revenue of reportable segments that is a and d if you do how much you're going to get 30 + 5 which is 35 correct this should at least be what sir 75% of the total revenue of the company when we say total revenue of the company it is what sir it's only external revenue or can I write it like that only it should be 75% of the external revenue of company so what is the extern total external revenue of the company sir don't take 100 the external revenue of the company is 50 so 50 75% you do 50 75% you do which is how much 37.5 that means the external revenue of reportable segment should at least be 37.5 is it 37.5 or lesser lesser that mean 75% threshold test passed or failed failed for this 75% threshold to pass this number should be external revenue of reportable segment should be 37.5 or more should at least be 37.5 is it 37.5 or lesser lesser so that but that means this 10 75% threshold test has failed if a 75% threshold test fails the management has to identify one or more segments and they have to report it they have to report a also they have to report D also along with a and d one other segment one or more segment should be identified so that 75% threshold test also will be satisfied so which to pick sir that is company choice they can either pick B or C whatever they can go for both all Al or they can pick one among the two is that okay with you so that's the thing so B and say is fa failing 10% test no yeah it though it fails a 10% test but 75% threshold passed or failed since 75% threshold is failed we have to compulsorily pick one or more one or more additional segments is that okay that additional segment either could be B or C that is based on company Choice whatever they feel they can report that's what is this the fun all over now 75% threshold test part is clear for everybody okay so these are some two popular questions that generally gets asked okay now let's come back to some of things and quickly run the other things as well all right sir you are saying you have to give segment information sir so what information should we give sir because segment reporting means giving some division data what in all data we need to give sir sir what in all data you need to give is segment Revenue segment Revenue segment result segment asset and segment liability this information should be reported now you 10% test know using 10% test you found out reportable segments that reportable segment Revenue result assets and liability should be reported is that okay with you not only reported whatever you're reporting should also be agreed with balance sheet next segment Revenue should be matched with pnl Revenue segment result should be matched with profit before tax segment data whatever you're showing should be matched with total assets in balance sheet so reconciliation also should be done we have done two questions on reconciliation also in our regular class that is not so popular so I'm leaving it out but just calling it out here okay basically so all this information you need to report and tie this or reconcile with this with main balance sheet or main financial statement also okay s now how are you giving the data sir now you need to check if the risk and reward is driven by product then you'll give the data what wise product wise okay that only we call it as business segment that means location wi data will never give us sir no no no no if risk and reward is driven by product the main data you will give it product wise what is that main data Revenue result assets and liability location wise data also you need to give location wise data also you need to give so what in all data of which in all location if you have 100 countries should we have to give all the 100 country sale no what the standard says is if your risk and reward is driven by product you give the main data product wise location wise data you give provided or rather you give only that location C data which is having a sales of 10% or more whichever location is giving you 10% of total sales whichever location is giving you 10% of total sales only that location sales you get every location need not be reported I again I'll apply it in one of the problems is that okay with you same thing goes for ass holds main data you give it product wise okay but you may have some other location also you may be operating in India Japan China like this so if any asset if any asset or let's say total assets of a particular company is 10 lakh total assets of a particular company is 10 lakh calculate 10% of this which is how much 1 lakh sir in Japan may you are owning assets worth let's say 150,000 that means Japan data needs to be reported why Japan is having an asset of 10% of total assets that Series so whichever location has a 10% of total assets of the company that assets or that particular location data should be reported so what and all data to give for that location sales as well as assets sales and asset Wise information on that location which crosses 10% should be reported okay sir all right let's take up immediately one question on this better someone doesn't like us they're doing the drilling okay now I'm also drilling they're also drilling all the side drilling for you yeah okay PK limited has identified business segment as primary reporting product because the risk and reward is driven by product that means main data you'll give it what twice product tce what do what do I mean by main data Revenue result assets liability that's the thing that means location wise data you will never give or you will give you will give check it has identified India us and UK as the three geographical segments they have locations also it sells the products in the Indian market which constitute Goods 70% so 70% of the sales will come through India 25% of the sales will come through USA balance 5% will come through UK now you tell me which location data you will give first of all UK I'm specifically asking UK data you need to report or not required not required why that location which generates only 10% of total revenue of the company here they only given Revenue data no whichever location generate at least 10% of the total revenue of the company only that location sales data you need to report here UK is giving you only how much percentage 5% so UK data is required to be reported or not required only report what India and US data that's what is given all this manageable so main data you give it product wise but these two data sales and assets you also give it location wise like this manageable okay now coming back to the certain other points huh sir what does segment revenue mean because you have to report segment Revenue know that mean you need to know what and all is a segment revenue or what and all comes under SE segment Revenue so segment Revenue are constituents or if you add a few things then you will get segment Revenue Internal Revenue you have to consider and external Revenue you have to consider those will form part of your segment Revenue as well as if you have any allocated Revenue that also should be considered what does external revenue mean sir the sale made by a particular division to outside okay that we call it as external Revenue what does internal revenue mean if one division is selling the goods not to outside customer but to the same company but to another division that inter division sale we call it as internal revenue so Internal Revenue also will be considered as a segment Revenue itself not only that even allocated Revenue also will be considered so what does this allocated Revenue let's take a small example so Hyundai companies there they have two segments they have two segments one is petrol vehicle another one is diesel vehicles leave the electric one for the time being they made two segments petrol vehicles and diesel vehicles Now One customer is there sir he has purchased two cars in that one car is a petrol car and another one is a diesel car now car means obviously you have to periodically service it okay now this particular customer no sir got both the cars to service on one particular day on the same day one Sunday he was free so he got both the Cars one both the car he'll drive us don't worry about all that one he drove another one his wife drove okay look at the doubts they're having okay so both the cars he got it to the center to get the service on a same day sir service bill of 10,000 was generated one bill of uh 20,000 was generated okay now now this 20,000 is a bill for one car or two cars two cars but two bills are generated or one one that means sir petrol vehicle is a separate segment petrol vehicle is a separate segment diesel vehicle is a separate segment this 20,000 is a revenue belonging to both the segments correct no because this 20,000 is a bill for diesel car also it's a revenue for petrol car also because what is how how does a division this particular division generate Revenue sir one by selling the car another by service Revenue both are revenue for the company yes no because both happens periodically right so even sale sales made is a revenue and service made is also a revenue so you this 20,000 is a service for petrol car also diesel car also that means this 20,000 bill you have to split between what petrol as well as diesel this we call it as Al okay because 20,000 you have to allocate in some ratio maybe equally or maybe 40 60 60 40 80 20 whatever ratio may you have to allocate not that not your 60 other 60 all right so some ratio you have to allocate right so that hence that allocated Revenue also will form part of segment Revenue that's the thing so these are your inclusions for Segment Revenue all these are not that important have a quick glance through it may be coming as an McQ at Best in my view all right so segment Revenue excludes few things so when we giving segment wise data now we want to give operational related data the main business related or operation related data we need to give so if you have any extraordinary item like some Lottery income fire loss and all no that need not be reported because fire roll Lottery income and all you get it every day or once in a blue Bo once in a blue the data that we are giving is Rel should be related to your main operation so hence segment Revenue excludes extraordinary items is that okay so extraordinary item is loss no sir not necessary your you have your an asset was destroyed by fire and you received some or your inventory was destroyed by fire and you received some insurance claim you received some insurance claim that means this insurance claim you are paying or receiving receiving so that becomes your Revenue as well okay so those sort of extraordinary item you should included or excluded excluded because it is not part and parcel of your business okay similarly if you have any interest income dividend income profit on sale of assets and all ignore it because that is not main part of your operation so these are some inclusions these are some exclusions no need to Mar it up just have a quick glance through in my opinion they're good okay next is segment car expense because if you want to get segment car result how do you get segment result Revenue minus expense right so that's the reason we are saying what and all is a component of segment expense segment expense means it will include its own operating expenditure One Division means to operate a division you will be having some expenditure because that division will have electricity it'll have some uh employees you need to pay them salary so that don't division cooperating expense if it is there add it and it could have some inter segment expense also because it's possible that one division may be taking service from another division for the entity giving service it's an income for the entity taking service it's an expense like this if you have any inter segment expense you can consider and if you have any allocated expenditure same like Revenue there you had allocated Revenue no here you'll have allocated expense same example here sir you got a service bill of 20,000 okay who will service the car employees do you think we should have a separate employees for petrol division separate employees for diesel division or one employee can service both the cars that means you could have a common employee one employee he Services both the diesel car as well as a petrol car yes no that means you have to pay him salary but that salary is an expense for two division okay it's a common expenditure but both the division has to share it hence expenditure will also include your allocated expenditure same like allocated Revenue it will also have allocated expenditure these are inclusions what are the exclusions same extraordinary item because extraordinary item could be an income or it could be an expense and then similarly that it was interest uh interest income dividend income here it will be interest paid okay and then loss on sale of assets and if you have any income tax expense because you not the segment reporting no sir tax you will pay segment wise or overall company wise overall company wise hence income tax expense if at all you have ignore these are your expense next will be segment car assets segment car assets means it'll have if you're having a division means a division will have its own asset like datar some fixed assets probably so that can be considered and some allocated assets allocated asset means like here petrol and diesel vehicles both the cars you will sell it in a separate separate building or in one building there will be one building which will sell both the cars that building that means belongs to both petrol as well as diesel segment so that means that building has to be allocated hence that is your allocated assets done now some exclusions could be your defer tax assets we'll talk about more about defer tax assets defer tax asset is not really an asset it's a Time beinging asset or it's a temporary asset hence it is exclude and if you have any general assets or head office asset ignore it why let's say Sir Hundai company sir they're doing one research as to which other new business to start they already have a business in the form of manufacturing a car now they want to diversify they are thinking what extra business to start that extra business no can you start it right away or first you have to do research research so one building they have purchased in that building no only research is going on nothing else is going on only research is going on which business to start now you tell me that research building is it Anyway associated with petrol diesel or completely different completely different now this can you allocate it to petrol Division and Diesel division or cannot allocate cannot it because it is a general asset sence it needs to be excluded D okay next is your segment liability what and all will be segment liabilities those own that's own division liability like your credit etc etc will be considered if you have any allocated liabilities you can consider that exclusions will be same here it is DTA means there it will be dtl defer tax liabilities and general liabilities quick glance through is good enough for this D sir okay yeah I think one second all the question yeah all the question and related concept we have covered relating to as77 team thank you okay so next standard we'll take up is related party disclosure accounting standard 18 which talks about related party disclosure okay so what is this overall background behind the standard is so name itself is saying related party if you are a related party transaction may not happen at fair price transaction may not may or may not happen at fair price I just to give this example suppose we are in CA coaching fees coaching business right normally let's say for CA inter coaching we CHS 30,000 okay so for coaching we charge 30,000 but my cousin came he told Anna an Anna and need a CA coaching I told come Ma I didn't tell him Ma I don't come all right I he asked how much fees you are my cousin right for you 15,000 so normally for coaching fees how much we charge 30,000 because he's my cousin I charged him only 15,000 that means this particular transaction is happening at fair price or not at fair price not at fair price why is it not happening at fair price because that relationship ship that relationship is causing that spoil sport over here so now you tell me you have invested in this company you have invested in our company you got to know that we are giving coaching only to our cousins nobody else is coming only cousins after cousins after cousins as an investor don't you want to know all this transaction because the normal price is 30,000 but you are charging only 50 that means it's a heavy loss for the investors Equity investors yes or no hence the standard is saying if you have any related party transactions if you have any related party transaction you should compulsorily disclose it so this is not an accounting W standard this is only a disclosure related standard F now so for that first we need to know before you go to related party disclosure first you need to know who is a related party so if you want to call two parties that party could be individuals or for that matter it could be a company if you want to call two parties as related party no sir one party should either be able to control or exercise significant influence over other part party if you want to call two parties or two companies as related party one company either should have a control over other company or one company should have at least have a significant influence over other company if that is a case means they become related party so when do you have control for you to get control you should have more than 50 50% more than 50% of voting power when do you get significant influence 20% or more we have done all this as21 as23 all consolidation we have done correct no so either you should have a control or significant influence only then you'll become a related part let's run through a small example X limited has 90% in y limited but 90% what do you get control so is X limited y limited related party very much yes for you to be a related party either you should have a control or significant influence here we have control so both of them are related party let's take another case X limited has 30% in y limited with 30% what do you get significant influence with significant influence has both the company become related party yes so that means here both X and Y are related parties comfortable okay so this is with respect to companies but did they standard use the word company or they use parties parties Sir Mr X One individual he has 80% in y limited he has 80% in y limited that means with 80% what does Mr X get he gets a control so if one party has a control over another company that party and Company also will become related parties is that okay related parties is not with respect to companies it also it could be with respect to individuals and companies also comfortable let's take other example X has 30% in y limited with 30% what do you get significant influence so if you have significant influence then X Mr X One individual and Y limited the company they both will become related parties like this okay sir all right sir Mr X has 30% in y Limited with 30% what do you get significant influence are these two people related party Mr X and Y limited related party yes not only that the relatives of this individual and Company they also become related party it's just not the individuals and Company being related party the relatives of that individual and Company also will become related parties is that okay that means in this particular example Mrs X Mrs X is a wife of Mr X so this Mrs X and Y limited also will become related parts so it is not just individuals and Company it is the relatives of individuals and Company also will become related part the logic is quite simple sir a will have X will have sensitive information about y limited correct obviously if he has 30% shares in y limited means all y limited data he'll be aware of correct now sir ex limited may have the data but he has one dapne called this is X at home all the things you have to spell it out for dhap correct no you know honey what happened today like that all all information will come out yes or no so that means indirectly what will happen here not only X will have no about sensitive information of why even the relatives of M Mr X also will have sensitive information hence even relatives has been brought into the definition so we have to find the definition what it will be now the party who has control or significant influence will become Rel related parties not only parties the relatives of party and the company also will become related parties thank so what are relatives how did you come into this world matri pitashri so parents are your relatives are you you you are the only one son and daughter or you could have siblings so siblings is your related party so after one age you will also get uh after that girlfriend boyfriend stage some some stage may you will settle down you get married your husband or wife is a relative with husband or wife obviously you will procreate and produce someone okay so by product yeah so that's children's of yours are also related part like this so these are your relatives for this particular purpose okay now okay so when will you upload remaining topics sir I'll do it tomorrow I'll upload yeah tomorrow is the last day we will finish tomorrow and after that team also need some time to merge in on okay they will take one or two days for merging and everything and we will upload don't worry by the end of this week be available okay and I can I come back to topic so yeah H first wife second wife no in India we only talk about current life okay same thing you will study in CF final same thing you will study in CA final there they will say even Liv partners are related parties if you have any children from Liv Partners shantum shantum they are also relatives okay in India we are going we are conservative approach that's the reason all that extra curricular activities we have not brought into relative definition but in D may you will study all this right now you are in CA final CA inter that means for you relative means only this much no extra fitting okay have extra fitting but don't bring it in here okay don't I told I having that is your personal things I'll not interfere into that my business only is towards the teaching subject for extra things and all I will not come okay sorry comfortable with this this is one another one is key managerial persons and the companies are related part KMS and companies are related parties sir KMP means sir KMP means those persons who have the authority and responsibility of doing planning controlling directing the activities of Enterprise who will take all the decisions in the company those we call it as KMS usually they are your board of directors CEO CFO etc etc okay so whichever person is directing who was taking that planning directing and controlling the activities of Enterprise that we call it as KMP the KMP and and the company will become related parties not only that relatives of KMP and Company also will become related parties same like that party okay so I've just built up here just check sir a limited has a managing director Mr z a limited has a managing director Mr Zed managing director means what do we call that as KMP so means Mr Zed and a limited will become related party because company and IT company and KMS are any which way related party only that or there there is an extension extension what is that relatives of KMP and the company are also related parties same relatives what we discuss there that also same thing will hold okay sir one more thing is Enterprise over which KMP has either a control or significant influence that Enterprise and Reporting entity also will become related parties let's do a thing this we will learn it with help of one question immediately then we'll go for the other one sir NADA limited has sold goods for 9 lak to ganga limited okay during the financial year managing director of narmada owns 100% of Ganga managing director of NADA so NADA limited and managing director company and KMP are related party but this particular K know he owns 100% of Ganga okay now the question is anyway managing director and NADA related party managing director and ganga are related party because one side it is KMP another side it is control so they become related party the question is not that the question is is nada and ganga related party so look at this Arrow Mark there is one Mr X he is a managing director in NADA and he has 100% control in ganga are X and NADA related party yes company and KMP are related parties is X and ganga related party yes because X has a control the party controlling and the reporting entity are related parties if this is the case means these two guys also will become related parties that's what the definition said Enterprise over which KMP either has a control or significant influence are related parties now here he came Mr X is a campaign NADA Mr X also has a control over here it may not be control it could either be a significant influence also if Mr X either has a control or significant influence in ganga then these two also will become related parties okay this again all this are safety question brought in okay because obviously Mr X can influence both the companies no yes that means they are saying these two if these two guys transact it may not happen at fair price so just to be on the safer side even this is also brought into the related party disclosure standard all these are safety measures that's all okay because are you doing extra thing here or just giving a disclosure just giving a disclosure hence the Spectrum or the definition of related party is quite wide as far as this is concerned all right now let's check this the sales were made to ganga Limited at normal selling price by NADA is nada and ganga selling are doing some transaction yes are they related party yes sir if you have any related party means related party transaction should be disclosed or not disclosed it should be disclosed okay here the sales will be made how much is the selling price 90 so company is saying we sold it at normal price only we did not do any jugat we did not do any manipulation we are selling it at normal selling price at whatever whatever price we sell it to others same price we have sold it to gangs you know what our cheap accountant will say what does our accountant say he's contending that the sales need not require different treatment from other sales hence no disclosure is necessary he see because sales have been happened at a fair price they are saying I will not report acceptable not acceptable not acceptable what does the standard say Sir if you have a related party transaction you should compulsorily report it doesn't matter whether you have done a transaction at fair price below fa price or above fair price disclosure is mandatory because the standard thought processes this year you might have done it at fair price next year it may not happen so better disclose of all this so that investors have full information in mind so if you are a related party and if you have related party transaction compulsorily it needs to be reported No Escape okay that is one so let's come back to the other Concepts now so now we saw who and all is a related parties okay next will be who is not a related party who is not a related party sir two companies if they have a common director normally you have studied a director means he'll be a director in one company or he could be a director in more than one company I think companies are what is the Restriction number of directorship you can hold in 10 or 20 how much is that out of syllabus okay it's not there director is not there in your C inter syllabus H okay no problem fine there is a limit for that also companies act will tell I think sair is the best person to guide you on that I'll not interfere because I don't want to quote incorrect numbers okay but basically you can become a director in more than one companies so what as18 says is if two companies have same director if say if two companies have a same director they will not become related parties like here Mr X he is a km in a limited also he's a KMP in B limited also just because these two companies have common KMP they they don't become related parties two companies having common directors are not related parties this is a general R if you say no no no no you know they can become related party based on circumstance if you see both are influencing each other then you can treat them as a related party but as a thumb rule standard assumes that the companies having common directors are not related parties but you can contradict this and prove it as a related party with facts but should you have to do all that in exam or just simply write all this simply right two companies having common directors are not related parties if they give you this scenario just simply write it as not a related parties that is one the second one is a major customer major supplier provider of Finance distributor agents government unions trade unions all these are not related party doesn't matter whether you're transacting with them in low volume or high volume what did I say major customer major customer means datar let's say one company sir one company a limited they they make 90% of sales to X Limited 90% of their sales they're selling to One customer okay so this these two companies will not become related party okay whether you could be transacting in high volume or low volume your major customer will never become related BST never allow this is a thumb rule general rule is a customer and Company will not become related party because normally means customer means you'll OB obviously sell the goods to him you can sell it at a higher value or lower value so value is irrelevant so major customer is not your company and major customers are not related party that is one second one same goes with credit also if you're purchasing suppose 80% of you are a manufacturer 80% of raw material you purchase it from one Company the company from whom you are purchasing and you don't become related party because he's your major supplier okay fine as a thumb roll company and the credit are don't become related parties that is one and then franchiser franchiser means your now all this dominoo pah and all it's owned by probably someone entity in us now somebody else will pay some 30 lakhs 40 lakhs or one CR and take what a right to run that business in the same name that we call it as franchise Arrangement yes the franchiser and franchise don't become related parties these are all thumb rules you can contradict but if they give all this an examination if no further information is available simply write it as what not a related party same goes for your distributor agents TR trade unions and government Department also okay you could be transacting with them on a higher scale or lower scale doesn't matter they are as a thumb rule not considered as a related party any confusion no so this is about related party and who is not a related party so what is the standard name related party disclosure so that means you need to know what you need to disclose okay that's what we are studying next so what the standard say is first check how do you have that related part relationship how did you become a related party if you think or if you conclude that you become a related party through control if you you become a related party through control meaning one company has a control over other company or one individual has a control over another company if control is there means compulsorily you need to disclose the name of the related party and nature of relationship meaning who has control over you like this disclosure has to be given doesn't matter if there is a transaction done or transaction not done like let's say a limited has 90% in B limited with 90% what do you get control okay now sir that means for whenever B limited prepares their financial statement they need to tell that they are controlled by a limited they need to disclose that a limited is controlling them so a limited and B limited are not doing any transaction still this disclosure has to be given whether transaction has taken place or transaction has not taken place name of the related party and nature of Rel nature of relationship means how you got the control simply you'll say we have 90% shares in a a limited like that you need to give a disclosure okay even if transaction is not there this disclosure is compulsory needs to be given with respect of all other related parties all other related party means your related party through significant influence your are related party through KMP like that for all other related party uh things you only have to disclose provided there is a related party transaction only if transaction is there report otherwise not necessary only if transaction is there report otherwise reporting is not or disclosing is not necessary think logically what in all you want to report a comp two companies who are related party are doing some transaction as an investor what do you want to know name of the related party nature of transaction what sort of transaction is this whether did you purchase the Goods sell the goods you gave some service or you took some loan what sort of transaction you did and then amount of transaction whether is 50 lakh 1 CR whatever it is amount of transaction you want then standard is saying also amounts written off because normally in case of related party transaction the amounts could be suppose you give a company gave a loan to director after two years they said hey director loan Mafi loan MAF that means that loan has been written off so if you have done some write off of the loan disclose and amount written back written back means bad debts recovered so if you have any bad debts or bad debts recovered disclose this is your common sense no so these sort of disclosures you need to give name of a related party nature of relationship what sort of transaction amount of transaction and if you have written off any amount or written back any amount so these sort of disclosure you need to give provided only if you have done a transaction okay that's all is all about this chinto standard okay now done sir conceptually over that's all can we take a one or two more questions and build upon few Concepts okay this was there in RTP 24 let's go over this a limited enters into an agreement with Mr Bola for running a business for a fixed amount payable to the latter every year so a limited has a business they don't have time to manage their business so they have given that they Outsource that business running capacity to whom Mr Bola and Bola since he's doing this activity he'll not do it at free of cost he will get some money the contract states that day-to-day management of the business will be handled by Bola routine decisions Bola will take while all financial and operating policy decision are taken by border directors all important decisions in all board of directors all your day-to-day Affairs is taken by Bola and Bola does not have any voting power also in the company now they are indirectly asking you is a limited and Bola related party first of all company and KMS are related party is Bola a KMP or not a KMP so for you to be a KMP you have to do you should have the authority and responsibility of planning controlling directing the activities of the Enterprise here is Bola doing that major activities or he's taking care of day-to-day routine things he's doing day to day to-day routines so is Bola a KMP or not a KMP he's not a KMP company and KMS are related party however Mr Bola is not a KMP so will Bola and the company become a related party or not a related party not a related party that's all you need to write write one provision saying company and KMP is are related party in the present case Bola is only doing the routine activities so hence Bola is not a KMP hence company and Bola are not related parties so same things comes as a five marker question little bit of Masala you add but generally I think they'll give you like one one Marka two two Marka five cases they will give you and ask you to identify okay all right now Shri Manoj a relative of KMP a relative of KMP sir does a relative of KMP and the company become related party yes Manoj a relative of KMP he received a remuneration of 350,000 for his services to the company so that relative is giving some service to the company and he received some remuneration first of all is relative and Company related party yes is there any related party transaction here yes if there is any related party transaction should you report it yes but the transaction happened only from 1st April to 30th June on 1st July he left the service so they're saying we had a relationship only for 3 months in the year only for 3 months in the year transaction happened only for 3 months should should we disclose what the standard says is relation no need not exist throughout the whole year even if relationship existed even for even one day you need to report it relationship need not exist for whole of the Year meaning transaction need not happen whole of the Year even if transaction has happened on a one day still you need to give a disclosure your transaction happened for how many months 3 months that means that three months of transaction you need to rep okay so first of all Mr Manoj and the company are related party because relatives of KMP and the companies are related party hence this particular transaction should be reported can I comfor can I move on okay okay over here sir identify related party in the following cases a limited holds 51% in b b holds 51% in O Zed holds 49% in O let me drop an arrow a holds 51% in b B holds 51% in O and Zed has 49% in O you need to identify a related party sir this you know this a b o I'll draw an arrow like this a has control over B yes no a has 51% means will a have control over B yeah B has 51% means does B have control over o yeah so that means for as far as a limited is concerned B is a subsidiary company and that subsidiary company has another subsidiary this we call it as members of the same group this we say is a members of the same group so members of the same group are all related to each other everybody are related to each other that means a b o all are related to each other it doesn't matter if you have like it could be Arrow like this a limited has 90% in B A has 50% in C or let 50 lot let's make it as a has 60% in C C A has another let's say 80% in D these are also what sir these are also members of the same group because it's controlled by a same party these are also members of the same group all are related to each other okay so now for first conclusion is for a limited who and all is related can you tell me for a limited who and all are related is b a related party yes o a related party yeah that's what we said members of the same group are all related to each other so for a b and O are related party for B who and all are related party a is a related party o is also related party for o how who is related party a is also related party B is also related party because they're members of the same group but Zed has 49% with 49% you get significant influence correct no the if one company has significant influence over other company both the companies are related party that means for oh who is a related party a b and Z for Z limited who is a related party is z there in this group or outside the group outside the group but Z has significant influence in O So if they have significant influence both the companies will become related party so for Z who will be a related party o will be a related party great H this part two and part three Drama Is Never Getting Over only P we will do it P we will post it don't worry about part two part three concentrate on the things now you'll post it by the end of the week by Friday or Saturday it'll be available for now chill take take care of this okay uh now this particular question goods sold amounting to 50 lakh to an associate company let's give an example a limited has 40% in B limited so with 40% what do you get control or significant influence significant influence now a limited sir has sold 50 lakhs to associate company so is associate company I mean are these companies transacting yes sir first of all are they related party A and B yes are they transacting yes so should we give a disclosure yes okay next they'll say what you check Goods amounting to 50 lakh was sold to associate company during the first quarter okay after that relationship ceased what after first quarter what a is they sold off 30% stake they sold off 30% stake so in 40% 30% is sold off I means how much is the remaining 10 with 10% will you get significant influence or no significant influence I mean significant influence is there or lost so for for the first quarter significant influence was there after that significant influences lost okay however goods were supplied as a goods were supplied as was supplied to any other ordinary customer continuously they are transacting with each other a limited and B limited are continuously selling the goods to each other whole year the transaction is happening so they are asking whole year transaction should we report or only first qu transaction should be report whole year first quarter so the standard name is related party disclosure that relationship existed during the whole year or only in first quarter relationship existed only in the first quarter so whatever transaction in happened in first quarter only that you need to report beyond that after first quarter if you are making any sale that need not be reported because related party transaction is not there as long as you have a related party okay and as long as you have Rel related party transaction you need to disclose that okay related party can exist for one quarter one day 10 days doesn't matter if it existed for one day and if you did any transaction for that one day then that one day transaction should be disclosed other transaction need not be disclosed that is what I've written over here report only quarter one transaction because relationship existed only in the first quarter understood sir and not for whole year any doubts move on okay okay next one this check this UK bank limited okay 1 minute sir check this bank has provided 20 million loan to P limited okay stop there bank has given 20 million loan to P limited what did we say previously before coming to this one provision was providers of Finance are not a related party because obviously sir is your bank suppose I took aru Pro we took a loan of 10 CR rupees from SBI is SBI and aruro related part no why is this a special transaction or normal transaction normal transaction so providers of finance and the company taking Finance are not related party yes no that's a normal provision but check here UK bank no sir they gave a loan to P limited but not only that UK bank holds 23% voting power in b sir if this line was not there if this line was not there normal if you have taken a loan from Bank banker and the company are not related party here you have just taken a loan or Banker also has significant influence Banker holds 23% in your company and he has also given a loan with 23% what do you get significant influence that means both the companies will become related party now even though UK bank is a banker still they will become a related party why because they own 23% that means have they done any transaction yes they' have given a loan I means is there any related party transaction yes should it be disclosed very much yes that is answer that's what is given over here manageable work so with this yes 18 also Dum D I'll do one more and then give you a break would you be fine with that another maybe 45 minutes or so okay now thinking let's see Theory Justin H M just one minute H just inform them if possible they can reduce the one second come could okay uh yes for online also you're hearing noise huh there's a drilling noise going on over here is that Audible for you as well for the online is it getting captured they'll respond after 10 seconds lag no okay not hearing anything okay maybe they're not hearing me only okay no no worries fine I'm thinking it's good for you it's all right so we'll adjust I think apparently that will go on for another one hour we have to adjust okay all right so the next uh standard that we'll be revising is accounting standard 19 which talks about lease as 19 which talks about leases so lease is a simply a contract between two parties those two parties are known as lesser and Lessie lesser is the owner of the asset Lessie is the user of the asset what will the owner do over here will he sell the asset to the Lessie or he will give its usage rights sir lesser will only give a right to use the asset to another party I mean he'll give this right to use forever or for a certain duration certain duration that we call it as Le term and this right to use the other party will get it at free of cost or he has to pay some money he has to pay some money that we call it as leer red so Lee is simply a contract between lesser and Lessie where lesser will give right to use the asset for a certain duration that duration only we call it as leer term in return lesie has to make some periodic payments to the Lesser that payment we call it as lease rental or lease payment like in this particular example a limited has leased planted has given planted missioner on lease for 5 years to B limited so a limited is the lessar B limited as the less C lease term is 5 years lease rental is 1 lakh per like this okay awesome that is one okay there'll be certain terminologies that will come in this topic first we'll run through them and directly we'll dive in then into the accounting aspect okay first is something called minimum lease payment okay so stress upon this world payment under this lease Arrangement who will make the payment lessar or Lessie who will make the payment lessar or Lessie Lessie correct okay what in all payment lesi will make lease rental and also something called guaranteed ridial value so minimum lease payment means it's a constituent or it's an addition of two components lease rental and guaranteed residual value or for our class purpose we used to call this as grv so what is this grv so in this particular example if you take who's using the asset lessi that is B limited for how many years Five Years sir after five years what will happen asset will come back to which company a limited okay now let's say useful life of the asset is 5 years useful life of the asset is also 5 years okay so who's going to use this asset B limited after fifth year the asset came back to which company the Lesser which is a limited now what asset has reached it reached the end of useful life what do you think a limited will do now the asset has reached the end of its useful life so he will sell it so he is expecting a limited is expecting that the residual value will be 10,000 residual value at the end of fifth year will be 10,000 but sir be limited know such a mahanu he has used the asset Left Right Center like crazy that asset should be operated only for 8 hours a day he was using for 14 hours every day because it is not his no so Left Right CER Bas isy okay all right so now you tell me is the residual value that a limited will get at the end of fifth year be 10,000 or lot lesser lot lesser so if the asset is maintained in good condition a limited will get how much 10,000 if the asset is not in good condition means a may not get this 10,000 that means is it fair for a limited how much residual value he's getting is based on the usage done by B limited hence what do you think a limited will tell now a limited will tell B limited you give give me a guarantee saying my residual value will not fall below a certain number you give me a guarantee that residual value will not come below a certain number be limited told no problem I will give you a guarantee that residual value is 8,000 guarantee value is 8,000 that mean no matter what no matter what 8,000 payment has to be made by whom to whom be limited to a limit suppose a limited got zero as residual value he's not able to sell the asset at all still he will collect how much from B limited 8,000 because B has given a guarantee that minimum residual value will be 8,000 like this so This guaranteed residual value also payment who will make to whom less C to the Lesser hence how do you get what do you get how do you calculate MLP MLP means what minimum lease payment how did you get how do you get or what in all is minimum lease payment lease rental Plus guaranteed residual value comfortable so in this particular example residual value is 10,000 let's assume residual value is 10,000 how much is grv how much is grv how much guarantee Lei gave only 8,000 total residual value is how much resid value expected is 10 but lesie told I will give you a guarantee of only 8,000 because this is a negotiation number could be high or number could be low Lei told I'll will give you a guarantee only of 8,000 that means what is that balance 2,000 for that balance 2,000 is lesser having any guarantee or no guarantee no guarantee that we call it as ugv meaning unguaranteed residual value okay that means construct the equation for me how do you get a residual value residual value is nothing but grv plus ugr correct that is what I've written here next okay maybe I don't know I didn't write that okay fine no problem leave that but overall okay with you everybody resid value is nothing but if you want you can write it over resid value is nothing but grv plus u RV done done okay next is gross investment now sir in this particular example who has purchased the planted missionary a limited sir if you want to purchase planted missionary means you have to spend some money or you have to invest some money so who has made the investment here a limited has purchased plant and missionary means a limited has purchas a limited has made the investment now sir now let's say we have we have purchased a laptop let's say we paid 1 lakh rupees for this laptop okay that means we have invested 1 lakh rupees in this asset we want to recover that one lakh how will we recover we will use this laptop to conduct classes and we will generate the revenue correct normally when you buy and fixed asset we will utilize that fixed asset and generate the revenue but here a limited has purchased this planted missionary but is he using it or is he letting it out letting it out but still a limited wants to recover this planted missionary yes how A- limited will recover the money invested on planted missionary now through Le rent is that okay with you so now how do you get gross investment tell me the equation for gross investment one one thing from lessar perspective what and all lessar wants to recover he wants to recover only lease rental no three things he wants to recover what is that lease rental grv and ugv three things lesser wants to recover Lee rental grv and UV is that fine that are the constituents of gross investment so lease rental plus grv if you do what are you going to get lease rental plus grv if you do only we're going to get MLP that means you can restructure this gross investment as what MLP plus UI like that also you can write or simply you can write lease rental plus grv plus u comfortable okay now sir in this particular example asset is Le for how many years one lakh how many years lease rental five years that means what is a total lease rental one lakh you will get it every year for a period of 5 years so total Lee rental is 5 lakhs that is one is there any guaranteed residual value yeah how much is that grv is 8,000 and do you have any UV the total residual value is 10,000 and that grv is 8 means UV is two so what is your gross investment sir what is your gross investment for ler adding all this how much you going to get 5 lakh 10,000 any problem adding all this it is 5 lak 10,000 correct now sir this 5 lakh 10,000 recovery lesser will recover immediately or over leas over leas this 5 lakh he'll recover over a period of 5 years this grv residual value and all you will recover now or at the end of useful life that means this 8,000 and 2,000 he'll recover only by the end of year five that means this 5 lakh 10,000 is present value or future value this 5 lakh 10,000 is on future value terms but you do the lease accounting when you enter into a lease that means we need future value or we need present value we need to find out the present value of 51,000 that we call it as net investment gross investment will be expressed on future value terminology gross investment is expressed on future value terminology we have to find out the present value of that and the present value of that only we call it as net investment so to find out present value what do you need discount Factor discount factor that we use is irr Discount Factor we use you use is IR IR here stands for you can call it as internal rate of return but here they call it as implicit rate of return so in the whenever in the lease problem if they say implicit rate of return is 10% that 10% is nothing but your discount Factor the first priority for Discount factor is always IR if IR is missing you can use l incremental borrowing rate you can use borrowing rate if they give you both rate so far it is not happen if they give you both irr and borrowing rate you will always prefer IR I've told you the logic and all in regular class let's not worry about that for the time being keep it as formula for the time being okay so irr first you priority to irr then you will take if irr is missing then you'll take borrowing rate what do you take this as discount factor to find out the present value okay s s why do we need all this I'll tell you in a bit fine sir so suppose what is the gross investment here sir 5 lakh 10,000 correct maybe I'll write it over here 51,000 is the gross investment we got it here this gross investment is will be on present value terms or future value terms future value terms so you need to find out the present value that present value only what do we call it as net investment suppose that comes to be 350,000 suppose that comes to be 3 lakh 50,000 what is this 350,000 future value or present value present value is there any difference between this two 5 lak1 minus 350,000 how much is the difference 1 lakh 50,000 1 lakh 60,000 correct that is a difference that difference only we call it as unearned Finance income that we call it as unearned Finance income so basically lesser will book this 1ak 160,000 as the difference between time time value of money of future value and Present Value only we book it as interest charges but here lesser the person paying will book it as interest charges here lesser is paying or receiving receiving so lesser will book it as Finance income for the guy paying it as it is finance charges for the guy receiving it it is finance income okay so that total Finance income only we call it as unearned Finance income sometimes this also is popularly asked they asked you to calculate something called unearned Finance income great so why do we need all this one second I'll tell you all this in a minute okay uh first I when I come to a question I'll revisit all those concept what we discussed now first one or two more Concepts I would like to discuss and then take up one question sir Whenever there is a lease Whenever there is a lease Arrangement first check what kind of a lease it is lease are of broadly of two types one is a finance lease another one is a operating lease lease could either be a finance lease or a operating lease first find out whether it is an operating lease or a finance lease for finance lease they have given some indicators and they given some indicators all right first indicator anybody remembers what is the first indicator if you want to consider as a finance lease first present value of minimum lease payment should be equal to fair value of the asset present value of minimum lease payment are you able to come come across this term MLP that's the reason we studied what is MLP tell me what is MLP if you're getting confused stress upon the term minimum lease payment who will make the payment Lessie what and all payment lesi will make leer rental and gr Le rental plus grv only we call it as minimum lease payment so if you want to conclude it as a finance lease the present value of minimum lease payment should be equal to fair value the yes that is one first I'll go through one condition then we'll take up one question immediately to prove it okay one is this second one leas term will be equal to the useful life of the asset lease term will approximate or will be more or less equal to useful life of the third one asset is transferred to the the asset is transferred to lesi at the end of of lease term asset is automatically transferred to the lessi at the end of lease term lesser will tell the lessi you only keep the asset down at the end of lease term asset lesser will not collect back he'll tell the L you only keep it if such a feature is there in lease means that is a feature of what kind of a lease Finance lease asset is basically transferred to lesi at the end of lease or lesie has an option to purchase the asset at a value significantly lower than fair value let's say lease contract says the term of the lease is five years term of the lease is five years at the end of fifth year no sir leie has an option to purchase the asset asset will not be transferred to lesie lesie has an option to purchase the asset at let's say 1 lakh rupees leie has an option to purchase the asset at one lakh but the fair value of the asset is expected to be three lakh the fair value of that asset is 3 lakh but lesie can buy it by just paying one lakh now you tell me bad deal for lesi or good deal it's a good deal and leie feel it's a good deal we will buy it off if that feature is there means that is a feature of a finance Le so what is this feature again Finance lease is that lease where lesie has an option to purchase the asset at a value significantly lower than that is one okay or the last feature is asset is of specialized nature that only lesie can use it without making major modification basically customized asset we had a planted missionary Lei told I want you to customize the asset only then I can use it so lesser did customization and then gave it to lesie now you tell me since it's a customized asset anybody can everybody can use it or only lesie can use it if that is a case means if it is a specialized asset then is also a feature of Finance leas okay so if all these features if it fails if all of them if they fail then it'll become what sir operating Le it's like this H if all of them fail then it will become operating list like this to test done done G okay let's take up one question and uh see how it works okay we'll go with one question given in MTP only I think okay now surj limited wishes to obtain a missionary costing 30 lakh by the way of lease so they want to obtain one asset on lease so surage is probably the Lessie because he wants to take an asset on lease okay what is the cost of the asset 30 lakh what is the life of that asset sir 14 years but the company requires it only for 3 years this company they want to lease the asset for entire 14 years or only 3 years only three years not me there telling yes sir no it enters into an agreement with star limited for a lease rental of 3 lakh rupees perom payable in are payable in aers means when they use the word here payable in are what it means is lease rental is paying at the end of the year if you're paying lease rentals at the end of the year year we call it as payables in ear okay and implicit rate of interest is 15% that means there's nothing but your IR RR so to find out present value we need a discount Factor first priority for Discount factor I always told is IR if irr is missing you'll go for borrowing rate here IR is missing or given given 15% the chief accountant of surage limited the Lei is not sure about the treatment of lease rental and seeks your advice so he's saying I don't know whether it's is an operating lease or a finance lease you guide me okay use annuality Factor at 15% for 3 years as 2.28 okay now sir let's go over we need to First tell whether it is an operating lease or a finance lease let's conclude what is the first feature of Finance lease we told Finance lease is that lease where present value of minimum lease payment will be approximating it will not be 100% equal it will approximate to fair value of the asset so present value of minimum lease payment should be more or less equal to fair value of the asset so first let's find out the present value of minimum lease payment what does minimum lease payment mean lease rental and gr that means you have to find out present value of two things here present value of minimum lease payment present value of lease rental you need to find out and present value of grv you need to find out and it should be more or less equal to fair value of the asset if it is equ if it is equating means then it automatically becomes a finance like that can we try it out okay so check here sir how much is the Le resal 3 lakh is there any grv where at the question is there any grv so grv is a compulsory or negotiated number it's a negotiation in some problems may grv may be there in some problem may it may not be there okay so we want what sir what is the total leas rental you're paying every year three lakh what is the lease term three years so what is the total leas rental three lakh for every year for three years if you're paying means Total leas Rental is 9 lakh that 9 lakh is the present value or future value future value we want future value or present value present value find out the present value of minimum lease payment so now just check sir one way one way to do it is you can take year 1 2 3 what is the cash flow how much is the lease rental you're paying every year three lakh three lakh and three lakh okay now all this three lakh and all you'll make the payment immediately or this three lakh you'll pay at the end of first year this three lakh you'll pay at the end of first year this three lakh at the end of second year this three lak at the end of third year so that means all these are what sir future value how do you find discount factor I mean how do you find out present value by multiplying discount Factor discount factor is what here 15% so tell me what is the first year discount Factor how do you find out discount Factor 1 divid 1 plus I whole power n i stands for interest rate n stands for number of years so 1 divided by 1.15 you do how much you're going to get 0 0.86 9 okay again press equals to button how much are you getting 0. 756 then again equals to button 0 0 657 so this is your discount Factor how do you get present value of cash flows multiply these two so 3 LH into 869 is how much 2, 260,000 700 these two multiplication one of you do the third one as well huh 2600 2 lakh 26800 last 1 lak 21,000 1 lak 9700 add all this sir summation of all this is how much4 6 lakh 84 600 this is one way to get the present value thises your present value of minimum lease payment because you don't have grv over here if grv was there means I would have included grv also into my calculation here if I want I write one more three and write it a zero what is a zero for grp if it was there means you would have multiply that also with third year discount factor and got it not there so it is fine this is one way or another way is if you just check over here this three l is it changing or same every year same every year sir if you want you can calculate each year discount Factor separately if you are using each year discount Factor separately we say you are using PV if present value interest Factor but since the cash flow is same every year you need not use PV if you can use go for PV AF because mathematically this number is same no only this is changing so what do you do is all the three discount Factor you add all these three you add 869 2 point if you add all this you're going to get 2. 2.28 that's what they've given in the question that is what they've given in the question so indirectly the question is saying don't waste your time by doing PV if take PV AF three years discount Factor put together they so how do you find out present value of minimum lease payment then just one thing present value of minimum lease payment is nothing but present value of lease rental plus present value of grv so what is the lease rental every year 3 lakh so just multiply PV if how much is PV if 2.28 so this is any which way grv is anyway not there so I'll write it as zero so three 3 l multi by 2.28 you how much you getting 6 lak 84 4 a small round of error will be there that's fine 6 lak 84 6 lak 84 967 so instead of doing like this and wasting time you can do this in one lineer is it okay you do this or you apply this method only if the cash flows are same every year if it is not same every year you have to compulsorily do it for each year separately otherwise simply use PVF try and figure it out done now so you got the first component present value of minimum lease payment another component we need is what sir fair value of the asset how much is the fair value of the asset they told 30 lakh costing cost and fair value will be taken as same so how much is the fair value of the asset 30 LH now sir if you want to call it as a finance lease then present value of minimum lease payment should approximate to fair value that means this no should be more or less equal to fair value is it equal no say approximate so when can you say it approximate sir standard does not define percentage in class I told you take the percentage of 60 if present value of minimum lease payment constitute 60% of fair value conclude that it is a finance lease I told you because standard does not give you any percentage you find out the percentage here for me how do you find out percentage out of 30 lakh MLP constitute 684 how do you find out that percentage 684 967 divided by 30 lakh into 100 how much is that percentage sir huh 23% can I round it off if this percentage is 60% or more it becomes Finance Le is it 60% or more no that means automatically operating lease no no no what did I say all the condition if it fails then only it will become operating lease first condition it has failed okay next we will check the least term condition what is the least term sir 3 years but what is the useful life of the asset they told useful life is 14 years what is one of the condition of Finance lease for it to be Finance lease lease ter should approximate to useful life of DS and when when I say approximate I told take the percentage as 60% find out the percentage out of 14 years lesie is using it only for 3 years tell me the percentage 3 divided 14 into 100 how much is that 22 again 22 percentage you're getting if you're getting 60% or more concluded as Finance Le you're got you're getting 60% or more or lot lesser lot lesser what is the third feature asset is transferred to the asset Le see at the end of lease term there are no fourth one Lei has an option to purchase the asset at a value significantly lower than fair value there are not there not there asset is of specialized nature where only lesi can use it there or not there not there that means other three criteria can we comment or no comment you can only comment on these two these two criterias is satisfying or fails is is it 60% or more or lesser if it is 60% or more then it becomes Finance Le not both of them even if one of them gives you 60% or more then it becomes a finance lease but both are giving a number less than 60% therefore what is a conclusion it is an operating lease so you have to account this as an operating lease done not done G okay sir if it is operating lease means what do you have to do sir sir till now before this A9 if somebody had asked you what is the journal entry for lease rental paid what you would have done what is the journal entry for lease rental paid what you have to done rent account debit to bank account then P account debit to rent that is a treatment for operating lease if it is operating lease whatever you have done till now same thing will continue meaning here the journal entry will be there's an operating lease and what you have to do how much is the lease rental Le is paying every year here three lakhs so the journal entry will be lease rental account debit to bank 3 lakhs every year and that lease rental will be transferred off to B account but the cash here is if it is operating lease no lease rental is an expense you'll transfer it to pendl that expense has to be transferred on a straight line basis meaning meaning every year lease rental that you transfer to P has to be same okay but here ironically anyway it's same what is the lease rental you're paying every year three lakh is that varying or same same so if it is not same suppose lease rental was suppose lease rental is 2 lakh three lakh and or 1 lakh 2 lakh and three lakh lease rental first year is 1 lakh second year is 2 lakh third year is 3 lakh so tell me sir is lease rental same every year no what does this standard say if it is operating lease you transfer lease rental expense to pendl but on a straight line basis straight line basis means you have to find here what is the average leer rental you find how do you find out average 1 lakh plus 2 lakh plus 3 lakh divided by three you how much are you getting 2 lakh rupees that means every year you'll transfer how much Le rental to pendl 2 lakh but first year you paid only how much 1 lakh so expenses 2 lakh but you paid only 1 lakh means balance one lakh is outstanding Le rental like that so if you paid more means prepaid expense if you paid more means prepaid if you paid less means outstanding like that that drama is there in this question or not there not there because every year lease rental you're paying is sale and standard also says every year you have to transfer to lease rental expense to pay and no statline basis this is the treatment for operating lease did everybody understand like this you can present it the way I presented here D sir any doubt no doubt all this we have done H revising doesn't look like a revision though people have forgot Left Right Center at least here online many people may be remembering I don't know one second online everything looking good I suddenly got the message has stuck is everything good in online give me a quick response people is the audio part and the video part fine okay now it came now they'll respond okay all right cool okay fine we'll come back to this one sir this chart so whenever there is a lease first check whether that lease is a finance lease or an operating lease they have given indicator for what kind of a lease Finance lease so test all the indicators if every indicator of Finance lease if it fails then the lease will become operating lease every indicator should fail but practically in your question no they will only give you data for one and two one and two means the least term you can test present value of MLP you can test other things they will not give you the information so you don't have to bother so usually they'll give you data like this this question we saw we only test we were able to test only condition number one and two other information was not there is that okay with you all right so if it is operating lease if it is operating lease what is is a treatment you already know you tell me the treatment if it is operating lease for lessi lease rental is an expense that expense you transfer it to P but there is a catch what is a catch this expense has to be transferred to Pendle on an slm basis or any other systematic basis also is acceptable but practically we use it on slm basis only slm basis means every year what Lee rental expense you transfer to pnl has to be same has to be equal so if lease rental is not same means if if you paid extra lease rental treated as prepaid if you paid less Lee rental in a particular year treated as outstanding lease rental that way this is the treatment for whom this is a treatment for operating lease for L what is a treatment for operating lease for lesser who's the legally owner of the asset lesser that means asset will still be shown by whom lesser only will show the asset on that asset lesser will charge depreciation for lessy Le rental paid is an expense means for lesser it is income so what will the lessar do this income lesser will transfer to Pendle on a catch basis what are the catch basis on an slm basis same even lesser also will transfer this income to pandel on an slm basis Fu this is your golden days approach this is what you've been doing since your 11th grade I think your slm basis you're not doing that's the only thing extra but rest everything is safe comfortable sir what is the treatment for finance lease sir huh if by chance it becomes Finance lease then the whole treatment will change I give you a small example before that a limited Leed one planted missionary for 5 years to be limited meaning Le term is how many years 5 years so Le's rental let's say is 3 lakh rupees per anom every year Le rental is 3 lakh rupees per anom sir can you tell me what is the total Lee rental no grv and all forget a grv for the sake of Simplicity I'm ignoring grv I'm only taking lease rental can you tell me what is the total Lee rental 3 lakh every year for 5 years it will be 15 LH this 15 lakh lesser Lessie has to pay to the Lesser immediately or in future fure future that means this 15 lakh is a future value we need to find out present value this only we call it as present value of minimum lease payment because if guaranteed residual value is not there then lease rental itself becomes MLP correct so let's say we found out the present value of this minimum lease payment and got it as 10 lakh we got this to be 10 LH any doubt to here no let's say present value means it is there on today's value can I say like that this 10 lakh is the today's value let's say the fair value of the asset is also 10 lakh fair value of the asset is also 10 lakh now you think logically what has happened here sir the total if you want to buy the asset today not lease it if you want to buy the asset today in totality how much you need to pay 10 lakh what is the today's value of of Lee rental what is the today's value of MLP 10 lakh that means what has happened over here the agreement is saying that it is a lease but you're paying such amount of lease which is equal to almost almost purchase value of the asset lease value itself is equal to purchase value of the asset agreement is saying lease but in all reality terms this is not lease this is a purchase this is a purchase did you understand because the purchase value of the asset is 10 and the present value of minimum lease payment is also 10 lakh okay that means what kind of a lease is this Finance lease because Finance lease what is the first indicator sir present value of minimum lease payment will approximate to fair value of the asset approximate means it should be equal to 100% or 60% is good enough 60% or more is good enough sir standard mentioned 60% or I am telling I telling is that can we take that or sir yeah standard is not giving any percentage so I have just told that percentage by keeping few books in mind so follow that it's fine okay now all right so now now now you think logical accounting not see this as8 no runs on a substance over legal formula accounting the whole as8 runs on a concept called substance over legal form what does substance over legal form mean legal means legality substance means reality so what as8 says is reality is more important than legality now agreement is saying it is a lease legal agreement is saying it is a lease but in reality is it really a lease or like an asset purchased asset purchase why because purchase value of the asset is 10 lakh present value of minimum lease payment is also 10 lakh that means what you have to do now since it is a purchase lesie has to record the asset if it's a finance lease lesie has to recognize the asset but currently who's showing the asset lesser because who who's legally purchased that asset and given it on lease lesser So currently who showing the asset lessar so lessar has to derecognize the asset lessar has to cancel the asset because no you check sir is Lessa really interested in this asset is Lessa really interested in the asset no let's say the useful life I'll bring you one more point also for you the useful life of the asset is also 5 years the useful life of the asset is also five years now think the asset can be maximum used for how many years five years least term is also how many years five years that means who's using this asset and getting all the benefits who's using this asset and getting all the benefits be limited be limited is who here let's see that means in reality who is really interested in this asset asset and asset usage Lessie that is B limited so what as as18 is saying is or as19 is saying is since only lessi is interested in using the asset let lessi only show the asset because reality is that agreement says it is a lease but in reality may it is like a purchase so let Lei only show the asset but currently who's showing the asset a limited so a limited has to cancel the asset and B limited has to record the asset this is the treatment for what lease Finance lease that is what I've written over here if it's a finance lease the first thing lesser will do is he will derecognize the asset he D recognition means he will cancel the asset what will Lei do he will recognize the asset sir if you want to recognize the asset means you have to recognize it at certain value correct no sir if you purchase the asset for 5 lakh what does the journal entry will pass I said planted missionary you purchase for five LH the entry will be planted missionary account debit to bank account 5 LH here lesie has purchased the asset or it is substance over legal form accounting it is substance over legal form accounting because asset has not L has not really purchased the asset correct in reality is not purchased but the interpretation is that correct that means at what value should Lei record there has to be some guid for that hence a 19 says lesie has to record the asset at lower of two things lesy has to record the asset at lower of two value one is present value of minimum lease payment or fair value of the asset whichever is low present value of minimum lease payment or fair value of the asset whichever is lower understood this is the one thing I'll tell you the full end to endend accounting also I will take you through one question generally they don't ask full to fun full accounting just for your reference we have done it in regular class now also I'll do it because I'm seeing certain weird faces so so still I'll go through that once with you okay that is one all right what about lesser sir he has canceled the asset now lesser is interested in the asset or he's interested in recovering he's interested in recovering what lease rental correct that means he will record receivable because he's not interested in the asset he's only interested in receivable what receivable Lee rental receivable correct now how much lease rental is there over here 15 lakh okay now it means sir lesser is interested to recover only Lee rental or everything everything what and all lesser wants to recover Lee rental also grv also UV also in my example what is the total lease rental Ser we have already got 15 lakhs because 3 lak is a lease rental every year and Lease term is 5 years what is the total Lee rental 15 lakh grv and ugv in my example is how much zero that means what is the gross investment 15 lakh this 15 lakh lesser will recover immediately or over a period of five years that means this 15 lakh is the present value or future value future value you have entered into a finance lease means you will do the accounting in future or now you have to do the accounting now that means are we interested in this 15 lakh which is a future value or we want present value we want present value so find out the present value of gross investment which only we call it as what sir net investment let's say that comes to 10 lakh so that means lessar will record that receivable at net investment that's the reason we discussed MLP gross investment net investment initially so lessar will record receivable at net investment is that fine because he's not interested in the asset he's only interested in recovering that gross investment but recovery will happen not immediately but it will happen in future hence find out the present value of gross investment that only we call it as net investment so receivable will be recorded to the extent of net investment are we comfortable okay so currently let's say the asset is shown at in his books at one lakh rupees or maybe let's take this example currently the asset is shown in his books at 9 lakh rupees currently the asset is shown in the lar books at 9 lakh rupees if it is finance lease can lesser show the asset or he has to cancel cancel so he will cancel the asset asset has debit balance how does he cancel credited that means he'll credit the asset by how much n lakh what is that n lakh carrying amount of the asset what is he really interested in lease receivable that means lease receivable he'll account it lease receivable is a liability or asset asset he will record Le receivable at what value net investment how much did we gred as net investment here 10 lakh in my example net investment is how much 10 lakh is the journal entry matching or balancing figure how much balancing figure one lakh now asset if you D recognizing means you will get some gain or loss so this one lakh is a gain or loss which you'll transfer it off to P that's comfortable any problem no but but but but but hang on how much have you shown receivable Act check the screen how much are you showing the Le lesser is showing the leas receivable Act 10 lakh but will lesser recover 10 lakh in totality or he'll recover 15 lakh you have shown the receivable at 10 lakh but Total Recovery is at 15 lakh so what is the difference 15 15 lakh minus 10 lakh is how much 5 lakh rupees this is nothing but this what sir current present value of that is 10 lakh future value is 15 lakh the difference between this is finance charges a finance income the difference between these two you'll look it as income so the interpret ation here is lesser has given a loan of 10 lakh and he'll recover this loan with interest of how much 5 LH rupees so totally he'll recover how much 15 lakh at the end of fifth year like that you have to do the accounting it's like ler has given a loan of 10 lakh now and he'll collect at the end of fifth year how much 15 lakh so if you have given a loan means obviously you will collect interest so the difference between this present value and future value Only You accounted as interest income for for for for a person taking loan it's interest charge charges but for the banker it is interest income so here lar is like a financer because he's giving you the asset now but is he collecting the payment immediately or over five years five years that means he's like a financer now so financer will book the finance income that only we call it initially as un earned Finance income or ufi so how do you get ufi here construct one equation for me how do you get ufi it's nothing but difference between present value and future value which is there on present future value terms gross investment which is there on present value terms net investment so the difference between gross investment and net investment only we call it as unearned Finance income this is also popular question that's get asked frequently from this topic accounting they don't ask okay usually they ask this okay fine everybody okay let's have one quick recap I know we have learned as many Concepts and then we will apply it in one question okay uh so basically sir MLP how do you get what is the full form of MLP minimum lease payment who will make this payment lesie From lessie's perspective think what and all payment lesie is expected to make make in case of lease one is lease rental and another one could be grv as in guaranteed resal value grv may be there or may not be there if it is there add it that is one then we looked at one more what is that sir uh residual value residual value could be of two types guaranteed residual value and unguaranteed residual value so if you want to structure of an equation residual value is nothing but grv plus UV okay now come this is the L angle come to the lar K angle what has lar done he has purchased the asset to purchase the asset means he has invested some money and he has given it on lease okay that means what in all lesser wants to recover he wants to recover gross investment and grv also ugv that means gross investment is nothing but lease rental plus grv plus ugv all this recovery will happen now or in future future that means gross investment is expressed on what terms future value terms but we are doing the accounting right now hence we need to find out what present value that present value of gross investment only we call it as net investment the difference between future value and present value is nothing but time value of money interest received that only we call it as unearned Finance income for the Lesser because lesser is a financer financer will book an income other party who has taken a loan will book charges okay for lessy it is finance charges for lesser it is finance income like this done now okay okay this is a terminology now then we discussed Whenever there is a lease lease could be of two types operating lease and finance lease for finance lease there are five indicators one is present value of minimum lease payment will be more or less equal to fair value of the asset it's not exactly equal to the word used is approximate and I told for Simplicity you can say approximate you can substitute as 60% or more then least term will approximate to useful life of the asset least ter will be 60% more more of the useful life of the asset third one asset is given to the Lessie at the end of lease term lesie doesn't have to get pay anything automatically Le asset is given to the Lessie at the end of lease term or lesie has an option to purchase the asset at a value significantly lower than fair value and Le he wants to purchase it fifth one asset is customized asset or asset is of a specialized nature where only lesi can use it without making any major modification if all the five indicator does not satisfy meaning if it fails then it becomes operating Le even one indicator passes means it becomes a Finance lease what is the difference sir if it is operating lease you go for Golden Days accounting for lessar it is an income for lesi it's an expense whatever lease rental whatever lease rental lesie is paying he'll book it as an expense and what Le lesser will show that as an income but the cash is this income and expense has to be accounted on a straight line basis if you have paid more show it as prepaid if you have showed less means show it as outstanding that accounting however if it is a finance lease the whole game will change if it's a finance lease that means now again you have to remember substance over legal form meaning reality is more important than legality so I give you example if it is finance lease that means you tell me is the Lesser really interested in the asset or he's not interested so what should the Lesser do if it's Finance lease lesser has to cancel the asset L asset is shown at carrying amount so cancellation also will happen at carrying amount so credit the asset to the extent of carrying amount but what is lesser interested in he's interested in recovery that means he will show receivable okay receivable you are doing Accounting in future or now now that means this receivable is shown at gross investment gross investment gross investment value or net investment value lease investment or lease receivable will be recorded to the extent of net investment so if there is any difference in this journal entry that is gain or loss on D recognition of asset which will be transferred off to P that is one okay all right but is you have shown the lease receivable at 10 lakh but will lesser recover 10 lakh over a period of 5 years or he'll recover 15 lakh 15 lakh so the difference between that 10 lakh and 15 lakh is nothing but 5 lakh that is is nothing but time value of money interest income for the Lesser that five lakh is nothing but unearned Finance income okay now this is for lesser accounting how about lessi accounting who's really interested in the asset Lessie in case of Finance lease who's really interested in the asset Lessie that means who should show the asset lesie so lesser lesie will record this asset lesie will record this asset at lower of two things what is our two things present value of minimum lease payment or fair value of the asset whichever is low comfortable that is one there are other two things also which I'll tell you in one problem so far all of us have understood whatever we have covered let's go over one question this one I think is an MTP question lesie took a mission on lease from lesser fair value is 7 LH fair value of the asset is 7 lakh the life of the economic life of the mission as well as least term is 3 years oh nice least term is three years life is also three years that means what sir lease term and I mean and the useful life is same means automatically it is what kind of a lease Finance lease that one indicator itself is good enough for me it's a finance lease great at the end of each year lesie pays 3 lakh rupees what is this three lakh lease rental or lease payment the lesi has guaranteed a residual value of 22,000 so what is this 22,000 guaranteed ridial value or that only in our class purpose we call it as grv on the expiry of lease to the Lesser how lesser estimates that the residual value will only be 15,000 that is irrelevant though they're saying we'll only get 15,000 that is irrelevant let see has given how much Guaranty 22,000 that means for all our working we will take the how much value 22,000 is that fine so he's expecting only 15 no yeah leie became Bak over residual value is only 15 means how much guarantee he should have given 15 he became bakar and G 22 once he has given guarantee means he has to honor it cannot Escape so what is grb 22,000 that means 7,000 is negative UV resid value is also 22,000 grv is also 22,000 okay fine now people basically lessar got a good deal over lesi got a bad deal but happens because res value is a Paka number or estimated number estimated number okay like that the implicit rate of return so that is nothing but your I RR so you need discount factor means first priority is always to IR given present value factors at 15% they have given so check is lease rental every year or same same if it is same means we have to calculate it multiple times or we'll use PV if or PVF we will use pvaf how do you get PVF they given discount Factor now add all the discount Factor these three years discount Factor you add how much are you getting 2.28 2 that is nothing but your PV AF we use shortcut method fine now all right for calculate the value of machiner to be shown by the lesie obviously Lei will show the asset only in case of a finance lease so they are not asking you to test whether it is finance lease they are saying it is finance lease we know it you tell us how much less he will record the missionary act in his books also finance charges each year for lesser it is finance income for Lessie it is finance charges so every year finance charges they're asking okay you know this logic already at is it a finance lease yes if it is a finance lease who is really interested in the asset Lessie so who will record the asset lesie at what value and lower of two things present value of minimum lease payment or fair value of the asset whichever is lower do you know fair value of the asset yeah the only thing we need to find out is what sir present value of minimum lease payment FF can we find out that how do you get present value of minimum lease payment you need to find out present value of lease rental plus present value of grv because minimum lease payment means only two things no lease rental and grv both C present value you find out you'll get present value minimum lease payment so that I put up a working note here check finding a first working not is to find out present value of minimum lease payment lease payment constitu are lease rental and grv is lease rental changing every year or same every year same how much is that three lakh since it is same every year we'll use pvaf 3 lakh multiplied by pvaf you do if you get you're going to get present value of lease rental to be 684 600 is that the only thing or we have grv also how much grv gu how much guarantee less he actually give don't take 15 how much less guarantee actually less he give 22,000 this 22,000 L he has to pay now or at the end of lease term end of lease term what is the lease term here three that means you will take this 22,000 will come every year only once once that means here you will take PV AF or PV if PV if which year PV if when will you receive this when will this payment be done end of third year so check third year discount Factor what is third year discount Factor 0.657 all this is given take it sir when they give discount Factor you don't calculate take it as it is so if you do this you're going to get present value of minimum lease payment to be $699 054 correct okay asset has to be recorded at uh by lease at what value present value of minimum lease payment or fair value of the asset fair value is given in the question only to be 7 lakh so which is lower sir $699 0504 so asset will be recorded at the lower of present value of minimum lease payment and fair value which is $699 054 donear G okay now the journal entry we'll take care of so that it'll give you a little bit better idea they have not asked but just if you know one it'll be better so lesie has to record the asset now asset has what balance debit balance now lesi has to record it so what will he do he'll debit the asset account what is the name of that asset machinary so that means lesie will say plant and missionary account debit okay how much value $699 054 correct what will he credit will he credit bank did lesie make the $699 payment immediately or in future fure that means lesie has a liability to pay the this so he will record something called lease liability that means in case of Finance lease lesie will record asset also he will record liability also because he has not paid the $6.99 immediately he'll pay it over a period of 3 years that means he he has a right to use the asset as well as he has a liability to pay for it hence we record Lee liability okay now he'll record it at same value whatever his asset value at same value lease liability also will be recorded both will be same that is one thing everybody clear now check sir you have recorded lease liability at what value 699 054 but is lesie going to pay only $699 054 no sir every year lease rental is 3 lakh no and Lease term is how many years 3 years and he also has to pay grv of how much 22,000 that means what is the total payment 9 lakh 22,000 but you recorded only $6.99 because this 9ak 22,000 was is future value the 69954 is the present value the moment you enter into a lease this particular accounting should be done the asset will be recorded by the not at the end of lease term the moment when the lease is entered and that day itself asset will be recorded that means all this we have to record it what value present value present value is 699 054 but future value is 922 is there any difference yeah what is the difference 9 lakh 22,000 - 699 052 54 if you do you're going to get 2 lakh 22946 for lesser it was Finance income for Less C it will be finance charges it's like if you want for your understanding you can think you have taken a loan of 6 lakh 9954 after 3 years you need to repay 922 that means you're paying extra why are you paying extra on loan what extra you will pay interest that only they're calling it as finance charges is that okay sir there's a to this is what each year interest charges or this is total finance charges did they ask you total finance charges or each year of finance charges they asked you to calculate each year of finance charges that we will put up one table this table is quite popular know this almost many topics in CA final this will repeat here also in this and as50 in this table will repeat okay this I used to you can remember this as okay I'm not going to see a final terminology we'll leave this okay so you have to construct this table this table has few columns year opening balance finance charges payment and closing balance now what did I say Sir the 699,000 is like a loan taken you have taken a principle of how much $6.99 how much you will repay 922 so you're paying more because you have to pay interest so what is the opening balance of the loan 6 lakh 9954 correct sir so take that as opening balance understood sir on principle of loan what do you pay interest interest what is the rate of what is the rate given in the question here 15% so you have to book that finance charges at the rate of 15% so calculate 6 lakh 9954 15% that's what I've written over here column number three is nothing but column number two multiplied by 15% this 15% is how much 104 858 correct this is first year interest charges now check sir you how much is your loan amount $6.99 now you have to pay only loan or you have to pay principal also I mean you have to pay only principal or interest also interest also that means you have to pay interest also now 104 what is the loan value now you took this much loan are you actually taking loan or substance over legal form accounting the substance over legal form accounting you have to think like that and do the accounting over here okay so you had to pay $6.99 now you have to pay interest also added add up these two how much is the loan value now 8 lakh 3,912 that's what you're getting now first year did Lessie pay any money to the Lesser yeah every year he has to pay three lakh that is your payment column first year may he already paid 3 LH sir when you pay loan balance will be same or it will reduce reduce that's the reason closing balance check what have I written closing Balance 5 is 2 + 3us 4 so this is your loan value this is interest payable and this much you already paid so how do you get the closing balance these two you need to add this much you need to minus if you do that what are you going to get 503 912 first year closing will become second year car opening on this now you calculate now the loan balance is only 503 how much of our loan is outstanding on that only you'll calculate interest so this is the loan value means calculate interest on 15% on this amount now how much is it 75 587 correct second year how much again the less he paid to the Lesser three lakh that means what will happen to the loan balance it'll reduce so how do you get closing balance so these two you add three lakh you minus if you do that you're going to get 2 l79 4.99 second year closing will become third year C opening third year how much payment you have to make don't write three lakh third year Lei also has to pay grv third year lesi has to pay lease rental also he has to pay grv also what is the total payment lease payment is three lakh grv payment is 22,000 so total payout is how much 3 lakh 22,000 sir at the end of third year lease term is over that means will the lesie have any asset no will the lesi have any liability or liability should become zero that means liability closing balance at the end of lease term should become zero third year you should you'll get a small round of error that's fine so how do you calculate that is 322,000 minus 279 499 you do these two minus you do how much you getting these two 322,000 minus 27 4250 1 that you calculate as interest actual interest if you calculate 279 499 50% you do you will get 41 925 correct that'll be a small round of error because this 15% no it is not exactly 15% it's a rounded off percentage it's actually 15.0 to14 IR will always be de deal they would have given some roundoff that's the reason last year may you may get some round off it could be like 400 500 rupees also difference higher the number higher the round off difference is that okay so last year you adjust it off you simply call it as write the number and simply call it as roundoff this value not required done so this is your accounting understood everybody okay just give me a break up of this table again how will you put it up now what will what will your thinking process be now now the lesi has purchased the asset thinking think the way you think and do the accounting is like this Les he has purchased the asset so he has recorded the asset okay then he has purchased the asset but did he make the payment immediately or he'll make it in future future that means he will record one asset also he'll record one liability also when he has to record the asset later on or immediately immediately when the lease agreement is entered he has to record the asset also liability also that means both has to be accounted on present value terms book it book the asset at at present value terms that is one but you have booked the Li at present value terms but are you going to pay this much or you have to pay more you have to pay more that means you have to calculate interest every year so that table will give that okay what are the table constituents again first is ear column then opening balance on that opening balance you have to calculate interest then payment when you pay the low balance will reduce then finally you'll get the closing balance how do you get the closing balance in structure wise 2 + 3 minus 4 so opening balance and interest you need to add payment portion you need to deduct that will get you your closing balance remember at the end of leas term closing balance should become zero that's the thing based on this only this only theyve asked if you add this how much are you getting if you add all the finance charges you're getting how much 2 2 946 I already showed it to you here you you have recorded lease liability at $6.99 but you're going to pay totally how much 922 so the difference is nothing but finance charges so triple to 946 is a total finance charges they did not ask total finance charges they asked every year of finance charges which is this question stops there generally usually ask that much only in exam journal entry also we'll quickly revise off so that our understanding will get better okay sir currently you have shown Lee liability at what value $6.99 you charged interest means now you have a liability to pay interest also so due to interest liability balance will be same or it'll increase increase liability has credit balance how do you increase it credit it it'll increase due to what finance charges finance charges is an expense what does nominal account rule say all expense to be debited so tell me the entry for finance charges the journal entry is finance charges account debit to lease liability this is all the three years of finance charges where did you get this three three years of finance charges from this particular table okay now now every year did you make payment so when you make the payment liability balance will be same or reduce reduce what's the journal entry for credit our paid credits to bank what's the journal entry for lease liability paid lease liability to bank perfect that is the entry okay this on this asset the less can control this asset only for how many years 3 years that means he will depreciate this asset over how many years 3 years so 6 lak 9954 divided by three you do how much is every year depreciation this much is that okay on this asset he will depreciate now leie has two expense here one is depreciation other one is finance charges both will be transferred off to that is your end to end account at the end of third year asset also Damar lease liability also Damar CH standard not yet over standard little more okay that is not Damar yet so far good Fair idea so this is only for your reference most probably they'll not ask you this even lessar treatment they're not asking we have done regular problem one or two questions have built in purposely I've showed you the accounting but Exam May it may not have so much relevance we don't have study material any question so I will not do it now but I already told you what will lar do this is L SE accounting what will lar do he will cancel the asset at he will cancel the asset at carrying amount a book value he will record what what is he really interested in Lee receiv that LE receivable he recorded at net investment the difference between these two will be transferred off to P account on this net investment again he has to put up a table because net investment is on present value terms will the Lesser recover 10 lakh or lot higher in my example he will recover 15 lakh the difference between this 10 lakh and 15 lakh is nothing but time value of man interest income again you have to put up a same table but the table what you put up was for lesser initially now you have the previous problem the table was for lessi now same table you have to put it for lesser the table content will be same opening balance instead of finance charges for lesser it will be Finance income instead of payment it'll be rece then the closing balance that's all substitute finance charges with Finance income substitute payment with reip calculate in the same fashion is that okay entry also same we have done this in regular question but not required here because we don't have any study material question relating to ODS basically mostly Les L see accounting is popular from this St overall get a good feel about what we have done so far comfortable okay I don't have to do so much but I saw your face and suddenly I thought that many people are forgetting so I thought I'll do a lot more I didn't have so much of plans actually nonetheless we have done it so far okay okay all right sir this is one and the last concept we have that is quite popular in exam in fact this is the most popular one from this chapter a lot of times this concept have got repeated I'm not saying it will come in your attempt just that it is important what is that last concept is sale and Lease back first you will sell the asset and take the same asset back on lease now a limited have sold one planted missionary to B limited okay after selling what a limited will do is they'll take the same asset back on lease this is Arrangement they do okay why do they generally do is now let's say Sir a limited sold this planted missionary for 10 lakh a limited sold this planted machinary to B limited for 10 lakh that means a limited will recover this 10 lakh immediately a limited will recover this ass 10 lakh immediately now sir a limited does not want to throw the asset doesn't want to give away the asset he still wants the use the asset so that's the reason what a limited will do is after selling he'll take the same asset back on lease let's say lease rental is 4 lakh rupees for 3 years he has taken the lease for 3 years and every year how much he has to pay assumed 4 lakh that means what is the total lease rental 12 comfortable now check what happened over here sir a limited wanted money a limited wanted Finance he approached Banker Rock Banker told get lost you already taken enough loan don't come back to me my door is closed for you okay now a limited wants money so he did one jugat he went to B limited and told hey Macha I will sell one planted missionary to you for 10 lakh you pay me 10 lakh immediately okay I will take the same asset back on lease be limited told ah why what's in it for me I should give you B limited should give 10 L to a limited immediately B limited asked why should I do this a limited told hang on don't be impatient I will tell you I will give you 4 lakh rupees lease rental every year that means how much total payment a limited will pay to B limited 12 lakh this way what happened to a limited think a limited got 10 lakh immediately but he's paying this 12 lak immediately or over three years three years initially who had this asset before all this drama who who had the asset a limited now also who has the asset a limited only that means a limited is really interested in selling the asset or Finance Arrangement he's using plant and missionary as a tool a limited is using plant and missionary as a tool to raise Finance basically a limited raised money some extra money he raised by using planted missionary through this Arrangement that Arrangement only we call it a sale and Lease back Arrangement comfortable with the meaning any doubt or okay okay sir when Whenever there is a lease we already know as far as A9 goes the moment lease comes into picture we have to categorize the leases operating lease or a finance lease so check whether this lease back transaction is a finance lease most probably this will not come in exam if it is finance lease any profit or loss you make through this Arrangement I'll tell you how do you get profit in a bit any profit or loss you make through this Arrangement if it's a finance lease you will not book it immediately what is the lease term here 3 years the entire income or loss will be deferred over the leas term whatever profit or loss you get will be deferred over the leas term it will not be booked immediately if it's Finance lease this is not popular however if it's operating lease however if it's a operating lease then there are certain equation we did two questions in study I mean in this regular class over here I told you also anybody remembers the rules for operating lease if sale and Lease back results into operating lease what is the rule you have to check maybe once I'll tell and then we'll take you through one question check if the sale value is equal to fair value then profit or loss can be booked immediately if sale value is equal to fair value then profit or loss can be booked immediately however if sale value is lesser than fair value then profit can be booked immediately loss also you can book it immediately provided it is not compensated through future lease rental however if sale value is greater than fair value then profit up to fair value of book it immediately beyond that any profit you need to defer looks like full go two two three questions we did in regular class okay no problem that's the reason I keep saying as in when the class happens compulsorily you need to revise okay otherwise no we'll end up in these scenario you'll be like ah because that time you'll say super super super after 3 four months go go go it should not become like that okay that's the reason we keep saying every day when we start the class I keep telling you half an hour revision is a bare minimum nonetheless no problem we have got into that scenario now because we can't do anything so let's revise this okay now uh this particular question was asked in January 2021 it's come a lot more times but just say a limited sold a Machinery having wdv wdv means Book value so Book value of that asset is how much 40 LH they sold it for how much to be limited 50 lakh so 40 lakh worth of asset 40 lakh Book value of the asset is sold for 50 lakhs that means did a limited make any profit yeah looks like they made a profit of 10 lakh and the same missionary was leased back by B limited to a first you sell and then you take take the same asset back on lease hence the name is sale and lease back the concept name is sale and Lease back first you sell and then you take the same asset back on lease okay so machinary was leased back by B limited to a limited the lease back is an operating lease so if it was operating lease we have three equations one first I will tell you first one by one we will take it up first you need to check or to think logically here the sell or we'll understand with the help of case itself selling prices they've given five separate cases five or six separate cases they have given in the first case selling price is 50 lakh it is equal to fair value now logically you think sir at what value should you sell the asset at its correct value what is the correct value fair value correct so ideally the sale should be made at fair value what have they done here have they done any jard or they've sold it at fair value itself they've sold it at fair value itself hence what the first equation or first rule in operating lease in sale and Lease back Arrangement what they say is if s sale value is equal to fair value if sale value is equal to fair value then any profit or loss you can book it immediately because have you done any jard or you have done it you have done a fair transaction Fair transaction no now sale value is 50 lakh fair value is also 50 lakh did you end up making some profit yes to get profit what and all things you compare sir you compare Book value of the asset with selling price correct you compare Book value of the asset with selling price that you will get profit or loss what is the book value of the asset 40 lakh how much did you sell it for 50 lakhs did you make any profit yes how much profit 10 lakh that 10 lakh profit should you defer it over lease term or immediately immediately why because sale value is equal to fair value hence any profit or loss you can book it immediately understood this the first to you don't have to write anything they have given five cases means one one line may you have to write that answer for each answer you'll get one one Mark don't write stories and all so you'll simply write here profit of 10 lakhs should be booked immediately and move on to the next case very simple according to me but you should remember the rules okay next second one is sale value is 50 lakhs okay I'll know how much you have understood you will tell me this sale value is 50 lakh fair value is 60 lakh that means which equation is sale value is equal to fair value or lesser than fair value sale value is 50 fair value is 60 so sale value is lesser than fair value if selling price is lesser than fair value standard is giving the benefit of Doubt the actual value of the asset is 60 lakh maybe the this guy was in a harar maybe this guy was in a harur so let's say building value is 2 CR okay so to sell a building you can you sell it in one or two days or it will take some time take some time but I am desperately in need of money within one week somehow I want to close this building and I run a I have I have some other commitments I need the money within one week actual value of the asset is how much 2 CR but now you tell me will I be able to sell this building for 2 only or little lesser little lesser because I'm in Urgent need of money so that benefit of Doubt standard is giving to the let's see here so what they saying is if a sale price is lesser than fair value then profit you can book it immediate profit you book it immediately loss also you book it immediately however loss should not be compensated loss should not be compensated by Future lease rental loss C should not be compensated by Future lease rental what do I mean by this first maybe we'll go through this then I'll tell you the next equation okay so you'll get both profit or loss no you'll either get a profit or loss check first sale value is 50 lakh what is the fair value 60 lakh so which equation sale value is lesser than fair value check did you end up making profit or loss how do you get profit or loss by comparing Book value with selling price what is the book value 40 lakhs what is the selling price 50 lakhs so you ended up making some what profit so what does the standard say if sale value is lesser than fair value then profit can be recognized immediately so this 10 lak of profit you can recognize immediately that's scenario solved okay go for the third scenario fair value is 45 LH selling price is 38 lakh again which equation selling price is lesser than fair value so what does the standard say profit you book it immediately loss also you can book it immediately but loss should not be compensated so let's look at this now in third scenario you got profit or you got loss check to get profit or loss how do you what what it all you'll check book value is selling price what is the book value 40 lakh selling price is how much 38 lakhs so you got profit or you got loss loss standard says this loss also you book it immediately no problem but that loss should not be compensated you know here who has sold to whom a limited has sold to B limited what is the fair value of the asset in the third case 45 lakh what is the selling price 38 lakh you know what a limited should not tell be limited what is Arrangement here first a will sell later he will take the same asset back on lease you know what is a telling to be limited the worth of the asset is 45 LH but currently I will sell it only for you at 38 lakh let's say actual lease rental is 2 lak rupees every year a limited told I will not pay 2 lak relase rental I only pay 1 180,000 B limited ask why why are you asking why what was the fair value of the asset 45 LH how much did I sell it to you for 38 L that mean means I sold it to for I sold it to you at right value or lower value that means will I pay you the correct lease rental or lower lease rental that means what is happening here loss is getting compensated through future lease rental this should not happen if this happens then you think logically this compensation if it is happening means the loss is linked with lease rental leas term lease rental means it'll only come for one year or it'll go on for lease term here let's say lease term is three years lease term is 3 years that means compensation will happen for how many years this compensation will happen for how many years sir in this case if the lease term is 3 years means this compensation will happen for 3 years if the loss is getting compensated means what the standard says is don't book the loss immediately definite over 3 years because you are adjusting loss through leases and Lease will continue for how many years three years so if lease is getting compensated then the loss you have to book it over 3 years if however lease is not getting compensated actually Lee rental is 2 lakh and a limited is still paying 2 lakh that means is there any compensation or no compensation if there is no compensation book that entire loss of T immediately that got it have they told it is getting compensated or no not compensated no that means we will write subjective answer loss of 2 lak can be booked immediately provided loss is not getting compensated through future reduction in lease rate like that one sentence we have to write okay sir okay throw this back at me what is this Rule and tell me uh the full equation if the sale value is lesser than fair value ideally you should have make the sale at fair value but here you're making it lesser price so standard is giving the benefit of Doubt so what is in this case what is the rule if it is there profit means you book The Profit immediately loss also can you book it immediately yes provided loss should not get compensated in future if you don't want to write the full term just write like this loss should not get compensated in future okay if loss is not getting compensated entire 2 lak loss immediately otherwise defer it over the least term if the least term is 3 years book that loss over 3 years if the least term is 7 years defer that loss over 7 years like that okay now so two equation we've already done where sale value was equal to fair value sale value was lesser than fair value what do you think will be the other one sale value greater than fair value look at this fourth equation fair value is 40 lakh sale value is 50 lakh Paka jug now standard is not giving any benefit of doubt they're saying Fair value of the asset is only 40 lakh that means ideally you should have sold this asset for what value 40 lakhs no no fair value of the asset is how much 40 lakh so ideally if the value of the asset is 40 lakh means you should have sold for 40 lakh but how much did they actually sell it sell it for 50 L that means this is a finance Arrangement this you have done some jard so what the standard says is if the sale value is greater than fair value if the sale value is greater than fair value then profit up to fair value you book it immediately profit up to fair value you book it immediately any remaining profit a balancing profit balancing figure profit you defer over least that is a case up to fair value book The Profit immediately anything beyond that definite over least up to fair value means check sir ideally you should have sold this asset in scenario D for how much value ideally you should have sold this asset at 40 lakh what is the book value 40 lakh Book value is 40 lakh if you sell it at fair value of 40 lakh how much profit you would have made zero that means profit up to fair value in this case is how much Z correct because fair value is 40 lakh Book value is also 40 lakh that means you should have made any profit no so profit up to fair value is how much how do you calculate a profit up to fair value from fair value deduct Book value from fair value deduct Book value how much is fair value 40 lakh how much is Book value 40 lakh so profit up to fair value is how much 40 lhus 40 lakh which is zero profit up to fair value you book it immediately beyond that if you are making any actual profit that you have to defer it here how much is actual profit you made Book value is 40 lakh you sold it for 50 lakhs that means how much is the actual profit made over here 10 lakh this entire 10 lakh profit will be deferred over the least term they have not given least term so I will write the equation like this understood any problem no next equation is the same check what is the fair value 46 lakh what is the selling price 50 lakh which equation selling price is greater than fair if selling price is greater than fair value what is the equation profit up to fair value immediately beyond that defer profit up to fair value how do you calculate ideally you should have sold it at what value ideally you should have sold this asset at 46 lakh if you had sold it at 46 lakh how much profit you would have made Book value is 40 if you had sold it for 46 lakh means you would have made a profit of 6 lakh that only we're calling it as profit up to Fair Val so this 6 lakh of profit you can book it immediately but what is the actual profit you made 40 lakh is a worth of the asset you sold it for 50 lakh correct no so how much is actual profit you made 10 lakh out of 10 lakh profit 6 lakh profit you book it immediately balance four lakh profit you have to defer it over the least that's the third one any any problem okay can I go for the last one okay last one so fair value of the asset is 35 stop that only what is the book value of the asset 40 lakhs sir you already you know the concept of impairment loss how do you calculate impairment loss sir how you get empowerment loss if carrying amount if it is greater than recoverable amount then you'll get something called impowerment loss here check what is the carrying amount of the asset 40 LH value in use they not given if value in use is not given means NSP only becomes you can find out recoverable amount at higher of two things what is that NSP or fair value NSP or value news whichever is higher if value news information is not given then NSP itself will become recoverable how do you get NSP selling price minus selling cost okay that selling price itself nothing but your fair value okay so what is the fair value of the asset 35 LH that means the recoverable amount itself is 35 lakh because there is no selling cost correct no so NSP is 35 lakh that is nothing but recoverable amount is 35 lakh but carrying amount is how much 40 lakh carrying amount is 40 recoverable amount is 35 lakh means first thing you'll book is what sir you'll book in impairment loss of how much 5 lakh rupes here because carrying amount is greater than recoverable amount by 5 LH so B empowerment loss of five when you book an empowerment loss carrying amount will be same or it will get revised revised meaning it will get reduced currently the carrying amount was 40 lakh due to empowerment loss it will reduce by five and it will become how much 35 LH so Revis carrying amount is 35 lakh what is the fair value of the asset 35 lakh how much did you sell it for 39 lakhs so construct this equation for me what is it carrying amount and Rise carrying amount and fair value both are same but selling price is selling price is greater than fair value correct fair value is 35 lakh selling price is 39 lakh so what you have to do what is the equation if sale value is greater than fair value profit up to fair value immediately beyond that any profit def profit up to fair value means currently you're showing the asset in your books is 35 you should have sold it for 35 if your book value is 35 and if you have sold it at a fair value of 35 means how much is a profit up to fair value zero so profit up to fair value immediately which is how much sir zero beyond that if you you're making any profit what is the actual profit here you made Book value is 35 lakh selling price is 39 lakhs how much is the actual profit here you made 4 lakh that is profit up to fair value or Beyond fair value this four lakh is a profit what sir up to fair value or Beyond fair value Beyond fair value what you have to do defer it over the least what about empowerment loss impowerment loss and all you'll book it immediately have I told you anywhere impairment loss has to be deferred or immediately whenever impowerment loss whenever it is there you book it immediately this 5 l will be booked in Pendle immediately this four lakh profit will be deferred over the least understood yes so these are some of the common things or the relevant things relating to as9 maybe one more quickly I'll tell may not be that important another small thing is there something called contingent rent so contingent rent no should not form part of your MLP it should not form part of MLP so if at all they give you contingent R don't include it in MLP calculation so contingent R means what sir lesser gave the asset to the Lessie okay he's charging one lakh rupes leer Intel one lakh rupes leer Intel other than that lesser also told how much of units you are producing 1% of that give it to me other than lease rental he also charging some extra lease rental based on production or on based on sales this particular component we call it as contingent rent other than your normal so think logically why why will lesie pay the lease rental to lesser because he's using the asset he's using the asset for what for a specific term term that means the leas term that you paid it should be based on the term correct No it should be based on passage of time we say if you have taken a asset on lease for two years means how many years lease rental you need to pay two years if you have taken an asset on lease for 5 years how many years you need to pay lease rental 5 years because it is based on passage of time correct no as time passes lesie will get benefit so he has to pay lease rental to the L but here is this contingent rent based on time or based on something else something else that something else is production or sales production data sales data and all is fixed or variable variable hence contingent rent no is variable and it is not based on passage of time hence contingent rent is never included in Le rental calculation okay for a guy paying contingent rent it is an expense for the guy receiving contingent R it is an income book it separately don't bring contingent rent into your any of your calculation not so popular once in a while it used to come done now so overall fund contingent rent you should leave it up okay for the guy paying accounted as an expense for the guy receiving it accounted as an income contingent rent is based on what is it based on time or something else what is that something else based on production or sales usually okay so with this uh is 19 quickly I'll just see i' covered all the question once again yeah both we have covered this is yeah yeah with this all the types of questions which I felt was relevant and important I have covered with respect to as 19 thank you so much for your patience so I think now you're looking for a small break I believe or move on to the next one break okay so let's take about 15 minutes break people I still have a few more things to be covered so in about 15 minutes we shall resume back H thank you yes people welcome back after that short break so next we'll be revising a topic called accounting standard 15 that talks about employee benefits so if you have given any sort of a benefit to the employee would be salary wages perquisites in whatever name you call it all that will come under the umbrella of as15 how they should be accounted and all is what as55 gives us the guidance so as far as as15 is concerned there are four types of employment benefits or employment benefits are put under four categories first is short-term employment benefits the second one is post employment benefits or retirement benefits third one is termination benefits fourth one is other long-term employment benefits benefits so all this how to do the accounting one by one we'll see first employee benefits means sir so don't be misled by the term employee benefits just because it say employee benefits you can pay the benefits directly to employee that is also considered as employee benefits or the employee benefits can be directly paid to their dependents instead of paying salary to the employee you give salary to employe parents because they are dependent still it'll be considered as an employee benefits only instead of paying the salary to the employee the employee told the company don't give salary to me I am darala pru give it to satsi charitable trust he's saying I will work for you but my salary you put it in some some trust so that means if you are giving some the salary if you are giving to that trust meaning the beneficiary that will also be considered as an employee benefits itself so benefits could be paid directly to the employee or to their dependence or to their beneficiary everything for this particular standard will be considered as employee benefits only an employee for this purpose includes your temporary employee casual employee permanent employee directors anybody whatever name you call it everybody is considered as an employee for this purpose permanent temporary casual whatever even directors are considered as an employee for this purpose for this particular standard application purpose Okay g do you provide Marathon session for corporate law yes it it will be given every subject of marathon will be available wait for some time every every teacher is held up no whenever they get time they'll keep recording it'll be available just give us another week or week's time it'll be made made Available to You on YouTube okay next is the first kind of employment benefits first kind of employment benefits what we saw short-term employment benefits short-term employment benefits only you know for our class purpose we're calling it as step so name itself is saying short-term employment benefits so these are employee benefits like salary wages etc etc salary wages and all what sir will you delay over a long period of time or immediately you'll settle hence it comes under the category of short-term employee benefits so what is the meaning of short-term employee benefits short-term employment benefits are those benefits which are payable within 12 months not from the service date from the end of Current financial year in which the services rendered what did I say short-term employment benefits are those employee benefits which are payable within 12 months from the end of Current financial year in which the service is rendered let's say service date is 1st January an employee gave some service on 1 January don't count 12 months from 1st January 1 January means it will fall within a particular year let's say this particular year no is ending on 31st March 2024 because let's say current year is first April 2023 to 31st March 2024 so year will end on which date 31st March 2024 count 12 months from 31st March 2024 what are you getting 31st March 2025 if you are settling the benefits within 31st March 2025 then all such benefit we'll call it as short-term employment benefits so any benefits which are settled within 12 months 12 months not from the service date 12 months from the end of Current financial year in which the services rendered from the end of Current financial year you need to count 12 months is that okay so that is your cutoff date for short-term employment benefits now name it Asing short-term employment benefits sir the payment usually sir salary and all you will delay this month salary maximum you will pay within next month now you tell me is a time value of money effect material or immaterial basically is Discount Factor required normally we use no we find out present value if they give you future value we find out present value by using discount factor is a discount factor and all require for short-term employment benefits are no because this is settled very soon so H if you have any short-term employment benefits discounting and all is not required because time value of money effect is immaterial so how about the accounting simple accounting what's the general entry for salary paid salary account debit to bank account and pnl to salary yes no if salary is outstanding salary account debit to outstanding salary account that's what they're saying you recognize it as an expense and you will credit what account bank account if you have not yet paid means you have to recognize all liability so basically they're talking about this so if salary is not paid the journal entry will pass a salary account debit to outstanding salary outstanding salary is what sir it's a liability correct no so you recognize an expense as well as a liability if you paid the expense then liability accounting is not required that's what they say do we do we need standard to tell this or we know this we know this okay and expense where it will go salary expense where it will go usually it will go off to pendl however if it's a directly attribute able cost to PP means then it'll be added to the cost of pp like that employee was working on machiner installation that means it becomes a DC in that case that employee salary will not go to pel it will be added to the cost of pp if it is directly related to inventory because what does as2 says any cost incurred to bring the inventory to the present location and sellable condition if employee is some working in that regard he's doing some packing or he he's only doing the assembly then that employee cost will not be transferred to P but added to the cost of inventory like that usually employee cost go to pendl but it can go to added to the cost of asset also yes sir all right then the most important aspect or not important actually another the different area on the different component relating to short-term employment benefits is leaves paid leaves Whenever there is a leaves sir first check whether it is a non-accumulating leave or a accumulating leave whenever you have because if you're working in one organization means you will get leaves no for leaves you have to do some accounting first check whether whether the leave is a non-accumulating or accumulating non-accumulating means if you utilize the leave good for you if you don't take the leave it will get lapsed you have 10 days leave you took means awesome if you don't take means you lost nothing else you'll not get any extra money nor you'll get extra leave so that is your non-accumulating leave so that means for non-accumulating leave if you utilize awesome if it doesn't if you don't utilize it will simply get lapsed so no extra treatment is required here so you don't have to worry about not accumulating leave much the thing that you need to worry about is accumulating leave so if it is accumulating leave check whether it is a Westing leave or a non- Westing leave whether it is Westing or non- Westing Westing means incable non- Westing means non-cashable incable means let's say an employee was eligible to take 10 days leave an employee was eligible to take 10 days leave he only took seven so how much he did not take three three days he did not take no if it is wasting leave that means he'll get three days salary extra other than his normal salary he will get three days of salary extra such a leave is called as Westing leave Westing leaves another name is incable Le now you tell me sir is he getting his normal salary or he's getting little extra little extra should you if he's getting three days salary extra means journal entry required or not required required what's a journal entry if you have not yet paid means salary account debit or we don't we don't use the term salary you visualize your PN account will you show it as salary or will you call it as employee benefit expenditure employee benefit expenditure so the journal entry you will passes instead of salary account you'll write employee benefit expenditure account debit to provision for leave encashment to provision for leave encashment how much you'll make the provision for 3 Days salary later when you make when you pay that provision for leave encashment account debit to bank account that's the thing if you already paid means simply you'll write employee benefit expense account debit to bank if you have not yet paid these two interest comfortable such nature of leave we call it as Westing leave Westing leave another name is incable leave there is another kind of leave called non vesting leave or non-cashable leave same example an employee was eligible for how many days leave 10 days leave he took only how much 7 days this three days he did not took if it is non Westing leave or non encash leave you know what the company will tell you did not take the leave in the current year no I will not give you any extra salary I will not give you any extra salary this leave you can carry forward this leave you can carry forward and util utilize it in the next year so only next year that depends on company policy it can be carried forward only for one year 5 years 10 years forever that is an agreement between employee and the company so non- vesting leave means what sir if the employee does not utilize leave will he get extra salary no he'll be able to carry this leave forward and utilize in the next year now next year you tell me is he eligible to take 10 leaves no he'll be eligible to take 10 plus 3 days last year which is 13 so he'll be eligible to get or he'll be eligible to take 13 days leave in the next year okay such a leave we call it as what sir non Westing or non-cashable leave okay now in case of non non- Westing leave company has to do an accounting in the current year what entry they need to pass the same what is the entry previously you passed employee benefit expenditure to provision for leave encashment same entry has to be passed now here what the company has to do is the company has to estimate how many days leave the employee has not taken in the current year 3 years okay the company has to estimate whether this three leaves will be utilized by the employee in the next year or in the future if company feels he will utilize it then you need to make make the provision for three days salary why three days salary because 3 days leave is unutilized that's the reason company in the current year will make the provision for 3 Days salary in the current year and reverse the provision in the next year make this not paid this is only making the provision in the current year and reversing in the next year so why sir uh matching concept what does matching concept say revenue and expense should be matched now think about it logically let's take this example let's say first year the salary of an employee was 30 lakh second year also salary is 30 lakh only year salary so first year he was eligible to take 30 days leave he took only 20 days leave so so how many leaves he did not take 10 days 10 days leave he did not take okay that means think 10 days employee was elig this 10 days if he want he could have taken entire 30 no employee was eligible to take 30 but he took only 20 how many days leave he did not take 10 was he eligible to take the 10 days leave yes did he take no that means he worked more employee worked more in which year year one sir if employee Works more means is it beneficial to the company or not very much beneficial yes the more the employee works the more employee company earning will be so in the first year if employee has worked more means company also would have earned more hence what the standard says is you book more expense in the first year both the years don't book same expense first year you book extra expense why company work for 10 day employee worked for 10 days extra let's say per day salary is 10,000 rupees per day salary is 10,000 how many days extra he work worked 10 days one day salary is 10,000 I assume how many days extra he worked 10 days so that means what is the total amount 1 lakh that means first year don't book salary expenses 30 lakh book it as 301 LH so that means the journal entry will passes employee benefit expenditure account debit how much 30 plus 1 lakh which is 30 one lakh but how much employee company will pay to pay a salary only 30 lakh you'll credit bank how much 30 lakh you'll make a provision for how much 1 lakh in the current any doubt so first year how much expense was booked 31 LH why employee worked more the second year no sir you know what he did he was eligible to take 30 days leave because every year he's eligible to take how many leaves 30 you know how many leaves he took 40 days leave why 30 eligible of year two plus 10 days back black backlog was that last year salary he utilized in year two so how many days leave he took 40 days now you think in the second year did employee work more or he work less he worked less so company should work more expense or less expense less expense last year you made a provision no last year you made a provision you reverse it in the next year to make the provision what is the journal entry employee benefit expense to provision to reverse provision for leing inment to employee benefit expenditure how much provision you made 1 lakh reverse it done now so second year employee worked means he will get salary what is a journal entry for salary paid employee benefit expense to bank how much payment 30 LH now second year check what is the employe benefit expenditure 30 lakh debit 1 lakh Credit so how much expense 29 lakh first year how much expense was booked 31 lakh second year how much expense is booked 29 lakh first year more second year less but for both the years put together how much is it 60 lakh only what is the salary for two years 60 lakh only because employee worked more matching concept says expense also should be booked more this year when the employee Works more you book more expense next year when he works less reduce that is that okay now but the standard what the standard says extra one year you got to know that extra entry has to be passed what the as15 says is you don't book that extra expense for the whole leave remaining how much is the leave remaining over here in this example leave remaining is 10 don't make the provision for 10 days salary the company has to make an estimate how much how much of this 10 days employee will utilize if a company feels entire 10 days he will utilize make provision for entire 10 days s salary if company feels he will only utilize 8 days in future then make the provision only for 8 days like that how much of leave is expected to be utilized to that extent you make the Prof that yes this is about leave easy okay give me a background again leave of broadly classified into non-accumulating and accumulating ACC non-accumulating means if you utilize great if you don't utilize simply it will get lapsed no extra amount also no carry forward also How about if it's accumul ating accumulating leaves are further categorized into Westing and non- Westing Westing means incable so if employee does not utilize does not take leave means he will get extra salary so is extra journal entry required yes if it is non vesting means another name non-cashable should you make provision yes since in the current year if the employee has not taken leave means he has worked more so company has earned more so make a provision in the current year make the provision in the current year and reverse it in the next year to what what extent you'll make the provision to the expect to the extent that the leave will be utilized in future company has to estimate how many leaves will be utilized and to that extent you'll make the provision great all right next the first category is over that is your short-term employment benefits second category second category is post employment benefits or also known as retirement benefits like your pension gratuity etc etc okay so post employment benefits are broadly classified into two things defined contribution plan defined benefit plan defined contribution plan and defined benefit plan let's take a small example company has a gratuity plan you have already income tax students how do you calculate gratuity the usual limit is 15 by 26 into last drawn salary into number of completed years of service okay so same formula company is using and paying gratuity to the employee so 15 by 26 into what sir last drawn salary last drawn salary is Paka number or company has to estimate company has to estimate let's say one particular employee joined one company company thought his salary is going to be his last drawn salary is going to be 1 lakh and they calculated gratuity it came to how much 29 they thought his last da salary is going to be 1 lakh he's going to complete 5 years of service assumption and they got this gratuity liability is how much sir 290,000 but that employee turned so well so super duper employee so very hardworking employe he got promotion after promotion after promotion his salary last on salary became 2 and a half lakh that means now what is the gratuity liability 7 lakh 21,000 now the company called the employee and told I thought liability was only 290 now it came to how much 721 hey employee accept only 290 and shut your mouth and get lost company saying or requesting please Macha accept only 290 what do you think employ employee will say for that day you told 15 by 26 into last than salary yes or no that means how much should the company compulsorily pay 720,000 that means here the company has an obligation to pay full benefits company has an obligation to pay full benefits such an employment benefits only we call it as DBP as an defined benefit plan if the company has an obligation to pay full benefits such a plan we call it as defined benefit plan done Naru now in defined benefit plan no company has an actal risk weit in DBP plan company will have an actorial risk actoral risk here means the risk that the liability may be more than expected the risk that liability could be more than expected here initially what was the liability expected 290 later on it became how much 721 Can Company escape from this or they have to take this risk they have to take this risk this is a risk that the liability may be more such a risk we call it as what sir actoral risk so in case of DBP plan company will have actorial risk EAS EAS okay in case of DBP plan company will also have something called investment risk company will have something called investment risk where it is our huh company will have something called investment risk what is this investment risk is Sir this is for one employe for one employee how much is the benefit amount coming to 7 lak2 1,000 company will have thousands of employees so multiply this by, you're running into cores 7 CR 70 CR big big organization this amount only will be 700 800,000 crores correct no one one employee if he gets 10 at least if he gets like 5 lakh 6 lakh rupees if you have 5,000 employees that's easily 500 cror or 50 CR whatever it is that means this amount will be small or quite huge huge and moreover when you'll pay this liability is it a Paka or don't know don't know because the moment employee retires or the moment employee quits the company has to pay gradu they cannot escape from that means they should the company will keep all their money Idol because if company does not have money will they sell their assets and pay off no hence to safeguard because all these payments will be on a huge scale to safeguard no company will make an investment periodically every year they will buy some Investments okay so later on when some employees quit what will they do with that investment they will sell it because they made this investment to settle employe liability so every year periodically company will buy some assets when an employee retires that asset will be sold when asset is sold company will get money that money will be utilized to pay the quitting employee is that okay so you'll make an investment that investment here in as15 terminology we call it as plan assets to settle employee benefit plan we have purchased some investment and that as investment name what do we call it as plan assets simply okay this just an investment purchased to that's all is the thing all right now sir if you purchased an investment means would you expect some return yeah sir you expected 10% return later on Co happened return became 7% 5% and all possible that means the expected return may be lower than actual yes or no correct no sir that we say is investment risk in case of defined benefit plan also has an investment risk investment risk means the value of investment may be lower than expected I thought I will get 10% return but I only got 6% return that means value of my investment will be high or low low company has less investment means what they have to do if they don't have enough money in their investment means they have to put more money and pay the employee so that we call it as what investment risk the investment risk simply means the value of the investment may be lower than expected so in case of defined a benefit plan company will have both actorial risk as well as investment risk for this defined DBP plan we do something called pucm accounting projected unit credit method accounting okay now let's go for the other I'll take you through one question through that leave that not so important there is another kind of post employment benefits called defined contribution plan that is DCP defined contribution plan in case of defined contribution plan company obligation is just to contribute company obligation is just to contribute ah after that what happens company will not give a damn at all they not even worry like PF like Provident fund what will the company do or what is company obligation their employer share or company share of PF they have to give it to PF authorities correct after that what happens to that PF amount will company bother now that is between the PF Authority and employee they have to match discuss among themselves and figure it out yes or no that means company obligation is just to contribute such a plan we call it as what defined benefit a defined contribution plan defined contribution plan means where the company has an obligation only to contribute nothing more than that okay now you tell me does company have actual risk actual risk means what the risk that the liability may be more will company have that actal risk no who has ITF authorities Right company has a no so in there in case of this DCB plan there is no actoral risk R there is no investment risk also because is company making any investment the company obligation is just to contribute after that what who will do what PF authorities will do with that money they may invest somewhere that is their headache will company bother about it no so that means in case of DCP plan company will not have actorial risk as well as investment risk so how do you account DCP plan same like step same like step step means short-term employment benefits how did your account step employee benefit expenditure account debit to bank account if you paid if you have not yet paid means make provision that work expense liability while accounting is required that's why all right if you have not yet paid you need to create a liability otherwise liability creation is not necessary is discounting Factor required no in case of PF and all you'll remit within one month only sorry so is time value of money effect material or immaterial immaterial so is discounting Factor required or not required not required okay now now let's run through one question on DBP plan so one method we follow that we call it as projected unit credit method so let's go ahead and check this particular question study material question only employee russan has joined one company XY Z in the year 20 X1 the annual amol liment of the russan was 14 lak9 210 company has a policy of giving a lumpsum payment of 25% of last drawn annual salary for each completed years of service if the employee retires after completing minimum 5 years of service so if any employee serves 5 years and if he quits what does the company do 25% of last drawn salary for each year of service they will give some amount basically gratuity yeah all right current salary of ran is expected to grow by 10% currently what is his salary 1490 his salary is expected to increase every year by how much 10% the company has in inducted russan in the beginning of the year and is expected that he will complete a minimum 5e term before retiring company feels his employee will serve five years and then only he will put thus he will get five annual increment because five years if he serves means his salary will increase five times okay what is the amount that the company should charge in its pendl account every year as a cost for the defined benefit obligation here it's a DCP plan or a DBP plan DBP means company has an obligation to pay benefits DCP means company has an obligation just to contribute here company has an obligation to pay whole benefits whatever is his last draun salary 25% of that compulsory compulsorily company should pay can they escape or they have to pay that benefit they have to pay that benefit that means this is what kind of a plan defined benefit plan uh of they also calculate current service cost and interest cost at discounting rate of 8% they've given PV if for respective years they've given okay all right so how is this question this PC method works is first you have to find out something called this benefit is payable based on current salary or last drawn salary last drawn salary first calculate last on salary what is his current salary 14921 they said he will serve for how many years five years that means how many times his salary will increase five times so add a 10% five times you'll get how much what is his last on salary 24 lakh you can use this like this in calculator or you can find out that mathematical formula how do you find out future value present value into 1 plus I whole power n like that also you can do your call I've showed you both this is easy according to me just add five times 10% okay now sir so his last on salary is 25 LH 24 lakh that itself you are paying or 25% of that so second one you need to find out is your total projected cost the total cost or total benefit which the company has to pay this employee last what is the how are you paying this total benefit 25% of last R salary into number of years of service me telling or question telling question telling what is the last on salary 24 lakh into 25% into 5 years that means how much payment company feels they have to pay this employee 30 lakhs okay don't jfy your income tax acts and say there is a minimum limit and all that maximum limit and all keep your income tax provision 10 whatever it is keep it there only don't bring it in here and all okay this is accounts that that you don't have to bring it in so how much is a total projected cost 30 lakh company feels they have to pay this particular employee a benef total benefit of 30 lakhs sir when will this payment be made when he retires when is he expected to to retire at the end of fifth year okay so just because you are paying 30 LH at the end of fifth year is it fifth year expense or all the five years expense you're paying this 30 lakh at the end of fifth year expecting to make this payment at the end of fifth year just because you are paying at the end of fifth year is it only fifth year expense or all the five years expense all the five years because the what is the requirement for employee to get this 30 lakh he has to serve for 5 years so this 30 lakh may be paid in year fight but it's an expense for all the five years for five years if the expense is 5 years uh the for all the five if the benefit is 30 lakh what is the benefit every year what is the benefit every year 30 lakh divided by five which is what sir six that is the third working node projected cost perom second working node is to find out total projected cost third one is to find out what is the benefit or projected cost every year understood everybody so the benefit every year is 6 lakh so that means this only can you book it as expens unfortunately no why sir benefit payable every year maybe six lakh but are you paying this now or at the end of fifth year that means this six lakh is not present value P it is future value but you're doing all the accounting now that means you have to get every payment to what terminology present value terminology for that you need a discount factor which is already given in the question to be 8% that only they're calling it as current service cost is that okay current service cost means what is the expense you need to transfer to pendl every year so why can't we transfer six lakh six lakh you cannot transfer because this six lakh is a benefit every year but you'll make this payment only at the end of fifth year so that means this six lakh and all is not on present value terms it is on future value terms first get it on present value so the present value of benefit only we call it as what current service cost okay now let's do this first year what is the benefit for first year sir benefit for every year how much is a benefit six lakh so now carefully sir you are at the end of fifth year you are in the end of first year carefully check this you are at the end of first year you have to pay the six lakh when you have to pay this six lakh when at the end of fifth year you are at the end of first year you have to make the six lakh payment at the end of fifth year so from year one ending to Year Five ending you count how many years year already over so year two year three year four year five that means you have to use how many years C Discount Factor don't use five years C Discount Factor use only fourth year discount Factor so do do 1 divided by 1.08 press equals to button four times 1 divided by 1.08 press equals to button four times how much is that 1 2 3 4 735 is what you're getting correct that's what theyve given no need to calculate they've just given it in Ulta order that's why okay they've given it in Ulta order so what what discount Factor will you use 6 lakh into 735 which is 4 lakh 41,000 so this is your present value terms so why can't we consider year beginning you can't take year beginning because the moment employee joins the moment employee joins the organization company will have obligation or no obligation see this is gratuity obligation will get created as in when the employee serves as in when the employees serves company will get obligation yes no so when the moment company joins or the moment when employee joins company has no obligation that means you will book this expense only at the end of year one when you are at the end of year one so has employees served one year yes now the obligation will get created is that okay that's the reason you have to count from year 1 ending to Year Five ending understood all so this is your present value easy people okay second year same thing every year how much is a benefit attributable 6 lakh now you are at the end of second year now you are at the end of second year this is six lakh when you have to pay now you at the end of second year you have to pay this at the end of year five count from year to ending to Year Five ending year to over year three year four year five how many years remaining three years that means which year discount Factor you have to use PV if at 8% for third year third year third year discount factor is how much year 794 that is what we have taken here 6 lakh into 794 you do you're going to get the present value of how how much 7 4 lak 76 4 like this okay now you in the third year how much is the benefit for third year 6 lakh again every year benefit is 6 lakh you are at the end of third year you have to make this payment at the end of year five count year three ending to Year Five ending how many years two years so you'll use a second year discount factor for this one done now now again at the end of at the end of fourth year again how much is the benefit payable 6 lakh so you are at the end of fourth year payment is expected be made at the end of fifth year so the payment will be made for what I mean you you lose PV if at 8% for one year which is .926 given in the question yes multiply you'll get the present value now again fifth year C benefit is what 6 lakh you are at the end of fifth year you'll make the payment also at the end of fifth year that means this six lakh is already on present value terms so that means don't write zero for year zero the discount factor is always one that's the reason they've given here they've started with one okay so always multiply one don't multiply Zer then the whole number will become zero the 6 lakh is already on present value term so you just multiply 6 lakh into one it will become 6 lakh understood aaru this is the current service cost so once again I'll tell you when the employee joins company has any obligation or no obligation no obligation as in when the employee serves first when he joins no obligation at the end of first year obligation will get created then when he serves more and more obligation value will go on increasing that account okay that only we call it as what sir current service cost sir it's a cost it's an expense what does nominal account rule say expense to be debited so what's the journal entry for current service cost current service cost account debit current service cost account debit did you pay this expenditure or you'll pay in future that means you have to make provision the name of that provision is this is what kind of a plan defined benefit plan no so you make provision called like this to provision for defined benefit obligation due to defined Benefit Plan company is getting one obligation hence you make you call that name as what sir provision for dbo provision for defined benefit obligation what is first year entry 4 lakh 41,000 past year done now what is second year and third year fourth year fifth year car same thing what and all you got over here no you pass the entry for that done aaru all right now if you do the total you have credited provision here no if you do the total of all this you will get 25 lakh 87200 you'll only get 25 l872 200 but total payment is expected to be 25 lakh or 30 lakhs total payment expected is 25 lakh or 30 lakh 30 lakh but you made book The provision only for 25 this is the present value 30 lakh is the future value difference between present value and future value is nothing but time value of money interest charges because you have to pay you not receive when you're receiving it's an income when you're paying it's an expense or if you wanted an even formula way whenever on liability you will always get finance charges on asset you will always get Finance income here you made a provision for dbo provision for dbo is an asset or liability liability on liability you'll always book finance charges or interest charges like a loan taken from bank loan taken is a liability on that liability you will receive interest or pay interest pay interest like that if you're getting confused you can figure it out like this done now so you have shown the provision at 25 lakh but total payment is expected to be 30 lakh that difference is nothing but interest that means for that interest you need to put table or sir yeah sir which table sir this one sir you know this already sir here opening balance interest charges here don't write payment because payment and all will be made only at the end of fifth year but instead of payment column have current service cost one substitute and then have a closing balance let's go over this now okay this table will give you what is the interest charges every year and also what is provision for dboca closing balance what is provision for DB that liability closing balance what at year One what is the opening balance of the debut zero why sir because when employee joins company has obligation or no obligation when employee joins company has no obligation hence opening balance of that liability is what zero you will charge interest on this only no you'll calculate interest on this only if opening balance is zero interest is also zero okay now sir what is first year current service cost 4 lakh 41,000 bring it in here why sir the moment employees serves obligation will get created as in when the employee serves more and more obligation also will go on increasing hence here we will not deduct current service cost rather we will add because as in when the employees service obligation will go on increasing hence here the formula will not be like in the lease May used to write 2 + 3 minus 4 here it will not be that here it will be 2 + 3 + 4 because as and when the employee serves obligation will increase so add all this how much are getting 441 first year car closing will become second year car opening now on this opening calculate 8% why 8% sir they only given in the question discount factor is 8% 441 8% is how much 35 28 okay so if you add this the obligation is if you add all this how much you going to get 441 + 35 280 470 no no no uh uh 476 oh you added I thought you told this number only okay 476 to 80 sir that means if you add these two your provision balance is coming to 476 but as in when the employees serves provision balance will increase so second year what is the current service cost 476 again add this the obligation balance will become how much 952 but the end of fifth year you should have a Clarity that the provision account balance should become 30 lakhs zero allow first make 30 lakhs and then you will settle 30 lakhs is that okay with you second year car closing will become third year car opening on this opening again calculate interest all the current service cost no from this table straight away you copy off third year how much current service cost 540 next five triple 5 then it is 6 lakh first copy of all that here okay then go on punching the numbers is that okay at the end of fifth year the closing balance of provision will become 30 lakh so why it will not become zero sir here you do should not make it zero the reason is Sir you'll make you'll pay this amount to employee only when he retires company is expecting that employee will retire at the end of fifth year company expectation may be fulfilled or may not be fulfilled employee May retire after 7 years also H okay you can retire after 5 years only no problem okay so if employee does not retire at the end of fifth year will this payment be made ah no that's the reason provision of closing balance will not become zero here because we exactly don't know when the employee will retire all these are based on expectation hence provision for dbo you close it at 30 lakh don't go beyond this don't make it at zero okay everyone good with this this now based on this only we need to pass journal entry now journal entry you tell me sir first journal entry you already passed current service cost account debit to provision but but that provision balance currently showing at what value 25 LH you have to increase it and bring it up to how much value 30 lakh so what is the journal entry for interest charges same like Lees interest charges account debit to provision for debut there you used to write interest charges or finance charges account debit to lease liability here you write here the liability name is provision for Deb credit that this interest you'll get from this table these are all your interest understood all right so this you pass done so this current service cost is an expense this interest charge is an expense where it will go PN so transfer the and later in the year you settle in the year you settle the journal entry will be provision for DB to bank do we know we will settle at the end of fifth year only or it may go beyond it may go go beyond because settlement will be dat on the settlement will be made on the day employee retires that could be at the end of fifth year or sixth year 7th year 10th year we don't hence I not written the amount here I've just given you a sample done now that's all is about this accounting this method of accounting we call it as projected unit cost method or projected unit credit method clear sir can I move forward to the next question okay there are only three to four types of questions in this chapter that can come I don't think so the one we solved has a lot of scope because that is quite lengthy okay I don't know if it if it has to be asked means it has to be asked for at least eight marks or they can become very very Chalo and say they can give it as an McQ question what is third year current service cost what is four four year provision for DB closing balance so McQ can be gone created like crazy but you don't have to prepare any you have to don't have to practice extra for McQ question you just have to know the concepts very clearly if they ask you third year current service cost if they ask you third year current service cost which is nothing but this data in you're working it is nothing but this data 5 lakh 14 200 if they ask you fourth year provision for dbo balance come to the table this is your fourth year fourth year provision for dbo balance is 22 22142 is this something new to us or we know it we know it just that we have solved it as a full-fledged question they asked it as an McQ question like that if they want they can ask for five five marks by cutting it into bits and pieces if they want to ask full question it has to come in my opinion at least for eight marks because it looks a little leny or journal entry they should not ask most probably journal entry in fact this question is there in study material this journal entry I gave it to you it is not there in study material for your understanding I give because when you know Journal only we will understand the treatment so maybe this journal entry they may not ask they may ask you only each year finance charges for five months like that they can ask anyways so I'll not go waste much time into deciding what they will ask how they will ask and all that is not my job somebody else is there let them do that job I'll do my job can I move on to this work next is something called actorial assumptions actoral assumptions means sir so basically all this accounting runs on estimates do you agree with me the accounting that we just now did dbo and all runs on estimates what estimates previous example only or case study only you take last drawn salary Paka number or estimated number estimated number number of completed years of service estimate discount Factor estimates so that means all these are estimates you need a lot of estimates to do this particular accounting that only we call calling it as actoral assumptions actorial assumptions so actorial assumptions could be demographic assumptions or it could be a financial assumption demographic assumption means let's take a small example one employee is there he's aged about 25 he has joined he's got a government job and you know the saying with government job once you get a government job you never quit they have to compulsorily retire you till then people work correct no let's say retirement age is 60 so he has joined at 25 retirement age is 60 that means how many years this particular employee is expected to serve for government 35 years but mortality table of a particular country says employees especially male employees by the age of 58 they are swaha at the age of 58 usually male employees don't survive mortality table means a death rate a death rate of a particular country says by the age of 58 he's gone now you tell me will you take 60 as a cut off period to calculate expected number of service or 58 58 that means this also this assumption also affects your account so this your actual assumption actual assumption could be these are all demographic assumption meaning Countrywide data so more demographic assumptions could be your mortality rate like your death rate death rate depends on location to location country to Country state to state etc etc like that okay now all right or it could be employee turnover disability early retirement look early retirement is a big thing now many people are talking about Financial Freedom have you heard about it by the age of 40 I want to retire I want to make enough money so that I can spend enough I don't want to work anymore that's a big thing many influencers in YouTube are going Gaga about it yeah so let's say that has become a trend now whatever is Trend we follow the trend is at the age of 40 you want to retire okay now you will take any service Beyond 40 for consideration or you'll ignore you'll ignore because a particular country statistics is showing that employee will retire by the age of 40 means you have to take his service period only up to age 40 so even that influences your working note so all these are what sir demographic assumptions there could also some Financial assumptions are also there which could affects your working like what discount factor to use because all this you all these accounting all the value they've given is in a future value how do you get future value to present value by using discount Factor what discount factor to take that's a question that's an assumption or what is his future salary because in the previous problem you told his salary will grow by 10% suppose if company performance is very bad then that year company may not give him an increment or if company performance is extremely good he may get higher increment or company company performance is good but this employee da fellow he became lazy that means he may not get increase company is also doing good employees is also doing good but economy is not doing good economy is not doing good that means that also affects so all those are what sir all those also are Financial assumptions which affects your working not that means it looks like crazy accounting no sir yeah sir that's the reason we take the help of act all this we we take the help of an actu so when one person is there who does acturial course we will approach him and say give me employee benefit obligation data you give he will charge some money and he will say this is the liability using that report we simply pass one journal entry accountant will pass one journal entry auditor will say ah this report is there this amount is matching D done take over ma life because we don't have necessary expertise because all this accounting works on mortality table country inflation economic condition lifestyle choice so many factors should be considered for you to do the accounting yes all that we as a charted accountant will not be able to estimate that's the reason we take the help of actual so every company they will take actual report so practically this is very very easy but uh theoretically question can be a little complex we need to little practice okay now can I come back to the other one all right sir actoral assumptions are estimates actal actal assumptions are estimates estimates a Paka number or can it change can it change so due to estimate change liability value may increase or it may reduce the return on plan assets may increase or it may reduce that means you may get some actural gain or you may get some actoral loss that should be transferred to pel immediately know this this is one important McQ question that same question is there in uh thank you thank you so much for your uh comments but it's okay listen to this you can comment later listen important yeah maybe you want to go that's the reason you're commenting thank you thank you so much but yeah all right uh so the thing is due to estimate change you may get some actoral gain or you may get some actoral loss and actoral gain loss should be transferred to pnl immediately that the thing done no Okay one minute sir how much you have done no understood all let's take this question RTP question hello limited hello hello you there online also everybody there H okay hello limited belongs to manufacturing industry the company received an actorial valuation for the first time for its pension scheme pension scheme means DCP P or dbpb company has an obligation to pay pension just to contribute or pay pension pay pension that means whole benefit they have to pay so what kind of a plan DBP defined benefit plan okay that the it received an actal valuation for the first time for its pension scheme which revealed a surplus of 12 L Surplus means loss or Gainer gain it wants to spread the company wants to spread this gain over two years stop there only rest nonsense they will give okay acceptable not acceptable not acceptable what does the standard say any actural gain or loss you get has to be transferred to pel immediately they can give whatever reason they are saying we will spread it across over two years average life blah blah we're not interested okay you give whatever go we are like we will not get shaken it's an actal gain or loss to be transferred to pnl immediate there ends our question we don't have to even read it further done okay come back to the charart this is done next is actual actual return on plan asset I've written an equation but I'll not tell you as an equation we'll solve one question you know this already that's the reason uh where is that uh uh this one okay on first April one second sir sir I told what to settle this obligation company creates an investment what is a fancy name for that investment plan assets plan asset is simply an investment made to to settle employee benefit obligation whenever employee retires this investment will be sold and money will be utilized to pay the retiring employee correct okay they're throwing things okay maybe time up you maybe time up but I still have a lot of targets h s that reminds me sir tomorrow sir we will have uh we will have a morning session okay so timing will be a little some Logistics it's creating a problem and I also need maybe a little extra time tomorrow I'm not very sure because after 8 8:30 know it may be a little difficult for me to see your face it'll become like that it full okay so no not required so we will do only for tomorrow we will do 10 to 4 kind of a session we'll have okay now uh I don't know 10:00 we start for ending time I'm not very sure okay it may be a little more also but tomorrow is a deadline to finish this we are finishing it so today also we will stretch a little bit okay I have a Target once the topic is over I will only tell you Tata byebye till then you don't tell okay mentally physically online offline everybody be present okay G who knows this question only making your exam five marks in your pocket I can see this it's question number two part number c I don't know seriously okay all right look at this question now on 1st April 20 X1 the fair value of plan asset was 1 L sir which dat first first April that means this is plan asset plan asset is an investment investment what balance they have given 1 April 1 April balance only we call it as W as in opening balance where will opening balance of plan asset come debit side or credit side debit side two balance brought down one L uh okay uh SE on 30th September 20 X1 plan paid out of benefits of 90,000 plan paid out of benefits means some employee have retired if any employee retires we have to pay him the benefits how much benefits have you paid 19,000 this 19,000 money will come out of our cash balance or we will sell investment because we have to sell the settle this obligation only we have created an investment so if any employee is retiring means the first thing we will do is sell the investment how much we have to pay the employee 19,000 that means how much investment worth we will sell 19,000 what's the journal entry for investment sold what's the journal entry for investment sold bank account debit to investment so the posting will be what by Bank 19,000 yes sir okay next it received an inward contribution of 49,000 sir investment is onetime activity or recurring recurring because if some employee quit means another employee will join yeah we have to pay him so the investment is an ongoing activity it will go on be made so how much contribution you made 49,000 contribution made means you purchased additional investment contribution made means you purchased additional investment worth how much 49,000 what's the journal entry for investment purchase investment to bank how much 9,000 easier okay next on 31st March 20 X2 year begin on 1st April 20 x 1 31st March means it is closing balance the closing balance of plan asset is how much 150 where it will come credit side buy balance carry down 150 okay what did they ask in the question you need to calculate the actual return on plan assets first we'll take the actual return then we'll see the expected return you need to First calculate actual return on plan assets so both the side total this side total is how much 1609 that side also should be 169 is it matching or balancing figure balancing figure is how much 20,000 that is nothing but your actual return that you got on plan assets that's all that is because obviously sir you you just check over here in your calculator one lakh opening balance was there how much contribution you made 49,000 add 1 lakh plus 49 is how much 149 you paid benefits worth 19,000 so investment balance will reduce so- 19,000 you do how much is it 130 that means closing balance of inment should be 130 but it is 150 130 became 150 how sir if you have purchased an investment means you'll obviously get some return so that return is arrived as a balancing figure so 20,000 is actual return you have got it as a balancing figure easy but don't present in this format study material presented in statement format you also follow the same this is easy now you have to get this as a balancing figure so what you'll do what and all comes on the credit side you add what and all comes on the debit side you minus so construct one statement for me how do you get what is take from here construct this what is this fair value of plan assets closing balance to this you add what sir benefits paid deduct What contributions received and then also deduct opening balance opening balance only we call it as fair value of plan assets opening balance if you do that you're going to get 20,000 easy that is what I've written in the chart here presented in this format only okay if you're getting confused between plus minus visualize The Ledger okay but don't present it in Ledger study material presents it in statement so you also follow the same statement approach can I move on to the next one okay next the last bit or one or two or actually this question was not fully over one more is there sorry my B they asked not only actual return they also asked expected return they as expected return actual return we already know which is how much sir 20,000 along with that they also asked expected return take your calculator everybody sir how much was your plan assets opening balance 1 LH sir they have given goalie investment means you'll get a return correct that return percentage is finally given over here how they arrived this is irrelevant for us we want a the actual return how much are you expecting check your expected rate of return is how much 10.25% one extra study material is doing over here so return means it could be a simple interest return or compound interest what study material is doing is they're assuming that compounding is happening on a six months basis in every problem why don't know that's what they're doing all the solution they're presenting like that you also present it as a it's compounding is happen on half yearly basis one or two attempts don't change the solution especially for new new topics better to be in sync they' also written one more line that you can solve using simple interest so if I were the evaluator I would have given marks but unfortunately I am not okay so because evaluator may not know all this so better to follow what study material is doing whatever mother body says J ma that's all okay now so what does IC study material is assuming return is getting compounded every year now carefully observe how much was the plan assets opening balance one lakh this one lakh was there from the beginning till end what is the return perom what is every year return 10.25% so on one lakh how much return you will get 10 .25% Calculate 1 1 lakh into 10.25% 10,250 understood okay then sir on 30th September 30th September means beginning of the year or during the year that to after 6 months because April to se September is 6 months on 30th September what happened you paid some benefits and on the same day you received inward contribution how much 49,000 49,000 came in 19,000 went out so how much net money remains with you 49 came in 19,000 went out how much money remaining 49 minus 19 how much money sir 30,000 correct if you have 30,000 means on this 30,000 you'll get a return this 30,000 you are investing for whole year or only six months this 30,000 you are investing only 6 months that means don't take 10.25% because 10.25% is a return per an 10 and a half 10.25 % as a return for the whole year but this 30,000 did you invest for whole year or only for for six months 6 months only have invested correct and here what does study material assume compounding happens on an yearly basis or half yearly basis half yearly basis on half yearly basis now don't do this of taking 30,000 and I will do into 10.25% into 6X 12 I do no no no no 10.25% is a compounded rate you can't take like this why in a bit I'll tell you check this let's take a small example sir you invested 100 rupees in a bank bank pays you an interest rate of 10% but compounding is happening half yearly so for the compounding happens half yearly means for the first 6 months how much interest rate you will you get 100 rupees you invested rate of interest is how much 10% per anom for the first 6 months only I want hence what I'll do into do into 6 x 12 yes sir so means how much interest will I get from the bank on my investment for the first 6 months 5 rupees understood if the compounding happens on a half yearly basis means next the bank will calculate interest on 100 rupes or 105 rupees they will next calculate the interest not on 100 rupees compounding means on interest you will get another interest that's what compounding means correct no so next interest will be calculated on 105 what is the interest rate 10% how many On's interest for the next 6 months into 6 x 12 how much is this 5.25 that means what is the total interest you receive 10 25 rupees how much did you invest 100 rupees how much interest did you get 10.25 can you tell me the return percentage for 100 rupees investment you got a return of 10 Rupees 25 PESA so what is your return percentage 10.25 divided by 100 into 100 which is what sir 10.25 percentage that is what they've given over here 10.25% is a return for whole year this 30,000 are you investing for whole year or only for 6 months 6 months that means we want return percentage only for 6 months calculate for the first 6 months how much return did you get 5 rupees return is 5 rupees investment amount is how much 100 rupees you invested 100 and got a return of only five so that means what is a return percentage return divided by investment amount into 100 how much is that sir five percentage that means on this 30,000 you'll get a return only for 5% understood that's what it means don't take 10.25 don't take 30,000 into 10.25 into to 6X 12 because compounding doesn't work like that compounding means if or another way or if you don't want all this drama if you want it in one simple formula so 10.25% is the interest for whole year divide by two 10 because why divided by two compounding is happening half yearly no so divide by two how much are you getting 5 125 Round it off to the nearest number backwards 5.125 is closest to what number five that is your whole number 5.125 you are getting rounded off to the backward closest number backward closest number whole number is what five if you want you can calculate I proved it to you with calculation if you don't want all this stuff you can simply take if they have given 10.25% then the return 10.25% is a return for whole year for 6 months it'll be 5% like this understood ah everybody so that means on this 30,000 you'll get a return only for 5% don't write again 6x2 this 5% is a return for 6 months only since 30,000 into 5 is how much 1,500 so on this one lakh you are expecting a return of 10,250 on this 30,000 1,500 rupees so totally how much are you expecting 11,750 this is your expected yes what is your actual sir you expected 11 you achieved 20 that means happy happy that is nothing but actual gain on plan asset because you're getting return on plan assets the difference between actual return and expected return is nothing but actual gain on plan assets it could be an actal gain or it could be an actal loss here it's a case of an actal gain why you expected 11 but you achieved 20,000 understood everybody good sir by chance if they give you just for my if they give you instead of 10.25 if they give you 12.36% what you will do if they give you 12.36 percentage per the percentage is not 10 point it is 12.36 perc what you'll do or tell me in calculation first on one lakh month this one lakh was invested whole year so on this one lakh you'll calculate the interest at the rate of 12 36 percentage but on this 39,000 you'll calculate the interest on what rate 6% how 6% 12.36 divided by two you do and round it off to the whole number they will give you an whole number you don't have to worry about that okay either they will play with five six or seven not more than that according to me so you'll calculate on this 30,000 you'll calculate return only at 6% understood calculate like that so difference between actual return and expected return is nothing but actal gain or loss on plan assets which will be transfer to pnl immediately whole question is over can I move on to the next work ah super online also is responding that is what i' would like to see super ARS I think ARS told you conduct class at 2:00 I will come ARS came also thank you maybe here or she was there they were not responding suddenly they became active after 6:30 they become active maybe yeah good good no problem be active like this so online people especially you know when you're watching recorded classes or when you're watching live classes it's okay speak up I know that nobody is hearing you but the more and more you speak up loudly right like you tend to remember the things that's what happens to me also sometimes when I'm sometimes preparing no I try to say it out loud I'm actually a mind reader I don't like to say it out loud I'm just when I'm reviewing I'd like to review like that but I feel when I say it out loud I tend to remember that particular thing a longer so you also keep responding if I ask something I know that I'm not I'll not be in a position to hear you but you say it out because the more and more you say in a way you are revising it for yourself so it is required is that okay so make it as a practice all right now it's okay session is anyway coming to an end you time up we cross the deadline now also my bad every topic is crossing deadline now you people have slow today okay next aspect is Sir what and all will go to P what and all will go to P first is current service cost you comfortable with this current service cost is an expense that will be transferred off to P interest charges just now we booked interest charges okay that is that expected return on plan assist only expected return return or even actorial gain actoral gain loss on both plan assets and defined benefit obligation both the things will go off to pendl account and then something else will go to pnl called pass service cost so what is this pass service cost sir sir pass service cost means any amendment made to the plan any amendment made to the plan so what is amendment so initially the company told the employee we will give the benefit based on 5% of last on salary whatever is last on salary 5% of that will be paid as benefit later on company performance is very very very good company is doing extremely good since they said let's increase the benefit from 5% make it as 20% now originally what was the benefit C percentage last run salary into 5% now they have amended and made the benefit percentages how much 20% correct so is the plan same or plan got amended now from 5% you're you're paying at 20% means obligation will be same or it will increase increase this amendment only we call it as past service cost understood this amendment made to the employment Benefit Plan only we call it as past service cost past service cost may be positive or it could be negative meaning you can make the amendment in such a way that benefit may increase or make an amendment in such a way that benefit could reduce is that fine that Amendment only what do we call it as past service cost what will happen to past service cost sir immediately don't transfer it to pend first check if there is any condition or condition is already fulfilled if there are no conditions you have amended a plan no sometimes they'll put forth a condition like let's say they tell they tell they told henceforth we will pay the benefits to employee not at 5% but at 20% but they told whichever employee has already served 3 years they will get 20% whichever employee has already served 3 years they will get 20% okay is that fine with you now due to Amendment plan let's say you have to pay extra benefit to the extent of 500 rupees I assume a simple number you made an amendment to the plan due to this amendment you have to pay more to the employee how much 500 rupees so past service cost is an expense expense should be debited or credited expense should be debited or credited so what's the journal entry for past service cost pass service cost account debit to bank have you settled or in future so that means instead of debting crediting Bank you'll write provision for Deb because of this amendment your dbo balance has increased understood so entire pass service cost can you transfer no because there are some condition whichever employee has fulfilled the condition if his condition is already fulfilled we call that as a vested pass service cost if condition is already fulfilled we call it as wested pass service cost wested pass service cost will be transferred to pay unwed pass service cost will be kept as it is like here let's assume there was a condition what is the condition whichever employee completes 3 years whichever employee completes three years they will get extra benefit now let's say 20% of the employee have already completed 3 years 20% of the employee have already completed 3 years that means entire 500 can you transfer to pnl or only 20% since only 20% employee have fulfilled their condition only 20% of 500 can be transferred to pendl because this is what sort of PSC this is wested pass service cost n now so that means you'll pass the journal entry what pnl account debit to pass service cost 100 how did I get 100 how much is the total amendment 500 in in that how many of them have completed their condition 20% so 500 20% is how much 100 that 100 you can transfer it to P what about remaining 400 have they fulfilled condition not yet when they fulfill the condition this pass service cost will be transferred to P till that time pass uh this pass service cost will have a balance can you tell me what balance it will have you have debited here by 500 you have credited pass service cost by 100 so what is the balance still remaining 400 so what sort of balance this pass service cost still has debit balance of how much 400 this we call it as wested or unwed unwed unvested means what condition fulfilled or yet to be fulfilled yet to be fulfilled okay now sir keep this in mind so that means in a way can I say even past service cost will be transferred to pnl past service cost also will be transferred to P fully or only wested portion that's what I've written here even P service cost will be going on to P only the amortised portion amortized portion means wested pass service cost done G this is the thing let that 400 be there there's one more treatment for it that affects your balance sheet I'll tell you understood pass service cost meaning now so tell me in one line what does pass service cost mean you made some Amendment you made an amendment in such a way that the benefit could increase or benefit could reduce so hence pass Sur cost could be positive or negative but usually you will give more benefit because you're dealing with employee if you tell any employee I'll cut your benefit they'll feel good no that means usually all these amendments will be it'll be more you'll pay give more benefits to the employee so what is the journal entry for pass service cost pass service cost account debit to provision for DB done entire pass service cost can you transfer it to Pendle yes provided there are no condition if there is no condition entire thing you transfer to Pendle if there are condition means check how much condition is already fulfilled how much our condition is fulfilled to that extent past service cost can be transferred to pendl that we call it as wested past service cost okay if condition is not fulfilled means we call that as unvested past service cost can you transfer that to pnl no it'll have a balance what to do for that balance in about 2 minutes I'll tell you all right okay next aspect effect is curtailment you'll have you'll also transfer to pnl something called curtailment gain or loss sir previous one was planner Amendment next is pull stop meaning planner cancel okay like let's say a company was there they had they have about five divisions they're having five division one division is doing pathetically wrong too much loss loss after loss after loss okay now that division defined benefit plan company told we'll cancel because that division is performing very badly employees are also not working well so the initially plan was there now what did the company decide they will cancel the plan because company only made the plan so agreement will tell don't say can they do it sir all this is as per contract contract may give the right to company to cancel in case of bad performance of company or for that matter an employee so let's say one defined benefit entire ABP plan is cancelled or only relating to that division only that division could defined benefit plan company cancel let's say the obligation on that day on the cancellation date liability value of assumed it to be 70 LH so when you cancel the plan can you entirely say canceled and keep quiet or you will pay some money and cancel out you'll pay some money and say take this much don't ask anything extra how much is the liability value 70 lakh company told 60 lakh you take and get on with your life don't ask me even one rupee more how much is the liability value 70 lakh how much did we settle it at 60 so when liability we settled at correct value or lesser value lesser value how much lesser by 10 lakh if liability if you're settling at lesser value means it's a loss or a gain gain this we call it as curtailment gain understood curtailment gain curtailment gain comes when you have curtailment gain or loss will come when you cancel the plan sir can it be loss also instead of paying 70 lakh let's say you paid 75 lakhs that means in that case May 5 lakh will be a loss okay fine it could be a gain or it could be a case of loss doesn't matter that curtailment gain loss also will be transferred to pel immediately any problem okay the last bit sir you have three Ledger account which has a balance can someone point out me what are the three ledger balance one is provision for dbo another one fair value of plan assets then unvested pass service cost agreed so provision for dbo has what balance provision for dbo has credit balance done plan asset is an asset assets have what balance debit balance unvested past service cost just now we discussed again it'll have what balance debit balance correct so all the three are related to employes only know hence what ASCS is don't show all the three separately net off net off the two everything you net off let's say this is 500 plan asset value is 400 unvested pass service cost let's say is 50 rupees assumption or maybe I'll take it as 70 okay could be any value randomly I assume this 500 is credit this 400 is debit this 70 is debit net off which is more total debit is how much total debit is how much 470 total credit is how much 500 which is more credit only is more how much is credit is more by 30 that means that 30 you showed and the liability side of balance sheet net off everything and show the final component either on the asset side or liability side since liability component is more you show this credit that on the liability set if asset component is more very rare if it is so show it on the asset side that is your balance sheet presentation which I written over here manageable so what is it again take the provision for dbo net of unamortized pass service cost net of fair value of plan assets balancing figure you show usually liability only will be more usually liability only will be more hence in the format I've written net defined benefit obligation in balance sheet okay if asset side is more means show it on the asset side that is your balance sheet presentation next one okay one curtailment gain one question is that F we'll do off that okay today little extra time guys okay I have one more standard to complete I'll finish that only and then only we leave okay uh tomorrow class uh up to yeah yeah I know that but I can't manage ma with the existing time no it's difficult to manage anyway classes will be available on YouTube you can watch it later on yeah so tomorrow I'll have to do with 10 to 4 only little difficult to adjust tomorrow logistically it's creating some problems here you're reshuffling everything and uh they're actually not scolding me but deep down they are scolding okay this because of this guy you doing all this drama so yeah it's creating some problems so we'll have 10 to four because any which way you video will be available if you can you can come post lunch the remaining portion you can watch it when it's available on YouTube in about 2 to 3 days time okay now about this Rockstar limited discontinues a business segment one whole business segment they want to discontinue we are not canceling the plan One Division itself we are want to sell it off under the agreement with employees union the employees of discontinued agreement will earn no further benefit so we have convinced the employee that since that division is no more there that division employee also will not get defined a benefit obligation that convinced then they have given stories so we'll leave this is a curtailment without settlement AB so much of convincing power you convince the employee without settlement plainly of cancer not even one rupe you give sir such good convincing power no we should become like thatth okay so it's a curtailment without settlement in my example it was a curtailment with settlement with settlement means you are paying something without settlement means no payment this and all a story I don't have time you go through it later L okay Rockstar limited has a share of unamortized share blah blah blah story you need to guess calculate curtailment gain curtailment or gain and liability after curtailment only two things what is the liability value after curtailment how much is curtailment gain the thing I need is only these three four point immediately before curtailment gross obligation gross obligation means Pro obligation means what do we call that obligation name provision for dbo that's balance is how much 6,000 before curtailment this is the fair value of plan assets on that day is estimated to be 5,100 okay tell me sir this 6,000 will have what balance credit balance fair value of plan assets debit balance unamortized pass service cost debit balance do we show all the things separately or net off net off curtailment reduces obligation by 600 obviously sir if curtailment means one one one division benefit employee benefits you are not paying means the division itself is not there are you playing employ benefits to that division no so if you're not paying a benefit means will the obligation be same the liability be same or it'll reduce reduce they're saying it'll Reduce by how much 10% not only your 600 how 600 6,000 10% is how much 600 600 that's what I given so using this data you need to Simply find out curtailment gain or loss very very simple aspect check here present this in this format okay study material does a lot of drama around this present this way it is easy same if you follow this approach CF final also I'll present this format only okay uh before curtailment after curtail before curtailment what was provision for dbo 6,000 it'll have what balance credit balance you have unamortized pass service cost yes before curtailment how much was unamortized pass service cost 180 so reduce it because you need to net off then do you have fair value of plan assets yeah how much is fa value of plan assets 5,100 that will also have what balance debit balance so net off all this what is higher liability only is higher so how much is that liability Higher by 720 this 720 only you will show in your balance sheet as net defined benefit obligation correct but this is before what curtailment now did you do curtailment yeah after curtailment is your liability same or they told it'll reduce they told it'll Reduce by 10% before curtailment it was 6,000 after curtailment it will reduce by 6% 10% rather 6,000 minus 10% you do how much is that 5,400 such good problem they only given it will reduce by 600 also so 6,000 minus 6 6,000 is how much 5,400 correct now sir past service cost means what yeah but meaning I am asking tell me meaning P you're telling all the accounting treatment past service cost means what plan Amendment correct you made some plan Amendment yes because of amendment you have to pay extra benefit yes now this extra benefit you have to pay to everybody but one division is not there one division is not there means will your pass service cost be same or that will also reduce because this 180 is the amendment made for every employee every division is one division there or gone one division is gone if one employee benefit obligation is gone means this this amendment of benefit also should you pay or not required not required that means after curtailment its benefit this this PSC will be 180 only or it will change in fact it should reduce that you have to get it as a pro rated version like this if dbo dbo and PSC dbo stands for defined benefit obligation PSC stands for pass service cost how much was dbo before curtailment how much was dbo before curtailment 6,000 how much was PSC before curtailment 180 so if dbo was 6,000 means PSC will be 180 after curtailment how much is dbo after curtailment dbo balance has become 5,400 if this is 5,400 means how much is pass service cost pro rated version Pro rate that how much are you getting 5,400 into 180 divided by 6,000 which is 162 so before it is 180 afterwards it will become 16 2 any doubt in this this is arrived as a pro-rated number done everybody okay sir this is a curtailment with settlement or without settlement there is a curtailment with settlement or without settlement without settlement sir if it is with the settlement means you have to pay money you'll pay money from your bank account or plan assets you will sell if it's a with settlement plan means plan assets you will sell recover the money and that money you'll give it to employees this is with settlement or without settlement without settl if it is without settlement means is there any necessity for me to me as a company to sell any assets or not required that means where fair value of plan assets will it change or same same because this is without settlement that is the reason so suppose if they give you with settlement settlement value is 50 lakh settlement value is 50 then plan assets will not be 5,100 it will reduce by 50 here it is not there so it is like this in your examination question it could be with settlement also now net off in balance sheet do we show all the three separately or net off net off after you net off what is the final liability you're getting 138 so look at it before curtailment liability was 1 or rather 720 afterwards net liability is 138 liability value is increased or reduced or reduced that only is your curtailment gain from 720 it became 138 how much is the reduction 582 that is your curtailment gain which will be transferred off to p andl immediately easy that's one requirement second requirement they asked what is the liability value after curtailment already found no what is the liability value after curtailment 138 that's just for this they'll give you five marks chain to question put it up in this table five marks take it in your pocket done now work all questions we have done fully quickly I'll run through few other things as well yeah I think this is okay okay other if you just check two types of employ benefits we have already covered step and post employment benefits the third is other long-term employment benefits other long-term employment benefits means the silver jubile bonus golden jubile bonus etc etc meaning let's say company tells the employee work in my Organization for 10 years take 10 lakh work in my Organization for 10 years take a 10 lakh is this a step is this a short-term employment benefits you paying after 10 years shortterm no is this return retirement benefits is employee retiring or still there still there is this a termination benefits did you terminate the employee or did he quit no that means this is what benefit other long-term employment benefits other long-term employment benefits is basically a residual category something which does doesn't come under other three it will come under other long-term employment benefits category the example for this is Jubilee bonus Jubilee bonus is this only work in my Organization for 10 years and take 10 lakh work in my Organization for 5 years and take 10 lakh like this that and all we call it as Jubilee bonus sabatical leave means employee told I will quit company asked why he told I want to go to World Tour I'm bugged with your company I want to go for World Tour company told you finish your world tour and come no problem I will pay you salary employee told it'll take 3 years no problem three years salary I will pay you AR say Do Your World T that we call it a sabatical Lea we should find that company tell me also I will work here but I will join that company okay yeah that is the thing all right so basically all these are this so how about the accounting sir accounting is same as PM projected unit credit method know it forgot it got it getting it not got it whatever it it's over it okay same accounting like the previous one okay now okay the last one is termination benefits termination benefits means you terminated one employee when you terminate will you send them KH H or pay some money pay some money so at the time of termination if you're paying any benefits to employee that we call it as termination benefits this termination could be a voluntary termination or a forceful one voluntary means company only or employee only told dat buy by happens in your government employee vs voluntary retirement scheme fireal employee is retiring on his own they will many companies will have this voluntary retirement schemes especially in government companies so the terminat could be voluntary or it could be a forceful forceful means company fired so it doesn't matter whether you fire the employee or he quits voluntarily both are termination benefits so accounting sir you check sir if termination benefits are expected to be settled within 12 months from balance sheet date you'll account it as step if you are expecting to settle this termination benefits Beyond 12 months from current balance sheet date then you will account it like post employment benefits post employment benefits means you have to account it as pu cm that method so usually what will be it'll be step because first of all you firing the employee you tell them because I fired you I'll pay you five lakhs but you are telling I'll pay 5 lakh after 5 Years first of all employee few years you filed now you're telling I'll pay after 5 years does it happen like that no usually all this will be settled within one or two months that means it will be accounted like what short-term employment benefits so with this year 50 full D got it uh yeah now you're looking for class to end I am looking for next topic if I don't do this tomorrow today tomorrow's Target will become too much which I don't want we'll finish this topic and then only wind up for the day okay just give me one minute somebody's disturbing me non-stop I'll ask him what is that for not well you thought you'll get a long break unfortunately for you I'm back online people everybody there AA patiently you are sitting so thank you I don't know whether you are watching this only or something else so yeah if you're watching this only then I'm yeah very very happy or if you're studying also not a problem but if you watching Instagram that this then it is bad Okay g excuse me sitting in one place is a little difficult you know suddenly some parts which I can't mention no does happen something okay now can we get started with the next the topic yeah think recording is still going on I said something okay all right next next is watching class great great awesome na you are like brilliant now watch also I finish this till then you keep watching okay all right next topic we are starting with accounting standard n which talks about Revenue recognition huh so this particular standard gives us a guidance as to when and how much the revenue should be recognized oh one second H okay Revenue cut definition so Revenue means gross inflow of cash dears or any other consideration arising in the normal course of business from ordinary activities relating to sale of goods rendering service used by others of Enterprise resources yielding interest dividend royalty if you can remember remember and write it otherwise L terminology revenue is gross inflow of cash when you sell the goods for cash what is the ENT you will pass cash account debit to sales account so what came in cash so revenu is gross inflow of cash what is the journal entry for credit sales dats to sales did cash come in or datar come in datar come in it's a sale but what came in cash came in or datar came in so revenue is a gross inflow of either cash or receivable or any other consideration okay arising from what normal course of business from ordinary activities so this cash coming in or dats coming in know should be related to your main activities it should not be a on in a Blue Moon activity it should be main activities is that okay what do you think is a main activity of any Enterprise sale of goods or rendering service or interest dividend royalty so basically Revenue recognition Deals Only with five components how when to recognize the revenue when you sell the goods when to recognize the revenue when you render the service when to recognize the revenue for interest dividend royalty that's why okay now super ah okay that is one second one we'll go for the first aspect first aspect deals with the revenue recognition relating to sale of goods so standard says is you can recognize the revenue relating to goods sold if you have sold any Goods you can recognize Revenue meaning you can recognize Revenue means you will credit sales no when you will credit the sale is what standard telling the ENT giving you the guidance you can recognize Revenue when we say performance obligation is satisfied when the performance obligation is satisfied you can recognize the revenue so when do you say performance obligation is satisfied for you to prove performance obligation is satisfied Goods should be transferred to the buyer for a price like I'm a calculator dealer somebody came to me and told I want told me I want to buy one calculator I told 500 rupees take the calculator I gave the calculator to him that means Goods has been transferred to the buyer for a price that means my duty is complete can I recognize Revenue yes that's a first condition Goods has been transferred to the buyer for a price that is one or second instant Goods has not been transferred but the risk and reward is transferred and seller has no control over the goods these are one condition risk and reward has been transferred and seller has no control over the goods like a buyer came to me and told I want to buy calculator I told no problem take it he told no no no you keep it in your factory he told I want to buy 1 lakh calculators from me I told no problem I have it ready take it he told no wait keep it in your factory I will take it after a few days I told boss if something happen to calculator I'm not responsible I will keep it it's ready if you want you take it today only tomorrow if there is earthquake or fire or flood though if the calculator is gone I am not a responsible that means what as a seller I have done risk and reward I have transferred but Goods have I transferred not yet Goods still my factory Goods is still in my factory but the risk and reward I have transfer and do I have as a seller I have control over the goods or no control over the goods if this is satisfied means we say performance obligation is satisfied either first condition or second condition first condition is delivered the goods to the buyer for a price or second one risk and reward you have transferred and you have had you you you have control or you have relinquished control you have given up the control seller has no control over the goods either this or that and one more condition should be satisfied the there should be no uncertainty in collecting the sale consideration because normally when you sell no sir will it be a cash sale or a credit sale normally the business May sale now the maximum sale that they make will be on a credit sale okay all right so if you given two months credit means when will you recover the money after two months you should have a reasonable assurance that you'll be able to recover the money it should not be a Mia scenario yes sir where you sell in the goods and later he'll be like that should not be there you should have a reasonable assurance that or there should not be any uncertainty in collecting the sale consideration so one or two and three that is a condition understood it is one or two and three so for you to recognize the revenue these should be satisfied if these are satisfied we say performance obligation is satisfied okay tell me once again when is a performance obligation satisfied when goods are transferred to the buyer for a price or risk and reward transferred and seller has no control over the goods either one of those and no uncertainty in collection exist so if there is uncertainty don't recognize Revenue if there is no uncertainty recognize Revenue all right like that sir if there is a trade discount what to do sir sir I sold for 780,000 there is a trade discount of 5% what to do r using okay so if it a cash discount account it separately because Revenue means gross inflow of cash or datas okay so hence cash discount is accounted separately only trade discount is reduced from the selling price or purchase price for that matter depending on what you're do it yes sir this is with respect to revenue recognition relating to what sir goods sold next will be sir service I told you can buy this chartbook from website PDF will not be available you can buy it from our website I've showed you on the first today video where to buy learn. ar.com you can go come back to this service rendered when can you recognize Revenue relating to service rendered now what I'm giving you here is what sir am I selling you any product or giving one service service giving one service now when can I recognize the revenue relating to service I can recognize the revenue when my performance obligation is satisfied what is my performance obligation to render the service so for you to recognize the Revenue Service should be rendered price of price of the service should be fixed because if you want to recognize the revenue means you should know how much you should account it know so service Revenue should be fixed and there should be no uncertainty in collection I should have performed my duty that a service should have been rendered service car price should be fixed and there should be no uncertainty in collection should exist if all of these are satisfied you can go ahead and recognize the revenue so how can you recognize or what are the methods for Serv no sir there are two methods either you can go for proportionate completion method this only in as7 we learned it as percentage completion method or you can go for completed contract method okay percentage completion method or completed contract method so when can we go for percentage method if the if the contract has more than one act if the contract has more than one act you go for percentage method if the contract has only one single act you go for completed method so what is this more act to like that thing I'm doing here sir I'm let's say I'm giving you coaching for advanced accounting I'm giving you coaching for advanced accounting full syllabus now Advanced accounting has roughly 30 topics in our syllabus there are roughly 30 topics sir should I now you tell me now this coaching has one act or many acts each topic is one one act suppose I completed 10 topics after that suppose I'm not feeling well or I have some family commitment I'm not able to take any any more classes how many total topics are there 30 how much I finished 10 after this 10 am I able to conduct continue my class or not able to not able to now another faculty will come will he take all the 30 topics again once again or he'll only do the remaining 20 he'll only do the remaining 20 provided you have understood yeah okay so he will do only remaining uh 20 correct that means you tell me each topic is a separate act once it is over the topic is over yes or no like this if a contract has many acts you will go for percentage completion method like if one topic is over if one topic is over whatever Revenue relating to one topic let's say one topic my revenue is 1,000 rupees if one topic is over means I'll go ahead and pass the journal entry for 1,000 rupees if five topics are over there over means 1,000 into 5 5,000 because contract has one act or many many acts each topic is one act like that so once the topic is over the revenue relating to that topic I can go ahead and recognize the revenue such method we call it as percentage method so suppose I did not I'm not conducting accoun uh I mean Advanced accounting class I called you for a one day Marathon I called you for a one day Marathon I told you come at 9:00 we'll sit till whatever time One Day Marathon we will do of advanced accounting now you tell me contract has how many acts one because my job is to what revise the the entire topics that means now after one topic can I pass the journal entry from 10: to 10:15 I finished one topic can I go ahead and pass the journal entry no here the contract has only one main act to give the to summarize or revise the whole syllabus so once that revision of whole syllabus over then only I can pass the revenue recognition while journal entry because the contract has only one day act or if I call you for one day accounting standard while seminar one day I call you for as seminar that means I'll be able to recognize the revenue only when that seminar is fully over because contract has only one single act that yes sir okay next is with respect to two over sale of goods rendering service remaining is IDR as an interest dividend royalty so interest is recognized on acral basis on the basis of time interest acrs on time basis yes sir if I issued the debentures if I issued the debentures I have to start acing the interest every month correct no sir one month has passed means one month interest I need to acove I may pay it after 6 months I may pay it after one year doesn't matter but I have to do the accounting on a approval basis agreed so that is what I'm telling over here interest accounting is always done on a Time basis if one month is passed means one month interest expense you need to account in your books if 6 months is passed means 6 months interest expense you need to account in your books this is for interest expense same is for interest income ALS if company has issued debenture means let's say I have purchased some other company debenture as an investment I have purchased some other company debenture as an investment means I will pay interest or receive interest receive interest so that is revenue or sir yeah because for many companies no sir especially Banking Company financial institutions what is our main business accept deposit give loan not only that also to invest their major money they'll go on investing also so that means investing also is part of their main activity on investment what do they receive interest and dividend that mean this is also form forming part of Revenue itself so interest you have to recognize on a Time basis whether you have received it or not is irrelevant recognize it on a Time basis how about royalty royalty means royalty means so suppose I wrote a book same example I think I gave it in class I wrote a book how to clear CA in first attempt or how to get a rank in CA okay one book I wrote sir I have the exper to write the book let's say I'm an author I can articulate well and I can write a book but do I have the expertise in publishing the book and marketing the books no so I approached the publisher and told this is my book I have written it you publish publisher read the book and told good good content probably will'll be able to sell it okay I will sell it to you I asked what's in it for me publisher told on each book sold I will give you 30 rupees on each book sold I will give you 30 rupees that is 30 Rupees is nothing but m royalty because whose content is it mine but who's selling publisher so my content my resource somebody else is using no will I give this at free of cost or I will charge some money charge some money so my resource if somebody else is using we collect some money that only we call it as royalty so royalty how will you recognize it as Revenue like if I'm an author my main business is to write books sell that books to the publisher and recover royalty that means royalty is something abnormal to me or routine routine that means it is part of my ordinary activities anything which is part of your ordinary activities becomes your Revenue so when should you recognize the revenue relating to royalty as per the agreement here as per my agreement when will I get the revenue I will get a revenue of 30 rupees when the books gets sold not published not when you print the book I'll not get the revenue only when the books get sold so if suppose publisher has sold 100 rup 100 books on a particular day what is my royalty sir per book 30 that means one the day he sells 100 books I will recognize a revenue of 3,000 because my agreement says when the books are sold I will get the revenue so agreement basically will drive it okay fair enough and this also is recognized on acral basis because in my example the moment he sells the goods I will recognize the royalty as a revenue whether I have received this royalty or not is irrelevant I will account this royalty on an acral basis but based on agreement what my agreement tell based on that I will account yes sir okay last one is the dividend sir I have invested in some company Equity shares so what will I get dividend sir this year if I invested in if I purchased Equity shares of Reliance can I pass dividend entry one lakh last year I got one lakh dividend from infosis or uh Reliance this year also can I pass one lakh they have not declared it Reliance has not declared it I am thinking last year they gave me one lakh so this year also I will account one lakh will it work like that no dividend you will account it as Revenue only when the other company declares that's what we say dividend should be accounted as Revenue when right to receive the dividend gets established when right to re receive the dividend gets established that right gets established only when the other company declares it only if Reliance declares the dividend then only I'll be able to account the dividend in my books if they don't declare I cannot account it that's what this particular component is saying yes or sir okay next is uncertainty in collection one of the conditions for Revenue recognition is there should not be any uncertainty it goes for everything not just for goods and service uncertainty should not be there in collection for goods service interest dividend royalty for everything if there is uncertainty existing at the time of sale itself then Revenue recognition should not be done at the time of sale I had no uncertainty later on uncertainty came I sold the goods to a particular customer and that time that point of time I was sure that I will recover the money later on he's acting crazy I feel now I'll not be able to recover that means uncertainty came at the time of sale or after after if uncertainty comes after means make provision provision for doubtful Debs or if you're sure you will not get the money write it off as bads yes sir okay some special cases major delivery or inspection by the customer sometimes what happens is like a machinery dealer some guy is there who's manufacturing a Machinery it's a complex Machinery it needs an installation so what we do is for first we will sell the missioner to customer then we will visit the customer premises and they will and then we will install that missioner because it's very complex and Later customer will inspect it and say okay when should we recognize the revenue I gave the Machinery today I delivered the Machinery today installation I will complete after 10 days okay on the 10th day customer will say okay after the installation is complete so when should I recognize the revenue on day one when I delivered on on day 10 when he gives thumbs up day 10 day 10 if if if the asset requires any major inspection or buyer approval if it requires any buyer approval you will recognize the revenue only when buyer has given the approval in my example buyer gave approval only on the 10th day so you'll recognize the revenue only on the 10th day is that okay so money you might have received on whatever day is irrelevant Revenue recognition is not based on money received you can receive money on day one day 40 day 60 doesn't matter what it is money is not a criteria okay other things are the criteria yes so people okay Consignment Sales Consignment Sales means there will be two parties consigner and consigning consigner is the owner of the goods he will send the goods to the consig and later what will consig the agent do he will sell it to the customer so when should the consigner recognize the revenue relating to Consignment sale only when the goods are sold by the consigning only when the agent sells the goods only then we will recognize the revenue till then it's our Goods there in Kaya Factory we will still show it as stock only when the consign sells it we will record it as sales goods sold on approval basis goods sold on approval basis means normally sometimes when it's new product people will not find acceptance hence that's the reason what we'll tell them is we'll give the goods and tell use the product for few days if you like it buy it otherwise you can return it that arrangement we call it as good sold on approval basis you learned it as a separate topic and all in Foundation okay yeah I've given you my pen example yeah in regular class he remembers okay I'll not go too much detail there you can recognize good sold on approval basis as a revenue only on when of the three circumstance happen one when the time lapse let's say I give the buyer a time limit of one lakh uh one one week I I I'm a pen manufacturer I gave this pen to the potential buyer and told use it for one week if you like it later you can buy it from me otherwise you can return done one week already over that means the time has got lapsed now I can recognize Revenue when I give the goods I cannot recognize Revenue I can recognize Revenue when one of the three circumstance happen one is the time getting lapsed let's say on the fourth day buyer called me up and said product is good I will buy it that means now should I have to wait for one week because how much time I gave one week should I have to wait for one week or on fourth day only I can recognize revenue on fourth day only I can recognize Revenue because buyer has accepted or buyer doeses any action amount to S he destroyed my product he broke my product now will I accept it no yes I will not you accept Okay s your okay okay all right buyer does any action amounting to sale so if he destroys my product I will not take back my product I will treat it as sale okay basically I'll book sale so if any of these three circumstance happen then only we'll recognize Revenue otherwise no next cood sale COD sale as in cash on delivery sale so if you have sold the goods on COD basis you can recognize the revenue only when you or your agent has collected the cash when the company or its agent have collected the cash sometimes company will not have manpower to collect the cash so they will appoint agents so either when the company collects cash or when the age company agent collect the cash that day you can go ahead and recognize Revenue till then you cannot sell or till then you cannot recognize sales delivery delayed buyer request so I sold the goods okay I sold the goods I told the buyer take the goods buyer told I don't have space in my factory I will take it after 3 months I sold the goods okay let's say I'm a laptop dealer okay let's take a bigger one I have I'm a TV dealer I manufacture and I sell TV because one here no yeah that only bigger so sir one one buyer came to me one customer came to me and told I want 100 TVs I told yeah it's ready you can take he told no keep it I will take it after 3 months why I asked he told no space in my factory and I told why are you buying now he told I am scared that after 3 months the price will increase the price of the TV will increase so I want to purchase now only but I will take the delivery after 3 months now the question to me is the goods is still there in my go down I will deliver this Goods only after 3 months so when should I recognize the revenue standard says you can recognize the revenue today it's you can recognize the revenue today itself provided certain conditions is satisfied if you remember my normal class I told the condition same as CF fin this is the condition which CF final Books use as also gives the same condition but they don't give too much expansion in as what they tell is if goods are delayed at buyer's request recognize the revenue immediately recognize the revenue immediately but there are certain conditions which is not elaborated too much in a but is given in a minute scale so you remember like this it's okay you can recognize Revenue provided SE is satisfied cpur what is that cud agreement to be substantive meaning buyer should have initiated it product is ready who's causing the delay seller or buyer buyer should ask for this delay not seller that is the first condition that's what we mean by agreement to be substantive I for product to be identified as belonging to the customer sir 100 TVs are already sold okay that means am I recognizing the revenue today yes so if I recognize the revenue means is that Goods mine or customers customers customer Goods I'm still storing my goam can I mix it with all other Goods or store it separately so if you want to book it as sale you have to store that 100 TVs separately you should not mix it with other TVs because that is not your inventory it is your customer car so keep it separately that is a second condition third one product should be ready for physical transfer initially what the customer told I will take after 3 months after 2 weeks he told space cleared give me space space in my factory is free give it to me now so I should be in a position to ship that Goods immediately after after 2 weeks that's what we mean by product should be ready ready for physical transfer that is your is your P stands for last is ur d u means the entity that is us the seller should not use this TV because does this TV belong to us or customer customer the the seller should not use this TV or direct this TV to another customer this 100 TV I should not sell it to another customer I'm like anyway that guy is not buying it I send this temporarily to somebody else that should not be done the entity the seller should not use it or sell it to an other customer that is your u/d is actually sell you can you can call it as direct understood if all these conditions are satisfied you can recognize the revenue immediately you don't have to wait for 3 months you can recognize it immediately okay sir we have to write all this sir normally these sort of questions no they will give you five case studies one one Mark they will ask you one one case study so you don't have to write any reasons if at all you want to write reasons you can write in one liner that is good enough not beyond that insurance claim so can you recognize insurance claim as a revenue yes provided there is no uncertainty in collection so insurance is a revenue or sir yeah sometimes what happens especially if you are a logistics company what is the main business of logistics company to transport the goods when you're transporting the goods to so many location it's possible that some Goods will get lost or some Goods will get destroyed hence what will the insurance what will this company do they will take insurance that means Insurance claim is a what once in a blue moon for them a routine routine so Insurance claim also can be recognized as Revenue provided there is no uncertainty in collection you should have a reasonable assurance that you will collect the money from insurance company that day you can go ahead and recognize Revenue next if you have sale and rep repurchase agreement sir I sold the goods later after one year I will buy it back I sold the goods today I've told the buyer I'll repurchase it back after one year if that is the case means don't recognize the revenue because it is not re Revenue it is just a finance Arrangement it is just a finance arrangement like I sold the goods today when I sell the goods today I will collect 1 lakh rupees and I told the buyer I will buy the same goods from you or similar goods from you after one year and I'll buy it to you at 12 lakh rupees I'll not buy it at 10 I'll buy it at 12 lakh essentially what has happened here sir this Goods no sir now I have given later on the same Goods will come back to me initially from this Goods how much I recovered 10 lakh later after one year how much I have to pay 2 lakh that means indirectly this is what sir I'm using Goods as a tool to raise Finance what I wanted is not to sell the goods I wanted some money buyer told I will not buy your product that is the reason you're doing all this jugat so basically you paying extra why because buyer gave you the amount now but you are giving the amount to the buyer after one year that's the reason he asking you interest of 2 lakh so is this really a sale Arrangement or Finance Arrangement Finance Arrangement so don't recognize the revenue book it as Finance Arrangement that's the case of this okay P next is principal versus Agent consideration if you are a principal you'll recognize the revenue at gross amount if you are an agent you'll recognize the revenue at net amount let's take a small example sir there is an indigo Airlines all right normally when airline tickets and all can be sold by agent also so there is an agent what that agent does is he buys the ticket from Indigo Airlines air ticket first he will buy it from Indigo Airlines let's say he buys it at 10,000 5,000 rupees one ticket he'll buy it at 5,000 later on he'll sell it to the customer at 6,000 each ticket he will sell it for 6,000 now we talking from agent perspective this agent perspective May should we record the revenue at 6,000 should we record this sales at 6,000 or 1,000 why 1,000 because he bought it for five he's going to sell it for six that means agent commission is how much 1,000 1,000 so should agent recognize a revenue at 1,000 that is his commission amount or should he recognize a revenue at 6,000 that depends that depends whether this guy is really an agent or a principal for the name sake you may call anything agreement may say an agent that and all is irrelevant you need to check whether that particular person is an agent or principal now let's modify the agreement let's say like this agent no sir buys the tickets from Indigo Airlines and he will sell it to the customer if he is not able to sell the ticket to customer he will return the tickets to the Indigo aines that is Arrangement initially he will buy later he will try to sell it to the customer if he's not able to find any customer or sell the tickets to customer what will he do he will give the back tickets back to Indigo Airlines and collect the amount that means in this case you tell me is Agent really taking the risk no that means in this case is this guy is purely an agent that means he will recognize the revenue only at 1,000 rupes because principal is that guy who will bear the risk principal is that person who will bear the risk risk means what whether you'll be able to sell the goods or not that risk is the person is the one who who who will be born by principal in this case who's bearing that risk this particular agent or Indigo Airlines Indigo Airlines because if agent does not sell the ticket means what he'll do he'll give the tickets back to Indigo Airlines and collect the money back that means who's bearing the risk here Indigo Airlines so agent this guy is a purely an agent you'll recognize Revenue only at 1,000 rupees understood let's modify the example same Indigo Airlines there is another company a limited Indigo Airlines or A- limited purchases the ticket from Indigo Airlines for 5,000 rupees later they will sell it to customer at same amount which is 6,000 rupees now what is the arrangement is if a limited is not able to sell the ticket if a limited is not not able to sell the ticket they cannot return the ticket to Indigo Airlines if a limited sells the tickets good for him if he's not able to sell the ticket means the headache is on whom now a limited only the risk is on whom now a limited now you tell me is this a limited a really agent or principal principal so in this case me what A- limited will do he will treat this 5,000 as a purchase when how much is he selling this ticket to the customer for 6,000 6,000 he will record it as sales he will not record sales at commission amount he'll record it at full amount because he's bearing the risk away is that okay with you so if that particular guy is bearing the risk he will record it at he's recording at 6,000 here no that we call it as gross amount that we call it as gross amount in the previous example how much did you record the revenue at 1,000 what is that 1,000 commission that only we call it as net amount so if you are a principal you'll recognize the revenue at gross amount the full value if you are an agent you'll recognize the revenue at net amount net amount here stands for commission okay that's the difference now okay Concepts all done quickly we'll run through the questions this question is there in our study material it's come in MTP also why limited used certain resources of X in return X received 10 lakh and 15 lakh as interest and royalty during the current year you are required to State on what basis the revenue should be recognized they're asking B basis of Revenue royalty should be recognized on the basis of what agreement Royal is recognized on acral basis but based on agreement interest is recognized on acral basis so means have you received both of them yeah can you recognize Revenue yeah so this year you can both you can book it as revenue is that fine working next given the following information you need to tell how much revenue should be recognized first Goods of 2 lakh has been sold to den limited but at the request of the buyer these were delivered on 10th April so Goods have been delivery has been delayed at whose request buyer request if the delivery has been delayed at buyer's request should we postpone the revenue or recognize it immediately so entire 2 lakh you can book it in the current year only yes sir we don't have to wait till the delivery date book it immediately provided s is satisfied our standard doesn't say that because they'll give you like this see four five case studies you simply select you need to select the answer second case on 15th January and the year is ending on 31st March by the way the current year is ending on 31st March it's given at the end on 15th January Goods of 3 lakh were sent on consignment basis stop there if goods are sent on consignment basis the day you send can you recognize Revenue no you can recognize Revenue only when the goods are sold by the consigning 20% of the goods are unsold 20% of unsold till 31st March unsold Goods can you recognize as Revenue no 20% is unsold means how much is sold 80% so 3 lakh 80% is how much 240,000 that much can you recognize his Revenue yes 4 lakh worth of goods are sold on approval basis approval basis can you recognize as Revenue yes three circumstance time lapsed buyer accepted or buyer does any action amounting to sale 4 lakh we have sent on approval basis on 1 December the period of approval is three months so count sir first December mind you that means three months when it will expire uh December one month one okay December January February by the end of February the time will get lapsed correct 3 months time okay after which they're considered as sold that we know they don't have to tell that buyer sent approval for 75% great for 75% can you recognize Revenue yeah no approval or disapproval has been received for the remaining till 31st March we don't have to wait for approval because time has lapsed since time has lapsed should we wait anything or recognize revenue for full for 75% buyer is anyway accepted for 25% time has got any which way lapsed so full Revenue can I recognize yes entire 4 lakh you can recognize is because time has also lapsed buyer also has accepted apart from the above BS product sells the goods to dealers also one of the condition of sale is interest is payable at 2% per per month on delayed payments I'll sell the goods if the dealer does not pay the money on time I will collect interest at what rate 2% every month the percentage of interest of percentage of Interest recovery is only 10% so we feel we can recover only 50,000 okay on such the outstanding due to various reasons we have to collect lot more but we feel we can collect only 50,000 during the current year the company wants to recognize entire interest receivable of 60 totally how much recover of how much interest we have to recover 60 but company feels they can recover only 50 so how much you'll recognize revenue for 60 or 50 one of the condition for Revenue recognition is there should not be any uncertainty in collection company feels that they can collect only 50 means there is certainty in collection only to the extent of 50,000 so Revenue also you'll recognize only to the extent of 50,000 n now okay no other pointer if you add everything what is your total revenue 890,000 that is a total revenue you'll recognize in the current year yes sir that's what given here can I move on to the next work one last question we'll take up and we'll probably wind up for the year ended 31st March 20 X1 KY Enterprise has entered into a following transaction on 31st March KY supplied two missionary to customer missionary we have supplied both the missionaries are accepted on 31st March the key word is that customer has already accepted now they may give whatever goalie installation pending thus pending amount not received this whatever goalie they give what we will do recognize the revenue because customer has already accepted yes no normally acceptance of customer will be received when the installation is complete normally but this time the customer trust us so much that he's accepted the missionary on 31st March itself now check mission one was a was a machine that was routinely supplied by KY to many companies and installation process is very simple a missionary one was installed on 2nd April so usually customer will accept on after installation so missionary one was accept installation was completed on 2nd April means usually customer will accept on 2 April but here customer was in a hurry what did did he do 31st only he accepted so second April is relevant for me or irrelevant irrelevant missionary 2 is more specialized in nature and requires installation process which is more complex mission 2 was installed between 2nd April to 5th April again sir our current year ends on 31st March but installation is happening only in the next year so the question is should we recognize the revenue in the current year or next year which year since the customer has accepted the asset in the current year entire revenue on both the asset should be recognized in current year itself why though installation is not complete customer is already accepted customer has already accepted means risk and reward has been transferred so that's the reason you can go ahead and recognize the revenue understood when current year all right that is one okay check this on missionary one selling price is how much 320 what is the cost to produce at missionary 160 so how much profit company will make through this asset 320 selling price cost of production is 160 means how much profit they will make on first asset 1 lakh 60,000 when will you recognize this next year current year current year Machinery number two selling price 3 lakh production cost 150 so what is the difference between these two three lakh selling price 150 is a production cost so total profit is what 1 lakh 50,000 okay now sir other than this sir on machinary number two we are collecting installation fees because Machinery number one installation is very simple so we are not collecting any installation fees but Machinery number two is a complex installation and we are charging how much extra from the customer other than three lakh we are charging extra fees of 10,000 this 10,000 can you recognize it immediately this is not goods sold this is service rendered when can you recognize the revenue relating to service when performance obligation is satisfied when does the performance obligation is satisfied when the service gets rendered here what is the service here installation in the current year Machinery number two installation did you complete or in the next year so since installation is getting completed only in the next year you can recognize the revenue relating to installation only in the next year three lakh missionary Revenue you can recognize current year only because missionary is already accepted but installation related Revenue you can recognize only when the installation is complete and that is complete only in the next year that is a fun okay now that's what is given the full goalie over here got the Crux of it yeah with the this as9 also we have completed okay one quick checkpoint another uh 15 minutes if you can bear I'll complete another standard one small standard is there so that we don't have to stretch tomorrow or if you're okay I don't know whether we stretch tomorrow or not otherwise if you feel we'll do it tomorrow and I'll do it tomorrow tomorrow okay great fine all right so then we'll wind up for today we'll catch up tomorrow at 10:00 we'll have 10:00 a.m. is a starting time time ending time we'll see it later okay tomorrow will be the last session for the revision all right thank you thanks all right so after that little bit of a technical glitch we are ready to start the class now so for the today's session will'll be starting with the revision of accounting standard 20 which talks about earnings per share so PS is nothing but you're calculating earnings per share earnings belongs to the total Equity shareholders here we talking about if you own one share of a company how much earnings are you entitled to get so in this as20 two types of eps we calculate one is the basic EPS another one is the diluted EPS how do you get basic EPS basic EPS which we used to call it as BS in our classroom is given by the formula is divided by wains each as an earnings attributable to equity shareholders WS as weighted average number of equity shares so each divided by veins will give you your basic EPS okay so how do you calculate each is means profit or earnings attributable to equity shareholders is earnings after tax attributable to equity shareholders no from earnings after tax first you have to pay preference dividend so if there's any preference dividend first deduct that then you're going to get what sir earnings attributable to equity shareholders but in preference shares there is one catch first check whether the preference shares is cumula preference shares or non-cumulative preference shares cumulative preference shares means dividend goes on accumulating even this year suppose company made a loss that means will the preference shareholders get dividend in the current year no because they made a company made a loss but next year when the company makes profit they will get next year preference dividend as well as previous year dividend ear also will be paid so hence if preference Shares are cumulative means whether the dividend is declared the current year or not you compulsorily have to deduct it for the purpose of each for the purpose of each each calculation dividend has to be compulsorily deducted however if it is non-cumulative preference shares if it is non-cumulative preference shares to find each you will deduct preference dividend only if it is declared because in case of non-cumulative preference shs you will pay the dividend only if the company makes profit that is the reason so in this case in this case it is compulsory you have to deduct in this case may non-cumulative may you'll deduct only if it is declared that is one thing normally there's not much tested but watch out for this in case if it comes okay and divided by weight divided by W sir it is not the total number of equity shares it is the weighted average number of equity shares so how is the weights assigned here usually the weights are assigned in months okay it could be assigned in days also but all our our problems weights are assigned in months okay you can assign the weights and calculate it on an individual basis or cumulative basis individual basis means so suppose year begins on 1 April company had one lakh shares from the beginning which they had issued last year only so current year beginning only you had one lakh shares opening balance in the current year another 50,000 shares was issued on first October that means this 50,000 shares was there throughout the period or only it came current year current year so individually if you have to calculate weighted average number of equity shares this one lakh shares was there for how many months in the current year entire 12 months so you'll give the weight as 12 by 12 how this 50,000 shares was issued only in first October that means it was there in the company only from October November December January February March that means you'll assign a weight of only 6 months this W assignment is what we call it as wains calculated on individual basis or you can also calculate WS on a cumulative basis cumulative basis means so from 1 April to 1st October how many shares the company had the company had one lakh shares after that it changed so that means from 1st April to 1st October how many months 6 months for 6 months the company had 1 lakh shares after 1 October what happened company issued another 50,000 Shar shares that means the total number of shares is 1 lakh or 1 lak 15,000 from 1 lakh you added 50,000 more shares means the number of shares will become 1 lakh 50,000 so from 1 October till the end of the year company had 150,000 shares so from October to March if you count that's another 6 months so for this 150 you will give a weightage of 6 months if you calculate how much are you getting the answer 125 whether you are calculate under individual basis or cumulative basis answer will be same the choice of calculation is yours totally okay that is why one okay next is with respect to bonus shares bonus shares means additional shares given to existing shareholders at free of cost now sir you're calculating you're not doing bonus shares accounting you are calculating EPS now EPS may we know we need only two components one number in the numerator one in the denominator what will you consider in the numerator is what will come in the denominator WIS on bonus shares is company receiving any money on bonus shares is company receiving any money no that means bonus shares has no impact on is so if it has no impact on is on bonus shares we don't have to give any weightage on bonus shares we don't have to assign any weightage or if you want it in another way around on original shares how much weightage you are giving because you will receive bonus shares on new shares or on original shares if you are already holding some shares on that only you will get bonus yes or no if you're already holding some original shares on that only you will get bonus on original shares if you're assigning a weightage of 12 x 12 on the bonus received on original shares also you assign 12 by 12 on original shares if you assign a weight of 6 by 12 the bonus received on that you assign a weight of 6x2 so basically bonus weightage is not required or better weight put across is on original shares whatever weightage you are assigning on the bonus shares also you assign the same weightage because bonus shares has no impact on each that's the reason its weightage is linked on the original shares is that fine with you all right this is one point and the second point is whenever bonus shares has been issued in the current year last year EPS also should be restated last year EPS also you should restate as in recalculate this is done for what purpose comparison purpose I'd given you whole data in the regular class and told you if you don't do the restatement it will lead to an illogical interpretation it lead to a lot of I mean people will interpret in a different way and the company's performance will be branded as bad so that's the reason whenever there is a bonus issue you need to restate previous year EPS as well I told you simple thing how to remember this think that the bonus issue has happened in the last year only and calculate the EPS for last year so why are we calculating EPS for last year sir you're talking about financial statements you report EPS in pnl you show EPS at the end in pnl after preparing pnl at the end may you have to show basic EPs and diluted EPS do you prepare pnl data only for the current year or last year data also you give last year data also you give for comparison purpose so since you are giving last year data if you don't restate last year APS due to bonus issue it'll lead to a dis started it lead to a wrong comparison that's the reason we have to restate it is that okay all right so we'll take up one question quickly on bonus issue hardly three four types of questions are there in this top topic 111 FF we'll we'll do the concept immediately we'll learn it off to one question like that okay as on 31st March 2013 equity share capital of adya is 10 it's not 10 K it is rupees of 10 CR divided into shares of 10 each that means how many shares the company has share capital is 10 CR each share face value 10 means number of shares will be one CR during the financial year 1314 it has issued bonus shares in the ratio of 1 is to one company had one CR shares so how many bonus shares will be given 1 is to one means bonus shares also issued will be one CR itself the net profit after tax for the two years 31st March 13 and 31st March 14 is 8 and a half and 11 and a half respectively EPS disclos for the current year is 8.5 and 5.5 respectively you need to comment theyve already calculated EPS you need to tell whether they've done it correctly or incorrectly so let's calculate this so you just need to calculate EPS no one minute I'll this little data closer okay this one so EPS calculation so only current year we need to calculate or even previous year previous year we need to restate to calculate DPS we need only two datas what is this each and WS each they only given check what is a profit attribute of Sir so they give profit after tax no sir yeah they give profit after tax but is there any preference shares data no if there is no data about preference shares then profit after tax itself will become is if preference Shares are there then you have to deduct profit after from profit after tax you need to deduct preference dividend and then you will get is but here there are no preference share so Pat only will become or profit after tax only will become is what is is of last year they have given first last year and then current year last year is 8 and a half current year guys 11.5 that's what I've written here first I've done it for current year then for last year yes sir then we needed what sir wains how many shares you had before bonus issue one CR that one CR shares was there in the from the beginning that means how much weightage you will give for that one CR shares 12 x 12 how many bonus shares did you receive one CR on original shares how much weightage you give 12 x 12 so on bonus shares also you'll give a weightage of 12 x 12 that means what is the total number of shares you'll have sir what is the Ws of the current here 2 CR this is on the original shares this is on the bonus shares since on the original shares the weightage was 12 x 12 on bonus shares also weightage will be 12 x 12 so what will be the wains 2 is is 11.5 WS is 2 means what does eps for current year 5.75 yes sir what is each for the last year 8.5 how many shares you had it in the last year only one CR because bonus shares was issued in the last year or only in current year only in the current year but if you don't restate last year APS comparison will be wrong hence what do you have to do think that the bonus shares was issued in the last year only only for what purpose restatement purpose this is done for comparison purpose that means how many shares will you take as veins of the last year not one CR you will take it as what sir how many shares did you take in the current year 2 CR same 2 CR you take it in the current last year also okay one CR which you had plus one bonus restatement adjustment is that okay so that means how much will you get the epss 4.25 cres I mean 4.25 so that means EPS should be reported at this value what did the company do sir they reported 8.5 and 5.75 last year they reported 8.5 last year we should report how much 4.25 they reported 8.5 that means what they reported is correct or incorrect incorrect this is okay so what's the overall thing that you need to do for the last year think that the bonus is happened in the last year itself okay why is if you want to know if you forgotten the logic maybe 2 minutes I'll quickly tell you why we do this is current year previous year let's say is then we have veins let's say Sir is in the current year is 10 lakh veins is let's say 1 lakh shares first I'll calculate for previous year previous years is is also 10 lakh Rupees previous year may you had 1 lakh shares that means tell me sir how much is your basic EPS is is 10 lakh WS is 1 lakh so how much is basic APS 10 Rupees correct now current year you did a bonus issue current year you did a bonus issue in one is to one ratio meaning for one share you will give one share as bonus that means how much is the Ws in the current year one lakh shares you already had one lakh shares additionally was given as bonus if you calculate what are you going to get basic EPS is five if somebody looks at this data what will you know what they'll interpret last year EPS was 10 Rupees this year EPS has become 5 rupees that means company APS is reduced by 50% it's a very bad company let's not invest is the company performance bad last year also profit was 10 lakh current year also profit is 10 lakh so is a company performance bad no so that means if you give this data it lead to a long wrong interpretation hence what do we do last year's EPS we need to restate take the each as 10 lakh itself don't take the veins as one lakh think the bonus has happened in the last year itself that means you will take the veins as what 2 lakh now calculate EPS how much is it five now think what was last year EPS five current year five in fact that is a correct performance no because last year also profit was 10 lakh this year also profit is 10 lakh for this reason we restate the EPS understood okay this the two poins you need to keep in mind for bonus issue so this needs to be done not only for bonus issue if there is a stock splitter if you doing the stock split internal reconstruction may we have done one shares will be split into many so even if there is stock split you have to do the same adjustment whatever we we did for bonus issue now same thing has to be split for or has to be done for shares split or stock split also that is one kind of adjustment easy can I move on to the next one okay this is bonus shares second one is with respect to right shares right shares means again right shares is also additional shares given to existing shareholders but at a discounted price here when we say discounted price we mean compared to market price right Shares are issued at discount so right Shares are not issued at market price they're issued at a little lesser price than Market that's what me we mean by right Shares are issued at discount so now just now I told right Shares are issued at market price or below market price below market price that means right shares also has an element of bonus because right shares they are issuing it at its correct value or lesser value value lesser value because you're giving some discount that discount element represents what sir bonus so whenever they give you right shares while adjustment there is right shares adjustment also you need to do bonus shares adjustment also you need to do because right shares also has an element of bonus okay so how to calculate there are couple of ways to calculate it one is a logical way another one is Formula way but our study material is using only the formula so we'll also present it only in the formula so first whenever in right shares May whenever you have to calculate you have to calculate something called theoretical xrite price per share theoretical XR price per share fancy name but it is nothing but your average price it's nothing but your average price now sir now you have two class of shares can you tell me what in all you have two class of shares one is the original shares and another one is right shares one is the original shares and another one is right shares so first you need to find like here sir you purchased 100 shares at 10 Rupees how much is your value of investment 1,000 you purchased another 500 shares by paying 20 rupees so how much or you purchased another investment by paying 15 rupees how much is your cost of investment 750 what is your total cost 1750 what is the total number of shares you're holding 1,500 how do you find out average price if I ask you the average price of investment how do you find simply you will take 1,750 is a cost for 1,500 shares on one shares how much is the value 1750 divided by 1,500 how much is that sir R is WR there is actually 7,500 yeah my bad okay that means this will be 8,500 okay so how do you find out the average price 8,500 divided by 1,500 do that huh 5. 67 yes no sir that is nothing but that average price Only We are giving a fancy name and calling it as theoretical XR price per share so that means to find out theoretical XR price per share we need one number in the numerator one number in the denominator tell me what you'll take in the numerator value value okay that means we need we have one class of shares or or two class of shares two class that means construct your own formula for me two values you need to find out that first is value of original shares then add a value of right shares divided by denominator May what do you want number of shares in number of shares also there are two components what are that number of original shares plus number of right shares there goes your formula is that okay with you all right so that is what we saying over here theoretical X right price per share is nothing but fair value of the shares before the rights issue this is nothing but your value of old shares plus value of right shares divided by number of original shares before rights issue plus number of right shares is that okay sir if you do this you'll get average price that only we giving a fancy name calling it as theoretical X right price per share that's one second one is we already know that right shares also has an element of bonus to find out bonus we calculate something called adjustment Factor we calculate something called adjustment Factor now one share is worth one now or worth something more one share is not worth something one now it is something more why because it has an element of bonus so one share is not worth one now it should be 1.05 1.10 or 1.1 whatever yes or no so that means you need to calculate an adjustment factor and one trick to calculate adjustment factor is you should get a final result greater than one adjustment Factor should always be greater than one because now one sh is not worth one now it has an element of bonus so one share is worth a little more so the final result of adjustment Factor you should get a number greater than one so mathematically you think sir you taking you're calculating adjustment Factor by putting one number in the numerator one number in the denominator how do you get a number final result greater than one to get a final result greater than one numerator has to be always greater than denominator yes or no like 10 ided by 8 you do how much are you getting I think 1.25 yes 10 divided by 12 you do how much are you getting are you getting greater than one or lesser than one you're getting 10 divided by 12 how much point8 that means to get a number greater than one numerator always has to be greater than denominator okay so theoretically what they argue is after WR shares price of the share will fall after the rights issue market price of the share will fall because right shares was given at original value or a discount value discount value okay and the on right sh company has received money how that company will utilize real that money is also a little unclear that's the reason theoretically books wise practically don't say I if any company wants to issue right shares don't tell I told and buy that shares this is theoretically as per books once if the company wants to issue right rights issue books will say that after the rights issue share price will fall is that okay that means you tell me sir which number before the rights issue the price will be high after the rights issue price will be lower that means how do you calculate adjustment Factor you should always take a value fair value of the shares before the rights issue because this will be a higher number divided by theoretical X right price per share this no instead of fair value per share some books also will call this as come right price per share this the we call it as come right price per share that come right price per share means value of the shares before rights issue before rights issue what was the market price divided by theoretical X right price per share because we just now discussed after rights issue share price will fall okay that's another checko also when you calculate let's say here sir market value of the share is 25 market value of the shares before rights issue is 25 theoretical X right price per share should never exceed 25 it should be a number lower because what does what do we argue in books after the rights issue share price will fall so theoretical X right price per share should always be lower than market price is that okay with you so how do you calculate adjustment Factor again come right price per share or if you don't want to use come right price per share you can use another one fair value of the shares before rights issue divided by theoretical X right price per okay this adjustment factor is nothing but your bonus element so you have to multiply this adjustment factor to the Ws to get the uh I mean to get that particular weighted average number of shares let's do a thing last step I'll apply it in one of the problem better understood through numbers F now let's go for one question on rights issue compute B basic APS of Sav limited with the following data La net profit for last year is 20 lakh current year is 30 lakh so why have they given data for 2 years right shares also has an element of bonus Whenever there is a bonus Element last year EPS also should be restated that's the reason they given you current year data and last year data okay number of shares outstanding prior to meaning before rights issue how many shares you had 10 lakh rights issue one share for every four shares we giving the shareholders no sorry if they are already holding four shares they'll be eligible to buy one right shares how many shares currently we have if you have four you can buy one if you have 10 lakh how many shares 10 lakh into 1 by4 if you do how much are you going to get 2 lakh 50,000 so how many right Shares are given 2 lakh 50,000 rights issue price is how much 25 last day to exercise the rights is 31st March the fair rate of one share immediately prior to rights issue is 25 before rights issue the market value of the share was 25 calendar year is followed okay so let's go through this particular question this is a rights issue problem so first step in rights issue what do we need to calculate sir theoretical X right price per share how do you get what is theoretical xite price per share basically average price this average price is it to be greater than market value or lesser than market value lesser than market value because book says after rights issue share price will fall what is the current market price of the right share sir current market price of the share is 25 theoretical X right price per share should be greater than 25 or lesser than 25 lesser than 25 so first calculate how much is how do you get theoretical X right price per share value of old shares Plus plus value of right shares divided by number of old shares plus number of right shares you can calculate at total level or individual level it's okay okay because right Shares are given in one ratio what ratio if you have four you will be eligible to buy one right shares you can take that data and work or you can take how many shares are actually existing 10 lakh how many right shares did you actually get two and a half lakh that 10 lakh and 2 and a half lakh you can consider or you can take four and one and calculate final answer will be same it will not change okay so if you have four shares you'll be eligible to buy one right shares what is the value of one shares before the rights issue what is the value of one share before the rights issued 25 value of one share is 25 how many shares is existing four so one Share value is 25 four share C value will be how much 100 plus we need what sir value of right shares how many right shares you are eligible to buy one at what shares can you buy the right Shar at what is the right price 20 rupees so what is Right shares value 1 multili by 20 this is your value in the numerator divided by denominator what will you consider in the denominator total number of shares how many shares you had before rights Issue four how many right shares did you buy one so that means the total number of shares will be how much five so calculate this how much did you get 24 what was the value of the shares before rights issue 25 what is the final result you got 24 are you going in the right direction yes if you get this answer as not 25 not not 24 if you get 25.5 26 27 stop there and say something you have done wrong because theoretical XR price per share should always be lower than market price that is one second one is adjustment Factor what is this adjustment Factor trying to calculate the bonus element that means adjustment Factor should be a number greater than one how do you get a number greater than one numerator should be greater than denominator which value will be higher value of the shares before rights issue what was the value of the shares before rights issue 25 so what are the adjustment Factor formula fair value of the shares before rights issue divided by theoretical X right price per share fair value of the shares before rights issue is 25 theoretical X right price per share is 24 adjustment factor is how much 1.04 so one share is not worth one now one share is worth 1.04 that point 04 is your bonus element is that okay with you so once you need this or once you have got this we can calculate EPS both for current year as well as for last year because right shares also has an element of bonus so last year also you need to restate so to calculate EPS we need two components what are those is and WS what is is of the current year they've told profit of the current year is how much sir they told net profit sir net profit always means profit after tax but there is no preference shes while data if there is no preference shes profit after tax and each will be same how much is each of the current year 30 lakhs taken correct divided by what do we need sir WS hang on how many shares you had before rights issue totally how many shares totally you had before rights issue 10 lakh correct 10 lakh yes is 10 lakh worth 10 lakh now or something more more because we have an element of bonus so what you do is take this 10 lakh and multiply by adjustment Factor because 10 lakh is not worth 10 lakh now it has an element of bonus okay so 10 lakh into 1.04 you do how much are you going to get 10 lakh 40,000 correct 10 lakh into 1.04 you do how much are you getting 10 lakh 40,000 yes basically that 40,000 is your bonus element we are doing this under not under individual approach we are doing under cumulative approach in cumulative approach what do you do so check from the year is calendar year no when did the rights issue come sir 31st March that means from January till March company had one lakh shares from January till March company had one lakh shares correct so take this one lakh and multiply what 3 by 12 and just don't take 10 lakh also multiply adjustment Factor because on this 10 lakh you also get some bonus and what is the fund of bonus on how much of Weights you are giving on original shares same weight you give it on bonus shares also that's the reason including bonus shares we have calculated the weights is that okay with you everybody good okay on April onwards the number of shares will be 10 lakh or it'll increase now the company does not have 10 lakh shares they issued another two and a half lakh right shares they issue that means number number of shares will become 10 lakh plus 2 and a half lakh so the number of shares will become 12 lakh 50,000 from which day 31st March till end of the year count from 31st March till end of the year how many months 9 months so into 10 12 lak 50,000 into 9 by 12 you need to do this is under we have done under individual approach or cumulative approach cumulative approach like this comfortable don't multiply adjustment Factory to this don't multiply adjustment factor to the second number why sir you will not get bonus shares on the new shares you will get bonus on the original shares you'll always get bonus on the original shares hence on adjustment Factor should only be multiplied on the original shares is that okay with you basically indirectly I'm telling you 40,000 is the bonus shares because if you multiply if you do 10 lakh into 1.04 you're going to get 10 lakh 40,000 so 10 lakh Shares are not worth 10 lakh now it is worth 10 lakh 40,000 so that means that 40,000 is a bonus limit comfortable okay now these two numbers if you know means can you calculate EPS yeah 30 lakh divided by 11 lak 97500 it'll give give you an EPS of 2.5 done sir this is for current year EPS that's all or we need to restate we need to restate last year EPS for that what do we we need to do we need last year is what is the is of last year each of last year is 20 lakh that one you take and then divided by wains veins of last year don't take 10 lakh there is an element of bonus so what do you have to do how do you get bonus did you calculate bonus separately here or through adjustment Factor through adjustment Factor so what do you do don't take 10 lakh as a number of shares in the last year multiply by 1 Point 04 that means how much are you going to get 10 lakh 40,000 10 lakh is the original shares existing in the last last year plus 40,000 is an element of bonus so last year may is there any weightage drama no because what on bonus shares will be assign weight sir no whatever weights you're assigning on original shares same weightage you give it for bonus shares if you want you can write 12 x 12 or if you want you can ignore it so what about right shares no no right shars came in the last year or only in the current year current year for right shares and all you don't have to restate last year EPS so by we still why are we restating because right shares has an element of bonus only to the extent of bonus we restate the last year EPS is that okay with you so this is your e and this is your WS both division will give you EPS of 1.9 that's your right shares problem okay s okay give me a quick recap on right shares this is one important problem from this chapter first we calculate something called theoretical X right price per share how do you get that value of old shares plus value of right shares divided by number of old shares plus number of right shares that will get you theoretical X right price per share before you proceed first check what is books argument whenever right shares happen market price of the share will fall that means theoretical X right price per share should always be lesser than market price that is first checkpoint second check or second pointer is to calculate adjustment Factor Why are we calculating adjustment Factor because right CH has is an element of bonus that bonus is calculated with the help of adjustment Factor how do you get adjustment Factor numerator has to be greater than denominator so what's the formula come right price per share or fair value of the shares before rights issue divided by theoretical X right price per share the final result of adjustment Factor should always be greater than one this is your thing and then how do you calculate wains of the current year how do you calculate veins of the current year take the number of shares multiplied by The Adjustment Factor here right shares came only on 31st March and we following calendar year that means from January February March for 3 months we had this much so take the 10 lakh multiply by adjustment factor into 3x 12 plus from April onwards company will have 10 lakh shares or right shares also came in right shares also came in how much right shares came in 250,000 I means what is the number of shares the company has from 1 April onwards 12 lak 50,000 on 12 lak 50,000 you'll assign the weight of 9 by 12 that is from April to December that is 9 by2 yes sir this for the current year what about last year last year may you take how many shares was existing in the last year 10 lakh that's all or even bonus is there bonus how much is bonus 40,000 did we calculate that 40,000 separately or through adjustment Factor adjustment Factor hence what what do you do take last year in last year number of shares multiply by The Adjustment Factor weights drama is there in the last year or not required not required that's all is the fun okay all right this is about the right shest we have done almost like three to four problems in regular class now quickly revising some of your faces I'm getting little doubt that's the reason I'm revising once again you have not done the revision actually this and all I should not revise you should be revising with me but forgotten that's the reason I am going a little slow here or revising telling you once more okay this is one uh next is the concept of depths sir next is a small concept of diluted EPS we calculate two types of eps basic EPs and diluted EPS diluted EPS for class purpose we are calling it as depths so how do you calculate depths or first of all depths calculation is necessary only if you have something called potential ordinary shares or potential Equity shares only if you have potential Equity shares or potential ordinary shares Equity shares another name is ordinary shares so only if you have potential ordinary shares then only depsa calculation is necessary okay otherwise basic EPs and diluted DS will be same you don't have to do a separate calculation separate calculation of diluted EPS is only required if potential ordinary share is existing so what is potential ordinary shares potential ordinary shares means those shares currently they are not Equity shares but in future may they may become Equity shares currently they are not Equity shares but in future may they may become Equity shares sir example sir convertible preference shares currently they are what preference shares but if you convert preference shares into Equity shares they will become Equity shares they already become Equity shares or they they may become in future they may become in future that instrument we call it as what sir POS as in potential ordinary shares convertible debentures all these are examples of potential ordinary shares only if POS is there you need to calculate diluted EPS separate fine so diluted EPS is not a separate calculation sir have you already calculated basic EPS how do you calculate basic EPS each so that means you already calculated each of basic EPS take that to that you add a dilution adjustment you take each that you have calculated for basic APS to that you add a dilution adjustment similarly have you already calculated veins for basic APS yes to that you simply add a dilution adjustment you will get the diluted APS final answer is that okay sir sir what is this dilution adjustment sir think sir if you have convertible debentures if you have convertible debentures now if what is diluted APS trying to calculate is if you convert that debentures into Equity sh today if you convert that debentures into Equity shest today what will happen to your EPS that is what diluted EPS is trying to calc calate basic so what's the difference between basic and diluted EPS then basic EPS considers only the actual number of equity shares basic EPS considers only actual number of equity shares but diluted EPS considers both actual number of equity shares and and POS okay because if POS gets converted into Equity shares then the number of equity shares will be same or it will increase increase so diluted APS considers the actual also it considers poso okay so Dil DPS whole working is if this potential ordinary shares gets converted into Equity shares today has the conversion already happened or we just trying to calculate the depths is trying to calculate if if you convert it today if that POS gets converted into Equity shares today what will be your EPS that's the thing okay now come back to the example if you convert debentures into Equity shares today should you have to pay interest on the debenture on interest on that debenture or interest is not necessary if you convert debentures and Equity shares interest you will be able to save interest is an expense one expense you will have or you will not have you not have if you don't have an expense means earnings attributable to equity shareholders will increase that is what we mean by dilution adjustment here okay now because when interest is not there means is of equity shareholders will increase but correspondingly there is one more adjustment don't take don't add back interest always take interest into one minus tax rate because on interest you will get tax benefit yes no sir on interest you'll get a tax benefit I've showed you with regular class with charts and all okay with numbers and all that if now if you just look at think layman terms me interest is an expense due to expense what will happen to your profit profit will reduce if profit reduces means tax also will reduce because on profits only you pay tax due to interest profit will reduce so the tax also will reduce now if that interest is not there means what will happen profit will increase tax also will in increased that means there is one saving also but there is one disadvantage also due to this conversion there is an advantage also there is a disadvantage also what is that Advantage is will increase because interest expens is getting saved but tax also will increase that means what is a net benefit less correct now let's say you saved 100 rupees interest tax rate is 30% that means 30 rupees extra you have to pay tax so 100 rupees interest saving benefit you will get but you have to pay tax extra to the extent of 30 that means what is a net benefit you'll get 70 this net benefit only is expressed in one formula that only we call it as interest into one minus tax rate so don't take don't directly add dilution adjustment as interest you do interest into one minus tax rate comfortable this is the dilution adjustment on numerator now now on the denominator let's calculate sir if you convert the debentures into Equity shares what will happen to number of equity shares it will be same or it will increase it will increase because if you're converting debentures means you have to issue more equity shares that means the number of shares will increase that is a dilution adjustment got it so if you consider these two data you will get depths now let's do one more exercise sir if it is convertible preference shes you tell me what is the dilution adjustment if it is convertible preference shes then now what is depths trying to calculate if you convert that preference shares into Equity shares today what will happen to EPS now if you convert that preference shares into Equity shares on that preference shares should I have to pay any dividend no if I convert the preferen sh into Equity shares should I have to pay dividend on that preference shes not necessary that means the dividend will get saved that Savings in dividend is nothing but your dilution adjustment if dividend preference dividend is not there means earnings attributable to equity shareholders will increase so don't do Dividend into one minus tax rate only for interest you do interest into one minus tax rate for dividend just add dividend don't do one minus tax rate why perfect on interest you will get tax benefit on interest you will get tax benefit on dividend you will not get because order is what first you will take pbit from pbit you will deduct interest you'll get profit before tax from profit before tax if you deduct tax what are you going to get profit after tax from after ta tax only you will deduct preference dividend that means tax is already paid on preference dividend or for that matter on Equity Dividend you will not get any tax benefit because you will pay the dividend only after paying tax so due to preference dividend there is no impact on tax that's the reason on dividend don't do one minus tax rate simply add preference dividend is that okay with you that is one that is dilution adjustment in numerator what about dilution adjustment in denominator for convertible preference sh if you convert preference sh into Equity shares then the number of equity shares will increase that is your dilution adjustment so take these two number and calculate your diluted DS got it ass can we test this in one question everybody now quickly okay come to question number H question number 10 you [Music] come how many marathons in advanc accounting how many marathons are we are divided into five five parts five days we are doing the revision session that's called as five parts we will merge everything and upload As One video have patience for two three days okay all right every part part two part three part four every part will be available there'll be no more part every part will be merged and we will upload it patience two to three days give us some time if you wanted an urgency attend live class nobody's blocking you right otherwise if you want recorded class on YouTube wait for 2 three days we will upload it okay now come back to question number 10 now what is net profit for the current year 85 point five net profit means it always means profit after tax okay sir Pat only is ISA yes provided preference divident is not there okay number of shares outstanding is 20 lakhs okay one second sir you need to calculate deps and depths basic and diluted APS how much is earnings attributable to equity shareholders we see there we don't see any preference shares that means this only is what sir this only is is so how much is is 85h 50,000 what is the wains LH 20 lakh have they told this 20 lakh was issued only in the current year no that means this 20 lakh was there from the beginning that means even if you want to assign weights what will you do 20 lakh into 12 x 12 required are no that means what is basic EPS 80 lakh here where is that 85 lakh divided by 20 lakh basic EPS is 4 275 understood that is your basic EPS now we already calculated basic EPS now we need to calculate one more thing called diluted EPS so diluted EPS calculation is necessary only if you have potential Equity shares or potential ordinary shares read the data interest expense for the current year is how much 6 lakh income tax rate is 30% number of 8% convertible debentures convertible debentures only we call it as what sir POS POS has in potential ordinary shares number of 8% debentures of 100 each each debenture face value 100 how many such debentures we have one lakh and they're saying each debenture is convertiable into 10 Equity shares if you convert debentures on one debenture how many Equity shares you need to give 10 how many such debentures we have one lakh so we have 1 lakh debenture on each debenture you have to pay 10 that means how many Equity shares you need to give 10 lakh correct all right now how how what is depsa point of view sir if this debentures get converted into Equity shares today then what will be your EPS now if you convert debentures into Equity shares will you have to pay this interest anymore or interest you will save interest you will save but hang on Don't Mean a Jo J in these sort of problems generally this adjustment is not popularly test but always make it a point to check this what you need to check is always calculate the interest once always recalculate the interest sir how many debentures you have one L each face value is how much 100 that means what is our total value of debentures or total face value of debenture one what percentage debentures are these 8% so calculate how much are you getting 8 lakhs correct yeah no what we got is 8 lakh correct yeah sir but how much they have told sir 6 lakh that mean six lakh is paid sir no no no what did they use the word interest expense did they say interest paid if they had said interest paid then I would have said yeah expense is 8 lakh but they have paid only 6 lakh 2 lakh is outstanding maybe they will pay it the next year but did they say this is interest paid or they said interest expense only interest expense that means interest expense we calculated how much did we get 8 lakh but they are telling it is 6 lakh so what is the indication instead of paying 8 lakh why are they saying 6 lakh is expenditure debentures are redeemed a debentures are issued in the current year not for entire 12 months but they're issued during the year if debentures was issued on the first day of the current year you will pay 12 months interest if debent are issued only for 6 months means then you'll pay only 6 months interest if it is issued only for 9 months means you'll pay only 9 months interest that means the indication is what over here these debentures were not there from the beginning they came during the year that is what we need to find out how is Pro ration 8 lakh is the interest for how many months 12 months 8 lakh is the interest for 12 months how much is the interest they said 6 lakh so 8 lakh is interest representing 12 months 6 lakh represents how many months interest Pro rate high months that means indirectly what sir debentures are issued in the current year only for 9 months meaning it was not issued from April it is issued only probably from 1st to July April May June for the first 3 months debenture was not there so it came only in the 9 months it was there in the current only for 9 months keep that in mind okay now sir okay now what is the dilution adjustment on numerator numerator is what is on each what is the dilution adjustment if you convert this debentures into Equity shares interest you'll have to pay or interest you will save save but will you take interest as a dilution adjustment or into one minus tax rate interest into one minus tax rate what is the actual interest rate six lakh so six lakh into 1 minus tax rate you do what is the tax rate 0.3 so 6 lakh into one mped by 1 -3 if you do that how much are you going to get 4 lakh 20,000 so 420,000 of profit will increase if profit increases means that profit will be attributable to whom Equity shareholders that means what is basic diluted APS is these two cardition you do if you do these two cardition how much are you going to get each for diluted APS purposes 89 lakh 70,000 done now so we took is of basic APS we added dilution adjustment we got is for dilute APS purpose one more thing we need is what sir wains for diluted APS purpose how much is wains for basic APS 20 LH now what is a dilution adjustment in denominator that is number of equity shares if you convert debentures into Equity shares number of equity shares will increase on each debenture how many Equity shares you need to give 10 shares on one debenture you need to give 10 shares how many debentures we have one lakh on one debenture 10 shares on one lakh debentures how many how many equity sir 1 lakh into 10 which is 10 lakh but don't don't don't be in a j did you consider entire 12 months interest in the denominator or only 9 months 9 months because whole year interest was 8 lakh did you take 8 lakh for calculation or only 6 lakh 6 lakh because current year interest was only 6 lakh that means numerator considers entire 12 months kind interest or only 9 months interest 9 months that means a denominator also you should do 9 by2 12 denominator also you should do 9 by 12 because in numerator this interest of 6 lakh is not for whole year it is only for 9 months so here also it should be for 9x2 understood this adjustment is not tested often generally interest expens what we did calculation here no what we calculated and what they will give will be same okay but in some problems like this the way you calculate and the way they have shown will be different if it is different means what is the indication debentures are not issued at the first day of the current year it came during the year okay so here it came only for how many months 9 months that means the denominate in the interest if you have calculated only 9 months interest means denominator also you should take only 9 months you have to always Pro rate understood okay so how much is that now 1 lakh into 10 that is 10 lakh 10 lakh into 9 by 12 if you do you're going to get 7 and a half lakhs so add these two how much are you going to get 27 lakh 50,000 that is your WS for diluted APS purpose how do you get depths now 89.7 divided by 27.5 if you do how much are you going to get 3 26 okay so how much was how much was uh basic EPS in the current 4.25 so name it is saying diluted EPS name it is saying diluted EPS so word dilution means what dilution means EPS should reduce what was basic EPS 4275 what is diluted EPS 3.26 EPS is increasing or reducing reducing that only we call it as dilute sir can it increase or sir yeah it can increase if it increases we say it is anti- dilutive that anti-dilutive EPS you should not report is it anti-dilutive or dilutive only dilutive only how dilutive because from 4.25 it became 3.26 meaning EPS reduce that's the reason okay now yes that's enough manageable all right the one more thing we will calculate on diluted APS is this this one no not this too much drilling they're doing today no yeah okay can't help it we told them they had to finish Apparently one or two days before but still that drilling work is going on no matter we have to adjust compute depths and depths of A- limited net profit for the current year is how much sir 10 lakh what is weighted average number of equity shares 4 B uh e is how much 10 lakh WS is how much 4 lakh how do you calculate basic EPS each divided by WS so 10 lakh divided by 4 lakh how much is it sir 2.5 that is your basic EPS now we have to calculate diluted EPS check weighted average number of equity shares under options so you have given some share options you have given some share options how this option contract work is like let's say I give you one options if I give you a share option means it's just a contract between the company and you okay let's say Kumar and me we made a contract I'm the company he is the one one person so I have written an option to him let's say I've given an option to him for 40,000 shares what it means is we are making a contract through this contract what will happen is Kumar he will buy my company Equity sh in the future he will buy my company Equity shes in future at today's price only price is already freezed but shares will be purchased on a later date is this okay this we call it a share warrants or share options understood yes basically it's simply a contract where what what have I told i' I've given an eligibility to Mr Kumar to buy additional Equity shares of my company when in future but price is already fixed let's say I give an option to him to buy the equity shares at 50 rupees I've given an option to him to buy the equity shares at 50 rupees that means on one share how much he will pay 50 rupees how many shares he's eligible to buy 40,000 shares let's say he'll buy after 6 months he'll buy after 6 months after 6 months share price may be 800 200 doesn't matter he will only pay how much to me 50 rupees this is your share warrants or share options okay sir now share warrants means are they already converted into Equity shares or they will get converted they will get conver converted that mean share warrants or share options are also what poos as in potential ordinary shares meaning currently they are not Equity shares but in future may they may get converted into Equity shares understood okay check we we have such options weighted average number of equity shares outstanding under options so how many options we have given 2 lakhs basically we have given option to somebody and somebody can buy how many additional Equity shares 2 lakh okay and exercise price of option is how much 20 rupees meaning on one share they will pay us how much 20 rupees all right check the average price of equity in the last 6 months is 25 okay big problem why so the fair value of the share is 25 but I've given them an option to buy it at 20 rupees that means I've issued this options at correct value or at discount discount is it actual shares or POS POS that you have given these options at discount no so that discount element impact you need to calculate on EPS the discount element impact you need to calculate on EPS how quite simple how many shares will that option holder buy how many shares will that option holder buy 2 lakh and on one share how much will they pay 20 rupees one share they will pay 20 how many shares they're eligible to buy 2 lakh that means how much money totally company will receive 40 lakhs understood so if the option holder exercise the exercises the option company will receive totally how much 40 lakh rupees easy so what is the value of one share what is the fair value of one share 25 rupes sir think logically you have 40 lakh rupees with you you have 40 lakhs rupees with you and the value of one share is 25 how many shares can you buy you have 40 lakhs rupees with you and the value of one share is 25 how many shares are can you buy with 40 lakh 40 lakh divided by 25 how much is that 1 lakh 60,000 that means with the money available you should be only be able to buy how many shares 1 lakh 160,000 shares but the option holder is buying how many shares in reality 2 lakh actually the company should have issued the option only for 1 lakh 60,000 shares but we gave the option to buy 2 lak shares how many options is given at free of cost how many options is given at free of cost 40,000 is it given at free or discount discount like that the discount is interpreted as options issued for nil consideration once again I'll tell you this once can check so how many options can the shareholders buy can the option holder buy 2 lakh and on one share how much will they pay 20 rupees so totally how much money company will receive 40 lakh total proceeds the company will receive is 40 lakh what is the fair value of one share 25 the value of one share is 25 the total proceeds the company has is 40 lakh if if you have 40 lakh rupees with you and if the value of one share is 25 how many shares logically or ideally you should be able to buy 40 lakh divided by 25 which is 1 lakh 60,000 so ideally only 1 lakh 60,000 option should have been given to the option holder but how many options we gave in reality 2 lakh that means how much options we gave it at a discounted price or nil consideration 40,000 this impact we need to C out on EPS understood that's all it is on okay now basic EPS we have already calculated so the dilution adjustment on this warrant is zero because as option already got converted or it'll get converted in future it'll get converted in future but one one thing we already know this option was issued at correct price or at lower price lower price meaning how many shares indirectly got issued at free 40,000 only the impact of this 40,000 you need to calculate on EPS so what is the impact on is nothing what is the impact on wains how many shares you give it for free of cost 40,000 that means you'll not take 4 lakh as the wains for diluted DS you will take 4 lakh plus 40,000 it will become how much sir 4 lakh 40,000 each is still the same 10 lakh divided by 440,000 if you do what is your diluted EPS you'll get 2.2 sir how much was your always check whenever you calculate diluted EPS check basic EPs and diluted EPS comparison you do what is basic EPS 2.5 diluted EPS has become 2.27 has it increased or reduced reduced that means it is what dilutive only meaning it is not anti-d always check whether it is dilutive or anti-dilutive because if it is anti-dilutive we will not report it okay this is another kind of option okay these are kind of popular from this particular topic understood okay you've done all three four questions at least we have done in regular class but I'm seeing some weird weird faces that's the reason explaining it once again okay can I go for the next one there's one more question we will take up from this topic one second which is that this one one second hopefully they stop drilling P know it's disturbing no okay question number 15 okay X limited during the current year ended 31st March 20 X1 has an income from continuous operation 2 lakh 40,000 from continuous operations how much profit they made 2 lakh 40,000 from discontinuing operation they made a loss of 3 lakh 60,000 we'll talk about as4 this are you already done yeah continuing operation means those operations which the company is planning to shut down or it'll go on it'll go on discontinued operation means that operation or that division which the company has already shut so here company has continuing operation also they have discontinuing operation also how much is continuing operation profit 2 lakh 40,000 how much is discontinuing operation called loss 360,000 so what does the total operations sir total operation profit or loss from continuing operation 240,000 profit from discontinuing it is 360,000 loss that means what is the total net loss of the company 1 lakh 120,000 okay company has th000 Equity shares and 200 potential shares so they only given potential ordinary shares you need to calculate deps and depths let's do it for three categories now for continuing operation discontinuing operation and total operation so what is continuing operation C earnings they only told in the problem what is continuing operation earnings 2 lakh 40,000 how many shares does the company actually have 1,000 so wains is how much sir 1,000 e is 240,000 of continuing operation wains is th000 what is the earnings per share 240 these two are division yes sir okay let's calculate the similar thing for discontinuing operation discontinuing operation made a profit or loss loss how much is a loss from discontinuing operation 1 lak 120,000 so the is of discontinuing operation is 1 l20 or 360 in fact discontinuing operation loss is 3 lakh 60,000 okay this loss is 360 okay how many number of shares sir operation wise will you give shares or shares is issued for whole company shares are issued for whole company and not operation wise that means the number of shares for continuing operation discontinuing operation total operations and all will be same how many shares will you take, that means how much is the EPS you are getting POS positive or negative that means this is earnings per share or loss per share loss per share that means what am I indirectly telling you even loss per share is reported because what is standard name accounting standard 20 which talks about earnings per share it is not profit per share it is earnings per share earnings could be a profit or earnings could be a loss so even if it is profit we will report EPS even if it is loss we will report EPS so for discontinuing operation we are getting earnings per share or we getting profit per share or loss per share or rather earnings per share is negative comfortable okay so continuing plus discontinuing operation if you add you'll get tot all operations of the company that only I'm calling it as total operation this operation called profit is 240 this operation called loss is 360 add these two what are you getting add these two you're getting a profit or loss loss what is the total loss of the overall company level 1 lak 120,000 how many shares does the company have 1,000 what is the overall loss per share 120 any problem this is your what basic EPS we need to also calculate diluted EPS so they only given potential ordinary shares how much is potential ordinary shares 200 so we have to consider this and calculate diluted EPS okay so check sir how much is diluted EPS e sir 2 lakh 40,000 no other information they only told we have 200 potential ordinary shares what is that potential ordinary shares impact on each given or missing missing so that means can we assume anything no so we'll take the each for diluted EPS also as 2 lak 40,000 what about wains will you take th000 no th000 is the actual plus 200 is the potential ordinary shares that means how much is the wains for diluted APS purpose 1,200 correct so calculate the diluted APS how much are you getting 2 240,000 divided by 1,200 which is 200 rupees what was the basic APS 240 what is the diluted APS 200 increasing or reducing reducing reducing means it is what still dilutive profit profit is reducing diluted means what sir profit should reduce APS should reduce from 240 it has become 200 means obviously it is diluted only no yes no any problem no can I move on to the next okay so what is the is of discontinuing operation same because no other data what about W sir will you take th000 no 1,000 is actual plus 200 is the POS that means the number of shares will become how much 1,200 now calculate EPS how much are you getting how much is it 300 now observe how much was a basic APS 360 diluted APS has become 300 sir it is not profit it is a loss sir if you want to call it as dilutive if you want to call it as dilutive if if you're working from profit side if you're working from profit side okay then earnings per share should r reduce meaning if the basic EPS if the basic EPS is 10 Rupees means diluted EPS should be 10 rupees or lesser lesser if you're if you're talking from profit aspect means diluted AP should not be 10 it should be a number below 10 correct then only you can call it as diluted however if you working from loss side means if basic EPS per share or loss per share is 15 means diluted DPS loss should be less or more loss should be more it should be a number greater than 50 correct only then we become we call it as anti or only then we call it as dilu but here check what has happened loss per share in a basic EPS is 360 but for diluted APS it is 300 that means loss per share is increasing or reducing reducing loss per share is reducing means it is anti-dilutive correct no but hang on first we will calculate is that okay we have done it for do now do means discontinuing operation let's also calculate for total operation what is total operation K 1 lakh 120,000 what will be your Wis will it be 1,000 or 1,000 + 200 1,000 + 200 it will be 1,200 so what is your diluted EPS now what is yeah what is your depths 100 basic EPS was 120 profit or loss loss but diluted EPS has become 100 it is what it is reducing that means again it looks like what anti- dilu but what the standard says is to check dilutive or anti-dilutive no always check continuous operation to find out whether EPS is dilutive or anti-dilutive you always compare what sir continuing operation because discontinuing operation means that division you have already shut down when you have shut down the division will the operation be correct or you're doing wavered things because when you shut down the division if you have some Goods what will you do sell it off at some some price and close off yes soon since the division is shut no don't take this data to find out whether it is dilutive or anti-dilutive take only what data that division which is still remaining what is remaining continuing operation so now check continuing operation only check continuing operation BS and depths to find out whether it is dilutive or anti-dilutive how much was basic EPS 240 what is diluted EPS 200 that means what is it anti-dilutive or dilutive only dilu that means you can report if this is dilutive all this number also you can report you don't have to worry is that okay with you so that is what I've said over here it is not anti-dilutive as we check continuing operation to find out whether it is dilutive or anti-dilutive is that okay with you but just to be on the safer side let me modify this example you tell me suppose this was not 200 suppose this was 300 what you would have done this was not 240 this was 300 then what you would have done check what is basic EPS of continuing operation 240 how much diluted EPS you are getting 300 that means EPS is reducing or increasing increasing that means in this case what it will become anti-dilutive because what do we check for dilutive anti-dilutive only continuing operation continuing operation basic EPS if it is 240 means dilutive EPS should be lesser if you are getting any number higher than 240 it is anti-dilutive and standard says anti-dilutive EPS are not reported so in that what do you do how much is a basic EPS you got it for total operation 120 so you make if this is the case means you make basic EPs and diluted EPS as same how much is the basic and diluted EPS sir 120 if this is anti-dilutive we cannot report this if continuing operation itself is giving Dil anti-dilutive now other operation data we need not even compute we can stop there only we can stop there only so if it is anti-dilutive what did I say we do there's not tested it is there newly added in our study material new question it was not there in the last two three attempts it just came now that's the reason quickly covering so what do we do if it is anti-dilutive we make the basic EPs and diluted EPS to be sa anti-dilutive EPS should not be reported that's the overall fund okay everyone good okay someone is saying repeat just for the sake of that can we build a one another quick two minutes May one same illustration can we build is that okay all right I'll give you continuing operation profit is 1 lakh discontinuing operation called loss is 150,000 that means what is total operation called loss 50,000 correct all right number of shares number of shares is 1 lakh or I'll take this 50,000 actual 10,000 POS 50,000 actual 10,000 POS let's recalculate again what do we what do we have to calculate basic EPs and diluted EPS for one or for three three what is the first one continuing operation how do you what to calculate basic APS of continuing operation we need two data what is that we need Ag and then we need WS what is the is of basic EPS sir what is the E what is the continuing operation earnings 1 lakh how many shares we have an actual 50,000 so 1 lakh divided 50,000 you do what is the basic EPS you're getting 1 lakh divided by 50,000 which is two correct same data will repeat for what sir discontinuing operation for discontinuing operation also we need e and then we need WS what is the earnings of discontinuing operation profit or loss loss how much is that loss 150,000 will we have separate WS for continuing discontinuing and all it is common common that means thiss is also how much sir 50,000 so how much is your basic EPS 3 150,000 divided by 50,000 which is three but 3 is positive or negative -3 yes sir last may we have to calculate what sir total operation what is the is of total operation so 50,000 negative and then what is the wains of total operation 50,000 so that means what is the EPS you're getting 50,000 divided by 50,000 which is negative one so far good okay this is for basic APS can we repeat the same data for diluted APS have they given any any is separately for diluted APS or not no data I means is I'll still take it as what one lakh what about wains will I take 50,000 no 50,000 plus s POS what is the POS we have here 10,000 that means how much is this now 60,000 1 lakh divided by 60,000 you do how much are you getting 1 Point 67 so how much was basic EPS 2 rupees how much is diluted EPS 1.67 dilute it has reduced means this is what anti-dilutive or dilutive this is dilute yes sir if it is dilutive can I do other calculation yes if this is anti-dilutive means should I have to do further calculation or not necessary not necessary that's what I said understood now now this is anti-dilutive or dilutive dilute so should I carry on yes what is is of this one and a half lakh what is the veins you'll take 60,000 so do it how much is this 2.5 so loss has reduced loss has reduced that means it looks like an anti- diluted but we check anti-dilutive for discontinuing operation or continuing operation only continuing operation only so should I have to worry about this no okay again let's calculate for total operation is is 50,000 WS is how much 60,000 how much is the total operation IPS 0.83 again loss per share has reduced that means it is anti-dilutive we check anti by total operation or only continuing operation continuing operation that means these two can we report yes these two can we report yes because continuing operation is giving anti-dilutive EPS or dilutive only dilutive that's the reason we can calculate this that's what we meant okay now all right this is the overall fun about EPS h I think with this we have completed all the aspects of eps there are only five to six question in class everything we've done 3 three three questions if you are not comfortable if if you forgotten ideally it should not be if at all if you feel you forgotten take and revise one or two questions these are totally calculative driven numbers okay once if you have already done this revision should be very straightforward otherwise take this and revise it once more okay all right so with this as20 car revision we fully completed too much of disturbance on the outside it is disturbing me also but unfortunately we don't have that sound proof so other classroom also we will get that sound online way are lucky fellows there's some construction work is going on they're continuously drilling so all of us are getting a little Disturbed p is happening for us okay no problem we'll have to adjust no other go huh okay next we will revise accounting standard 22 let's revise accounting standard 22 with the help of our chart book as22 deals with accounting for taxes on income now why do we have this particular standard is accounting profit and taxable profit will not match accounting profit and taxable profit will not match because accounting profit you calculate by keeping accounting standard in mind companies act rules in mind etc etc but taxable profit you compute by keeping Income Tax Act provision so Income Tax Act provision and accounting standard provision in many area are not same they are different they will differ that's the reason accounting profit and taxable profit will not match to merge the two or to bridge this Gap or to fill this Gap we have accounting standard 22 is that okay let's get let Us's take a small example let's say profit before depreciation as per accounts is 10 lakh as per tax also it is 10 lakh assumption this is profit before depreciation that means depreciation you deduct sir as per Income Tax Act the depreciation is calculated one what based on useful life or you have rate Income Tax Act gives you for each asset rate of depreciation let's say as per Income Tax Act the total depreciation is 250,000 because Income Tax Act clearly gives you a rate for each asset but on accounts do we have any rate or we calculate it based on useful life we calculate depreciation based on useful life if you planning to use the asset for 5 years you'll depreciate over 5 years if you're planning to use the asset for 10 years we'll depreciate over 10 years like this yes no that means depreciation as per accounts and tax will be same or it'll be different different let's say depreciation as per accounts is only 2 lakh as per tax how much is it 2.5 lakh as per accounts how much is it 2 lakh matching or differing differ find out profit before tax one how much is as per accounts 8 lakh how much is as per tax 7 and half lakh matching or not matching not matching how much is a difference that there is a difference of 50,000 yes or no now check sir let's say tax rate is 30% with accounts profit if you calculate tax how much are you getting 8 lakh 30% is how much 2 lakh 40,000 but 7 lakh 50 750,000 into 30% if you do how much are you getting 22,500 that means the tax as for accounts you're getting 240 but tax as per taxable profit you're getting 220 to 500 is that is it matching or differing differing by how much 15,000 to fill this 15,000 Gap we have accounting standard 22 to fill profit Gap we don't fill profit Gap what do we fill we fill taxable difference Gap okay accounting profit and taxable profit will not match we are not trying to fill that Gap we're trying to fill the taxable Gap how much is the tax difference here as per accounts the tax amount should be 240 as per tax the tax amount is 2 l20 to 500 what is the difference 15,000 that 15,000 is one second yeah that 15,000 we are trying to fill through the help of accounting standard 22 and how do we fill that Gap either by creating defer tax asset or by creating defer tax liability the taxable difference Gap we try to fill it up by creating either DTA or DTA that's all is the overall scope of accounting standard 22 fine work sir before you dive into the accounting of DTA DL first you need to know what are the differences accounting profit and taxable profit will not match there is a difference there are two tyes of differences that could arise one is the temporary difference another one is permanent difference temporary difference means there are those differences which will come in one year and get reversed out in the subsequent years temporary difference are those difference which will arise in one year and gets reversed in the subsequent year but permanent differences are those difference which will arise in one year and never get reversed out meaning permanently that difference will be there so what is the example of temporary difference depreciation depreciation is an example of temporary difference like to give you a small example let's say accounts tax excuse me sir let's say as for accounts useful life of the asset is 3 years an asset useful life is 3 years that means you'll charge depreciation over how many years three years so let's take year 1 year 2 year three let's say original cost of the asset is 9 lakh okay ridial value let's take it as zero that means can you tell me how much is depreciation as per accounts 9 lakh minus 0 divided by useful life which is 3 years that means how much depreciation 3 lakh 3 lakh and 3 lakh what is the total depreciation 9 lakh comfortable let's say as per tax the depreciation on this asset has to be charged at the rate of 50% assumption as per tax income tax act you need to depreciate this as a at 50% that means uh how much sir let's assume for straight line method for Simplicity purpose I know Income Tax Act only allows WV for Simplicity purpose let's take it as understanding 50% on slm basis that means how much is depreciation in the first year 4 lakh 50,000 9 lakh into 50% no you bought the asset for 9 lakh 9 lakh into 50% is how much 4 and a half lakh second year how much depreciation four and a straight line method only so that means how much it will be 4 lakh ,000 yes sir I means third year will there be any depreciation as per tax no for Simplicity I've assumed it as slm okay Power generating units can go for SL no let's assume it is power generating unit okay now for understanding purpose that means what is Dei in the first two years 4 and a half four and a half what is thir year depreciation zero what is the total depri 9 LH so check is the total depreciation different or same same same different or same same but year on year you check the difference year on year is there any difference as for accounts the depreciation is three lakh for tax the depreciation is 4 and a half lakh how much is the difference 1 and a half lakh second year three lakh here 4 and a half lakh here so what is the difference one and a half lakh third year three lakh here zero here so what is the difference three lakh what is the total difference for all the three years put together Z so depreciation is an example of what difference temporary difference temporary difference means there are those differences which will arise in one year and get reversed in the subsequent year so for the first two years we had a depreciation or we had a differences but at the end of third year the differences become zero so that difference only we call it as what sir temporary difference and only for temporary difference we create either DTA or DTA so temp only for temporary difference we try to fix it by creating either DTA or DTA okay now permanent differ means what sir there are those differences which arise in one year but don't get reversed out at all like if you have agricultural income if you have agricultural income on that agricultural income should you have to pay tax to the government or permanently exempt permanently exempt that means what is taxable profit as per tax zero because you don't have to pay any tax on it as per accounts the profit is 10 lakh let's assume you earn how much profits from agricultural activity 10 lakh assumption that means as per accounts the profit is 10 lakh but as per tax the profit is zero because you don't have to pay any tax is there a difference yeah will this difference forever get sorted or it'll ever be there ever be there such a difference we call it as what permanent difference for permanent difference DTA dtl and all is not required DTA dtl is only required for temporary difference that is the first point of yes aaru okay now let's go for the other one I told you one equation if you remember four equations i' had given you I told one if you remember automatically you can remember construct the all other ones so let's go over this question now DTA dtl is created through this equation now listen everybody expense as per tax is more expense as per tax is more like here check over here what is the depreciation expense as per accounts three lakh in my example what is depreciation expense as per Tax 4 and a half lakh that means expense as per tax compared to accounts is more correct expense as per tax compared to accounts is more so if expense is more means what will happen to your profit if higher the expense profit will be lower so if expense as per tax is more means taxable profit will be less so if taxable profit is less means on tax taxable profit only you pay tax if profit taxable profit is less means tax that you pay in the current year is also less correct sir these are what permanent difference or temporary difference temp temporary difference so current year you might have paid less tax when the different gets reversed in the future may you have to pay more tax correct because the difference will get sorted in the current year you might have paid less tax but in the future may you have to pay more tax sir if you have to pay more tax means it's an asset for you or it's a liability liability that means will you create defer tax asset or defer tax liability we'll create defer tax liability like that understood one if you remember other things automatically you can construct but all the four we will test let's take the other equation if expense as per tax is less if expense as per tax record is less when how are we saying whether it is more or less we are comparing expense of tax with expense as per accounts okay compared to accounts tax is having in the second equation lesser expense so if expense as per tax record is less means if expense is less means what will happen to profit profit in the current year is more if profit is more in the current year means tax paid in the current year is also so more but this difference forever will be there or will get sorted the current year you might have paid more tax but in the future Year may when the difference get sorted out you will pay more tax or less tax you'll pay less tax if you have to pay less tax means it's like your Advanced tax advance tax means what sir it's a defer tax asset you'll have to create defer tax because it's like you already paid tax in advance hence for this you'll create what sir defer tax that's these are the two equations from the expense angle you can also build the equation from which angle income angle so let's build the equation from income Angle now income as per tax record is more if income as per tax is more means taxable profit also will be more if taxable profit is more means tax paid in the current year is also more tax in the current year may be more but when the difference gets sorted in the future you will pay less tax in the future may Year may you're paying less tax means you you'll create dtl or DTA you'll create defer tax asset links okay another one also same thing if income as per tax record is less if income as per tax record is less if income is less means taxable profit in the current year also will be less tax paid in the current year also will be less but when the difference gets sorted out in the future Year may you have to pay more tax so if you have an obligation to pay more tax what will you create defer tax liability like this one you remember other things automatically can construct yes sir okay on carried forward losses you know the rules of this in current year if you make a loss on loss should you have to pay tax to the government no what does a tax Authority say loss you can carry it to the next year and set it off that means due to this loss in future Year may you will pay more tax or less tax less tax that means on carried forward loss May you'll always create what defer tax asset easy let's do a thing let's quickly apply it in one question let's take this Rama limited has provided the following information depreciation as per accounting record is 2 L depreciation depreciation is an expense expense as per accounting record is how much 2 lakh however the same depreciation as per tax record is 5 lakh now tax is having an expense of five lakh accounts is having an expense of only 2 lakh so compared to accounts tax is having lesser depreciation or more more that means what is the equation here tell me the equation we'll construct it here expense as per tax record is less or more expense as per tax in the current year is more if the expense as per tax is more means taxable profit will be our taxable profit in the current year will be less because higher the expense lower the profit so because of higher expense current year profit will be less if current year profit is less means tax paid in the current year also is tax paid in the current year is also less sir will this depreciation difference forever will be there or it will get sorted it it will get sorted maybe 3 years maybe after 5 years the difference will be sorted in my example difference got sorted after 3 years is that okay so current year you might have paid less less tax but in the future Year may you have to pay more tax so tax in future will be tax in the future will be more so if you have to pay more tax in the future what will you create defer tax liability so due to this company you need to create defer tax liability okay how to create that quite simple so what is the difference difference what is the expense as per tax 5 lakh what is the expense as per accounts 2 lakh what is the difference three lakh is the difference I told we will create DTA detail on the difference or taxable difference previously I told we will we will try to plug the difference or taxable difference taxable difference so three lakh is the difference what is the tax rate they told 50% so take the difference multiplied by the tax rate three lakh of 50% you do how much is that 3 lakh of 50% is how much 1 lakh ,000 so you will create defer tax liability only to the extent of 150,000 we don't create DTA detail on the difference we create DTA detail on the taxable difference meaning take the difference and multiply it by the tax rate that taxable difference only we're trying to plug by creating either DTA or DT okay Naru can I go on to the next one sir work next one unamortized preliminary expense as per tax record sir amortized means when we use the term amorti amortized unamortized and all we use the word for expense amortized expenditure means that expenditure has already been transferred to P if you have already transferred an expenditure to P we call it as amortized here they're using the word amortised or unamortized unamortized we already saw past service cost also yesterday we had unamortized past service cost yes so unamortized preliminary expense means what this preliminary expense has not yet gone to pnl this is untied PR preliminary expense as per what record tax record that means as per tax has this expense gone to pendl no but as per accounts has it gone yes because they only use the word unamortized preliminary expense as per tax as per accounts is it unamortized or fully amortized that means that expense is fully transferred to pnl as per accounts but as per tax you have not yet transferred that means what sir expense as per accounts is more expense as per taxes less agreed because amortized means you have transferred it to pnl unor unamortized means you have not yet transferred to p as for what it is am unamortized tax I means this particular expenditure you have not yet transferred to tax cend that means indirectly they're telling expense as per tax record is less why yes why why do we have this is Sir if you incur preliminary expense of let's say 1 lakh what is the journal entry you will pass in accounts tell me preliminary expense account debit one lakh what does a journal entry will pass preliminary expense account debit 1 lakh to to bank account 1 lakh yes or sir all right that preliminary expense and all no what will you do will you defer it or will in one shot may you transfer to Pendle there is no deferment and all does the expense incurred means this year only one lakh will be transferred to P what is the transfer entry pendel account debit to preliminary expense how much sir one lakh one L okay now that means tell me sir what is the expense as per what is the expense as per the accounts how much expense have you transferred to as per accounting record how much expense have you transfer to P one L correct but if it is preliminary expense means we have section 35d in Income Tax Act what does Income Tax Act of 35 section 35d say preliminary expense has to be amortized over 5 years only one fifth has to be transferred every year that's what 35d says that means entire 1 lakh can you transfer it to tax copy andl or only 1th that means you'll pass this journal entry if you want to pass you can but second journal entry can you pass it for 1 lakh or only for 20,000 1 lakh into 1x5 if you do you'll consider only 20,000 understood because Income Tax Act says preliminary expense has to be amortized over 5 years that amortization rule is there in accounts or no rule like that so that means as per accounts you you transferred full expenditure but as per tax in the year one you consider only how much expenditure 20,000 understood this is what so as per accounts it is fully amortised but as per tax it is unamortized now you understood now check sir which record is having higher expense preliminary expense is an expense as per accounts the expense is 1 lakh as per tax in my example expense is only 20,000 that means what tax is having a lesser expense that is what I said over in my example it was 20 here they're saying it is 30 so unamortized expense means indirectly they're telling expense as per tax is less so construct that equation for me here I already written expense as per tax record is less so if expense as per tax record is less means what will happen to your taxable profit taxable profit in the current year will be more because lesser the expense higher The Profit so that means taxable profit in the current year will be more if taxable profit is more in the current year means the tax paid in the current year also will be more current year you might paid more profit but these are permanent difference or temporary difference temporary difference means difference will get sorted when the diff you might have paid more tax in the current year but in the future Year may you will pay tax in future will be more or less tax in the future year will be less so what you need to create tax in the future Year may if it do less means you'll create defer tax asset understood okay how much is the difference they told 30,000 will we create DTA DL on the difference or taxable difference taxable difference how much is the difference 30,000 multiplied by the tax rate how much is a tax rate 30 uh 50% 30,000 50% you do how much is that 15,000 on this 15,000 what will you create defer tax asset so one component is giving you dtl another component is giving you DTA so if you're getting both DTA and dtl what as22 says is don't show both net off and whichever is higher show that just like your fair value of plan assets and dbo you show both or you net off you net off here also same thing DTA and dtl you net off how much is dtl Sir 150 how much is DTA sir 15 Which is higher sir dtl dtl is how much higher sir 1 lakh 35,000 so you create defer tax liability only for 135,000 that's all a fun understood okay one recap we'll have the things we have done so far what is the standard name accounting standard 22 which talks about accounting for taxes on income why is this whole standard there because accounting profit and taxable profit will not match to fill this Gap only we have as22 okay the there will be a difference difference are broadly classified into temporary difference and permanent difference temporary difference means those difference which come in one year and get reversed out subsequently subsequently maybe mean next year or 5 Years From from now 10 years whenever the difference will get sorted permanent difference means there are those difference which will arise in one year but never get sorted future will we worry about permanent difference in as22 no we are only concerned with what temporary difference only for temporary difference we try to fill it up either by creating DTA or by creating dtl for the difference we create DTA dtl or taxable difference taxable difference so find out the difference amount and multiply by the tax that will get you your taxable difference for that you create either DTA or dtl DTA dtl is based on one equation expense you have to analyze the impact and accordingly find out the equation now for that you just check what is the expense they may give you expense data or income data all right usually they give you majority of the examination question has expense data but I have given you equation both for expense as well as income so let's revise the expense if expense as per tax record is less if expense as per tax record is less what will happen to profit taxable profit in the current year will be more so tax paid in the current year also will be more but in the future Year may you'll pay less tax in the future Year may if you're paying less tax means you will create defer tax asset however if expense as per tax record is more expense as per tax record is more means what will happen to your taxable profit taxable profit in the current year is less tax paid in the current year is also less but when the difference gets sorted in the future Year may you have to pay more tax in the future Year may if you have an obligation to pay more tax you will create defer tax liability like that okay G okay same equation you apply it for income holds that's what we did here this is one kind of question that can come can we go for another question so what is the journal entry for DTA dtl sir you only tell sir what is a journal entry for defer tax asset defer tax asset is an asset assets of what balance debit balance so if you have to create an asset what will you do debit it so what's the journal entry for defer tax asset defer tax asset account debit to P what yeah everything here will be rooted through pnl because you can't credit bank because all these are what sir bookish entries that's the reason if you remember in segment reporting I told segment assets excludes DTA because DTA is not really an asset it is a time being asset or it's a temporary asset that's the reason all these temporary assets of bookish assets are ignored is that fine so what is the journal entry for to create defer tax liability liability has credit balance so if you have to create a liability you will credit what will you debit pnl so the journal entry will be pnl account debit to defer tax liability understood that's the fundamental okay another one is there called minimum alternative tax or mat I think you have AMT in your syllabus currently in your tax CA final me tax May you'll probably study more about mat minimum alternate tax but one question is there around mat it has come one or two times so I will cover this as well okay what is minimum alternative tax meanus sir in Income Tax Act no there are various exemption Provisions correct no like 10 10 exemptions section 10 exemption 54 exemptions like that you have lot of exemptions what was happening is many company you used to use the exemptions and they used to pay zero tax to the government they used to pay heavy profits they used to make but tax paid to the government was Zero now think what will the government thinking be the the companies no sir they are making heavy profits but how much how are the tax they're paying to the government zero so that means to construct this Metro Railways Road Highway and all company government needs a funds one of the primary source of funds for the government is tax from the company but companies are not paying tax because they're using Provisions exemption so it started creating problems for companies hence they introduced a small concept of minimum alternate tax they said you take your exemptions you take your exemptions whether you take exemptions or do what whatever you want but minimum amount of tax every company has to pay that rule they brought in okay as per exemption you have to pay how much tax zero tax but one extra provision was Matt was introduced and Matt says what is the full form of Matt minimum alternate tax every company has to pay minimum amount of tax this way what happened government started getting some money is that okay so what provision they introduced in income tax uh taxes you calculate tax as per normal provisions you calculate tax as per normal income tax provision you calculate tax as per Matt provision for Matt there is a separate section 115 JB of income tax act 1961 you'll study more about it there now don't worry there is a way to calculate profit like there is a way to calculate taxable profit you calculate no computation of income you do that is your normal tax provision how to compute mat profit Matt profit also there is a separate section called 115 JB that will tell for now don't worry about it they will give you all this data in chapter because the chapter name is not tax chapter name is accounts so all this data will be given to you in the question so what this tax Pro provision says is you calculate tax as per normal Provisions let's say as per normal provision tax payable is 10,000 as per normal provision tax payable is 10,000 you calculate taxes per mat also you calculate tax as per mat also both calculations are same or different different okay so tax calculate tax as per mat let's say you got that to be 40,000 you got it to be 40,000 you know now what the government will tell or what do you think Income Tax Act will say pay lower of the two or higher of the two pay higher of the two calculate both and higher of the two you pay to the government as tax so which is higher 40,000 so basically company has to pay how much tax to the government 40,000 understood but companies are feeling sir this is unfair sir because as per normal tax we have to pay only 10 but government government is saying I also need a funds if you go on delaying my payment of tax it'll be a problem for me hence they what extra they did is so provision is still the same you'll calculate tax as per normal taxes per Matt whichever is higher that is a tax paid but can you tell me due to Matt is the company paying any excess tax because of Matt is the company paying any excess tax yes how much if this Matt was not there how much tax company would have paid only 10,000 because of Matt how much are they paying 40,000 so because of Matt how much extra they are pay 30,000 you know what the government or Income Tax Act provision ISS you can take credit of this you can take Matt credit you know set off and carry forward loss is there what do you do for carry forward loss utilize it in the next year the whatever Matt credit you have paid no paid in this year set it off in the next year set it off in the future this mat you can carry it for 15 assessment years this mat you can carry it for 15 assessment years and utilize so how will we utilize sir okay this is in year one so far did we understand what is this provision sir you calculate taxes per normal provision it would calculate tax as per Matt provision on what you need to pay tax to the government whichever is higher here what was higher Matt that means how much tax company will pay in the current year 40,000 because of Matt how much extra tax company paid 30,000 let's say in second year scenario is Ulta as per normal tax payable is 1 lakh as per Matt tax payable is 60,000 as per or let's take it as still maybe 50,000 as per normal tax provision you have to pay tax at the rate of some popups one second hope this is good okay as for normal tax provision how much tax is payable 1 lakh but as for Matt how much you need to pay 50,000 again second year may what do you have to do compare the two whichever is higher Which is higher one lakh that means how much tax you need to pay to the government one lak but hang on it hang on last year when Matt was higher you paid tax as per Matt how much Matt credit you have 30,000 now in the current year you will not pay one lakh current Year may you will not pay one lakh how much mad credit is there 30,000 utilize that set it off so how much remains 70,000 so that means in the second year you will only pay tax to the government at the rate of 72,000 this is your profession understood all these are for only for your knowledge sake all this will not come in exams accounts exam it will not come accounts I'll tell you what will come but I didn't want to tell it as a formula so I'm giving you a little background okay now what you have to remember is one formula that's all in accounts that also I will tell you what formula I've written in chartbook we'll solve one question also but understood the background so so again now can we come to the important one for our examination ah what they will ask in examination is this what they will ask in examination is this okay first before that let's calculate this current tax sir how do you calculate current tax so check tax you will pay based on accounting profit or taxable profit tax you will pay based on accounting profit or always taxable profit taxable profit current tax means tax payable as per tax record for that what do you take take taxable profit and multiply by the tax rate take taxable profit multiplied by the tax rate you will get what sir current tax yes sir okay now one second uh next I maybe I'll tell it as equation if you don't understand I'll take a small example tax expense have you seen pnl account have you seen pnl pnl format once again and maybe I'll show you it one second here this is your format of pnl as per schedule 3 of companies act 2013 now check sir here what do you have you have something called tax expense okay normally we write what profit before tax from that we tax and we get profit after tax Schedule 3 doesn't call it as tax they call it as tax expense there are two types of tax expense current tax and defer tax these two put together becomes your tax expense understood current tax plus defer tax we need to calculate done now that is what we are trying to calculate now can I come back to that look at this now how do you get tax expenses simply just now I showed you how do you get current tax expense current tax plus defer tax it's a simple thing what is the journal entry for provision for tax you tell me what is the journal entry for provision for tax you tell me pnl account debit to provision for tax yes sir okay there's nothing but your current tax there's nothing but your current tax because you make provision based on how much tax is payable to the government correct now all right but you are you also creating something called defer tax asset or defer tax liability so tell me what is the general entry for defer tax liability what is the journal entry for defer tax liability pendl account debit to defer tax liability that means here also you're debiting P here also you're debiting pnd both put together we call it as tax expense these two put together we call it as what sir tax expense understood yes so that means that's the reason the equation is current tax plus defer tax or if you wanted in one more logic check here accounts tax I told all this in regular class okay maybe I'll spend about 5 minutes on this so as per accounts the profit is 1 lakh as per tax the profit is let's say 70,000 okay possible this is profit before tax profit before tax okay let's say tax is payable at the rate of 30% tax is payable at the rate of 30% now you know this already tax is always paid on accounting profit or taxable profit tax is always calculated on taxable profit how much is taxable profit sir 70,000 so calculate 70,000 30% how much is that 21,000 yes sir everybody good that means you will make provision for tax you will make provision for tax that provision for tax only we call it as current tax instead of provision for tax we call it as current time how much provision for tax you will make 21,000 agreed us sir any problem you know one guy with calculator will be very unhappy there is one guy with calculator he's very very unhappy you know why he took his calculator sir how much is profit as per accounts 1 lakh what is a tax rate 30% he took 1 lakh and multiplied 30% how much is his calculator showing 30,000 but how much is provision for tax 21,000 he wrote one email to company you have done mistake throw that accountant out he doesn't know simple multiplication 1 lakh 30% is 30,000 but he has calculated 21,000 correct because what is profit as per accounts 1 lakh but how much tax have you paid 21,000 is it mistake or correct only correct only why because we pay tax on taxable profit but but but but hang on this accounting profit and taxable profit year on year they may differ but in future years may they will sort out hence we also need to create something called defer tax liability check what is the income profit means income no check what is the income as per tax record 170 what is the income as per accounts one lakh that means income as per tax record is less income as per tax record is less if income is less means tax paid in the current year will be less but when the difference gets sorted tax paid in the OR payable in the future year will be more so what will you create defer tax liability so what is the difference what is the difference between these two 30,000 will you create DTA detail on the difference or taxable difference that means you'll take difference and multiply tax rate how much you're going to get 9,000 correct now calculator gu is also very happy why sir current tax is 21,000 you also created defer tax liability of 9,000 that means what is your total tax expense what is your total tax expense these two addition how much is that 30 30,000 understood ah now that calculator guy is saying ah 1 lakh into 30% is how much 30,000 tax expenses how much 30,000 like this this is okay this is the overall concept of DTA or detail to bridge the taxable difference Gap okay that means how do you get tax expense now indirectly why am I shouting all this much overall what is the equation how do you get tax expense only current tax or also defer tax or also defer tax okay so tax expense is given by the equation current tax plus defer tax but one second which defer tax you will add only defer tax liability only defer tax liability if it is defer tax asset then you will not add defer tax you will reduce it understood because what is the journal entry for defer tax asset defer tax asset to PN is that okay only for if it is defer tax liability these two will be added understood or if you wanted in one more let's take someone is looking at me little weirdly so we'll take one more equation we'll do the Ulta equation let's say profit before tax here is uh 50,000 here it is 70,000 could we other way around also okay here it is 50 and there it is 70,000 from profit before tax what do you do sir dided a tax now we know that tax expense we don't call it as tax we call it as tax expense tax expense at least we now now have two components what is that current tax and defer tax d a g now you calculate current tax based on accounting profit or taxable profit taxable profit how do you calculate tax current tax take the taxable profit which is 70,000 multiply tax rate let's say tax rate is 30% so calculate that 73 is are 21 so 21,000 okay so that means current tax is how much 21,000 any problem no that calculator guy is full Furious why sir how much is profit as per accounts 50,000 what is a tax rate 30% 50,000 into 30% if you do how much are you getting 15,000 but accountant has booked a tax expense of 21,000 he's unhappy so what to do is accounting profit and tax profit same or different different okay permanent difference or temporary difference temporary difference now again apply the same equation what is the profit means it's you'll get profit based on income no sir so let's analyze from the income angle what is the income as per tax 70 what is the income as per accounts 50 that means income as per account taxes more income as per taxes more if income as per tax is more means taxable profit will be more tax paid in the current year also will be more but tax payable in the future year will be less so what will you create defer tax asset you'll create defer tax asset how much you'll create what is the difference difference between 50 and 70 is how much 20,000 you'll create DTA dtl on difference or taxable difference so take the difference and multiply tax rate how much are you getting 6,000 this 6,000 you will deduct now or add this I mean yeah here in the equation because tax expense normally we deduct no or tell me that what you do here you'll write Nega negative or positive you'll write this as negative or positive you'll write it as positive understood now this way what will happen minus 21,000 and plus 6,000 and tax expense will become how much now 15,000 understood so if it is defer tax liability current tax and defer tax liability will be added however if it is defer tax asset then current tax and defer tax asset will be nullified with each other understood everybody because the journal entry for defer tax liability and provision for tax are same for both you will debit P however if you're creating defer tax asset what is a journal entry DTA account debit to P for these two you will debit pendl for defer tax asset you will credit P understood in most of your problem it will be defer tax liability only but just in case defer tax asset comes be a little aware Okay g shouting so much OK G I know I mean I hope that they stop I'm feeling little Thro take now I feel like just jumping on them and saying throwing the what okay one last thing or maybe one last but one is there this is asked couple of times in exam can we test this let's test this with the help of one question itself come to question number three question number three thank you thank you from the following details of a limited for the year ended 31st March 2017 calculate the defer tax asset or liability as per a 22 okay we'll do that amount of tax to be debited to P how much you will debit the amount how much amount of expenditure you will get debited to P theyve given you accounting profit great they have given you book profit as per Matt mat minimum alternate tax they have given profit as per Matt they have given profit as per normal income tax because we know no we have to calculate tax on the norm normal basis Matt basis whichever is higher will be adopted tax rate normal tax rate is 20% Matt tax rate is 7 and a half% that and all they will give the rate don't check the current rate of mat it could be different okay I don't know what is the current rate of mat it may be more it maybe less I don't know and we don't need also in your accounts mat rate will be clearly given now we need to Simply calculate DTA or DTA let's do a quick calculation okay how do you get DTA dtl or on what you'll get DTA dtl by comparing in accounting profit with the taxable profit how much is accounting profit 6 lakh will will you take mat profit or normal taxable profit normal taxable profit okay we are not trying to bridge mat versus accounting profit as per as22 we are trying to bridge what sir accounting profit with normal taxable profit what is normal taxable profit 60,000 what is accounting profit 6 lakh so let's have that equation accounting profit 6 lakh taxable profit is 60,000 so profit means we have to work from expense angle or income angle profit how will you get profit income should be greater than expense only then you'll get profit so we'll do the income equation what is the income as per tax 60,000 what is the income as per accounts 6 lakh that means income as per tax compared to accounts is less in the current year these are permanent difference or temporary difference so if they don't tell the nature of difference in this chapter always assume it as temporary difference because we create DTA dtl only on temporary Defence moreover in this problem did they ask you to create DTA dtl they ask you to create DTA dtl yes if they're asking you to create DTA dtl means indirectly they're asking you to assume that it is what difference temporary difference is that okay no okay coming back again income as per tax when compared to accounts is less correct this is 60 this is six lakh so that means income as per tax record is less if income is less means profit will be less in the current year but when the difference gets sorted you have to pay more tax in the future year if you have to pay more tax in the future year means what will you create deferred tax liability what is the difference sir 5 lakh 40,000 these two difference is 5 lakh 40,000 on the difference will you create dtl or a taxable difference taxable difference so 540,000 into tax rate Which tax rate will you take mat or normal car all these calculations are only on normal tax rate what is the normal tax rate sir 20% so multiply 20% how much are you going to get 52 20% is how much 1 lakh 18,000 so what is this defer tax liability any doubt in this one part is over okay next so they asked you how much to be debited to pnl we already know how much to be debited to PN current tax and defer tax here it's a defer tax liability defer tax liability means will you deduct or will you add will you add because provision for taxation entry also is PN Del to provision for tax defer tax liability entry is also p to defer tax liability so if it's defer tax liability current tax and defer tax will be added done now that means first we need to find out what now current tax how do you find out current tax taxable profit multiplied by tax rate so current tax how much is taxable profit sir here only we got 60,000 what is the tax rate 20% so what is current tax 12,000 rupees yes can we pay tax to the government of 12,000 rupees no no no no because there is a provision of Matt what does Matt provision say first calculate the tax as per the Matt provision also do you know profit as per Matt yeah what is the profit as per Matt 350,000 what is Matt tax rate 7 and a half% multiply these two Matt profit is 350 Matt tax rate is 7 and A5 lak so what is a tax as per Matt 26,250 as per normal it is 12,000 as per Matt tax payable is 26 250 how much tax you need to pay to the government lower of the two or higher of the two higher of the two Which is higher mat only is higher that means the tax payable to the government is 26 250 any problem okay everybody okay this is one sir if you pay tax based on Matt will you get any matte credit yeah Matt credit you'll get on full amount or excess amount excess amount if Matt was not there you would have paid only how much tax 12,000 because of Matt you are paying 26250 so how much extra you are paying because of M 14,250 this 14,250 you will get Matt credit understood now how much amount you will debit to P first equation you already know how much will you debit to P current tax plus defer tax what is current tax 12,000 what is defer tax liability it is defer tax liability so you'll deduct or add add so current tax is 12 defer tax liability is 1 L 8,000 you'll add correct but one second hang on in the current year did you pay only tax to the tune of 12,000 or you paid 26250 26250 how much extra you paid because of Matt 14,250 sir just like that you will pay extra tax or first you will make provision usually what is the working first you will make the provision then only you'll pay the tax here you have paid how much extra due to mat 14,250 will you just pay or make provision for that also make provision for that also that means the last equation other extra fitting is so amount debited to pnl is not just current tax and defer tax if you have any mat credit that also should be added because you're paying extra 14,250 tax first you make the provision then only pay the tax hence this also should be added that they call it as excess of mat over current tax excess of mat paid over current tax excess of mat paid over current tax only is nothing but what mat credit so if there is any mat credit add that also then you'll get the final number which will be shown in the pnl as tax expense you will get the final number which should which should be shown in the pnl as tax expense that's all is overall fun okay so this is quite popular go through all this once if you have already done it these are very very easy questions we have I think for this only I think I did two or three questions in regular class in case you have not done this question at all revise them once just to be in the safite don't leave it at uh this level alone okay so let's have one quick run up of this question people so what did we do in this question now uh so first first tell me in one equation as a formula how much amount you will debit to pandle current tax plus defer tax you will add a defer tax only if it is defer tax liability if it is defer tax asset you will dedu that is one that's all or even mat credit mat credit mat credit will will not come in every problem that's a reason in your schedule 3 format you don't have Matt is that okay because Matt may be there may not be there because usually these days no Matt will not be there because only few companies get those exemptions that's e done okay so coming back to the equations of what we did now so what is the first thing we did in this problem calculate defer tax liability that normal okay that is one then we calculated current tax how do you calculate current tax taxable profit multiplied by tax rate taxable profit multiplied by tax rate will give you current tax that is one okay then we calculated tax as per Matt so compare Matt Matt tax with the current tax whichever is higher you need to pay that much tax to the government so if you paid any excess tax to the government you'll be able to get mat credit you can't just claim mat credit mat credit provision also you need to make so final amount to be debited to P is current tax plus defer Tax Plus M credit that's all is overall fund yes can I go on to the next one there's one small concept let's run through that concept and do this question and more or less this chapter questions will be done for is the drilling sound Audible for online also there a lot of drilling drilling going on over here Drilling in fact is it Audible for online anyone or only my voice is audible because that even I'm also shouting maybe they'll respond after uh few seconds lag know oh it's not audible awesome that is great good for you then for us no too much problem today yesterday also we faced a little bit issue I think yesterday we faced only for one hour I think last one hour we had that problem today whole day we are having the drilling m that means we should have called off class no tomorrow we should have done but unfortunately we don't know whether the drilling work will be completed today or it'll go tomorrow also we don't know see it started okay sometimes it is audible okay fine for you sometimes much for us all the time okay all right no worry if it is uh if it is too loud don't I'll take 2 minutes break people online uh that's the reason I'm not speaking I think they're doing it here only now I think directly down H started uh too much no now too much I also have to sh my throat also will go off off if I shout okay 1 minute I'll just talk to them and see if something can be done I'll tell these guys to talk one second guys I'll come so you go I mean he's want to see e e that's spee question speee yes I've told them to do it that side at least let's see hopefully we'll hear little lesser noise even they have work no because of our work they have they cannot stop their work because our work is important for us their work is important for them so right now they're doing it here only that's the reason we are hearing a lot of noise at least some they told some portion of that side is pending I've told them to do it that side today so hopefully we'll have a little lesser noise if at all they follow let's see okay great so one last provision relating to as22 spending now that is what can we switch on the AC it's pretty hot yeah one last provision we have here is Sir uh tax holiday tax holiday means the companies don't have to pay any tax during the tax holiday season so what the provision of as22 says is if any tax difference listen to this carefully it's a plain application of this provision is all if any tax difference is getting arised during tax holiday and the same difference gets reversed during tax holiday it is getting arised as well as getting reversed during tax holiday then no DTA detail is required for it for those differences which arises during tax holiday and which gets reversed during tax holiday no DTA or dtls required plain application of this is this particular provision can we apply this now okay so check one beta limited is a fully taxfree Enterprise so they have a tax holid day for how many years for first 10 years okay of its existence and it is in the second year of its operation great depreciation timing difference obviously we know that depreciation is a permanent difference or timing difference timing another name is Sir you can call it as temporary difference or another name is timing difference you can either call it as a temporary difference or you can call it as a timing difference that's another name okay so obviously we know that depreciation is a temporary difference it is not a permanent difference the depreciation timing uh difference resulting in tax liability in year one is tax liability means it is DTA or dtl it is dtl how much is that difference sir in year one and year two the difference is 1,000 and 2,000 respectively so this is not DTA dtl it is the difference the difference in year 1 is how much 1,000 the difference in year 2 is how much 2,000 okay so first year second year the difference is come now we know that all these differences are permanent difference or temporary difference temporary difference so that means the reversal it will get reversed so they are saying from third year onwards it is expected that the timing difference will reverse and it'll reverse each year by 50 it's not that reversal has to reversal should happen in one shot reversal can happen in installment also first year how much difference you got 1,000 second year how much difference you got 2,000 that difference is getting reversed every year from third year onwards to how much extent 50 50 5050 like that it'll go on getting reversed I means this difference will be for a few years or many years many years maybe 20 25 years the difference will go on so that much sir yeah when you're talking about something like a nuclear power plant and all that hydrogen power plants nuclear power plants those power plants know the useful life will be 30 40 years that means difference will be there for how many years 30 40 years so it is not necessary that the difference should get sorted out in one or two years it may get sorted out in 20 30 Years also as long as the difference is getting sorted or the difference is getting reversed that we call it as what sir temporary difference or another name for the temporary difference is timing difference here how much each year the difference is getting reversed by 50 okay assume the tax rate is 40% you are required to compute the dtl at the end of the second year and any charge to P account simple what does the provision say a any uh if if any DTA or if any difference is getting arised during tax holiday and if it is getting reverse during tax holiday then no DTA or dtl is required now check sir how much difference came in the first year th000 th000 is getting reversed immediately or it is getting reversed in stages it is getting in reversed in stages reversal will start from which year third year tax holiday is for entire year only for 10 years 10 years that means count from year 3 to year 10 how many how many years the differ difference will be for 8 year 8 years the difference will get reversed out in my right is my statement right for the first two years you will get the difference from third year onwards the difference will get reversed out so count from year three to year 10 how many years 8 years so how much the difference will get reversed out each year by 50 so how much will be reversed 400 so first year how much difference came 1,000 this difference came during tax holiday period yes is entire th000 getting reversed during tax holiday period or only 400 400 that means what does the standard say this 400 difference came this th000 includes 400 also no this th000 includes 400 also so in this, 400 difference arised during tax holiday and got reversed also during tax holiday so on this 400 is DTA dtl required or not required not required that means you will create dtl only on what sir 600 understood this is a provision that's what I've written here no DTA detail is required a difference that arise and gets reversed during the tax holiday period what is the tax holiday period here 10 years what is the difference you got in first year th000 you got the difference of th000 okay how much difference will get reversed during tax holiday period tax holiday ends at year 10 difference will get start getting reversed only from year three from year three to year 10 if you count how many years eight years each year difference will get will get reversed by how much 50 LH for 8 years how much difference will get reversed 400 lakh so out of this, lakh 400 black is getting reversed during tax holiday that means for this 400 is dtl required or not required not required you need to create dtl only on 600 but is that 600 detail amount or difference amount detail amount in fact I think they told detail only here one second oh 1 minute sir hang on hangang in fact they use the word detail over here know depreciation timing difference resulting in tax liability so that means tax liability itself they' have given it as th000 if tax liability itself is th000 means indirectly they're telling you what dtl itself is 1,000 rupees comfortable I think one minute the interpretation small one thing no according to me there's a difference I think one second let's read the difference fully depreciation timing difference resulting in tax liability of 1,000 and 2,000 sir no sir no this is the uh difference only there is not the taxable difference this is the difference amount itself because what will get differs or if you're getting confused think about it this way what will get reversed dtl will get reversed or difference will get reversed difference will get reversed so that means what this is the difference amount no so so this is the difference amount to get dtl what we have to do multiply by the tax rate so this 600 is the 600 is basically the the 600 is basically the difference amount on the difference amount you need to create dtl how much dtl you need to create to the extent of 40% so calculate how much will be the dtl required 600 40% which is 240 lakhs understood everybody understood it is not DL amount my bad it is a difference amount what they give you is the difference amount so on this 400 lakh dtl is not required but on this 00 lakh you need to create the dtl yes so you create dtl on what take the difference amount and multiply it by the tax rate so 600 is a difference amount and multiply by the 40% tax rate you will get Dil how much 240 lakhs any problem people any problem no that means end of first year how much dtl you will create 240 lakhs da carry on carry on okay sir did you get difference only in first year or also in second year second year also you got difference how much difference got in second year 2,000 lakhs this 2,000 difference came during tax holiday but is it getting reversed during tax holiday or later on this sir obviously sir this 50 reversal is happening how much got reversed out of this th000 how much got reversed during tax holiday only 400 in this, only 600 did not get reversed in the year two again you got a difference of 2,000 that 2,000 difference will get reversed only after tax holiday period this 2000 came during tax holid day period but it is getting reversed after tax tax soliday period that means on this 2,000 should you create dtl very much yes so what is the difference amount 2,000 will you create dtl on the difference amount or taxable difference taxable difference so take the 2,000 and multiply tax rate so how much will be the dtl required for second year 800 lakh first year you required how much 240 second year how much you required 800 so what is the total detl you required by the end of year to they asked what is the total dtl by the end of second year how much is that 104 problem or bouncer problem or bouncer bouncer okay let's do a thing let's take another example okay tax holiday is let's say 5 years tax holidays 5 years so what is the provision what is the provision those the differences which arise during tax holiday period and getting reversed during tax holiday period on that detail is not required no DTA and no DTA that's the main provision tax holiday of assumed to be how many years 5 years so first year year 1 year two you got a difference you got a difference here the difference is let's say 500 okay 500 lakhs here the difference is let's say 300 lakhs done now that means the total there's a depreciation difference only what is a total difference sir 800 lakhs from third year onwards sir third year onwards difference will get reversed difference will get reversed third year how much will get reversed 80 lakh fourth year how much will get reversed 80 lakh fifth year how much will get reversed 880 LH like this difference will go on I don't want anything beyond 5 years why because my tax holiday is only 5 years is that fine with me so far okay now what is the provision if any difference is arising during tax holiday and getting reversed during tax holiday detail is not required the how much is the difference in first year 500 lakhs this this difference came during tax holiday entire 500 is getting reversed during tax holiday or only partial partial how much got reversed during tax holiday 80 + 80 + 80 how much is that 240 so in this 500 240 lakh difference got reversed during tax holiday so that means on this is DTA required or no DTA dtl no Dil is required comfortable so in this 500 on 240 we don't have to create any dtl what is the balance balance is how much 260 on this 260 should we create dtl on this DT in this we require dtl yes entire 260 will accounted as dtl or there is a difference there's a difference how do we create dtl take the difference and multiply by the tax rate let's say tax rate is 30% tax rate is 30% so how much DL will you create how much is the difference amount 260 lakh 260 lakh multiplied by 30% you do how much is that huh 7 78 lakh so in the first year how much dtl you will create sir 78 lakhs any doubt comfortable sir difference came in only in Year One one or also it came in year two difference came in year two also how much difference came in year two 300 lakh is this 300 lakh difference getting sorted or reversed during tax holiday or Beyond tax holiday Beyond tax holiday if this difference came during tax holiday but is it getting revers during tax solid or beyond beyond that means on this should we create dtl yes sir this difference came in year two only means when can you create dtl on this year 2 itself because it came in year 2 no so when can you create dtl on this in year two so what is this this 300 lakh is a dtl or difference amount difference amount so take 300 lakh and multiply tax rate how much is tax rate 30% I assume 30% year so how much is this now 90 lakhs so that means you will create further dtl in year to how much sir 90 lakh first year you had already created how much Dil 78 lakh second year you created additional detail of how much 90 lakh that means what is the total dtl balance in year 2 the total dtl balance by the end of year two is what sir 78 lakh plus 98 lakh which is 168 lakh that is what we have done in the previous product now better off now let's go back to that question again once again I'll just look through that okay how much difference we'll talk about all this and rework again once again what is a tax holiday period here tax holiday period in this example 10 years how much difference came in first year 1,000 how much difference came in the second year 2,000 okay all right how much difference is getting reversed every year 50 okay 50 we'll write it like this over here year year 1 year 2 how much is tax solid period 10 years so year five year six year 7 year 8 year 9 and year 10 first year how much difference you got 1,000 second year how much difference you got 2,000 from third year on what what will happen it'll get reversed every year it'll get reversed how much sir 50 50 50 50 50 like that it'll get reversed okay so how much reversal happen during your tax holiday period from here to here account how much that 400 lakh this 400 lakh came from th000 only no so out of this 1,000 lakhs 400 lakh difference came during tax holiday and got reversed also during tax holiday so on this 400 lakh dtl required or no dtl no dtl on this 400 lakh what about 600 lakh of difference on this should you create dtl yes will you create 600 lakh of dtl or this is difference amount is a difference amount take the difference amount and multiply tax rate how much is the tax rate in this problem the tax rate in this problem is 40% so take 600 lakh into 40% how much is that 240 lakh so that means what is the dtl balance in year one 240 L understood this is one what about this 2,000 lakh this 2,000 lakh difference came only in year two but when is it getting reversed within tax soliday or Beyond tax soliday I mean should you create dtl on this 2,000 lakh yes you will you'll create entire 2,000 lakh of dtl or multiply tax rate this is a TA this is your difference amount you have you want create dtl on the taxable difference so multiply tax rate of 40% how much is it 800 L this dtl when will you create this dtl you'll create it in year two sir year one already how much dtl you had 800 how much more you created 800 lakhs so what is the total detail balance by the end of year 2 you had 240 in year 1 you created 800 more that means you will have totally one Z 4 Z that is what they've written as an answer over total detail Balan is one 4 now better apologies my bad is that okay with you now sorted no no problem now okay online also good [Music] right okay so this is another type of question that usually gets asked from this particular topic so with this as22 revision also we have completed thank you seems like a tractor hey now the voice is better no uh now I think they're doing Papa they're doing that side also yeah I think the no is lot lesser now we are only not able to hear so much yeah last time I mean 5 10 minutes before it was crazy okay so let's run through uh yeah as24 we will run through as24 we will run through a to standard quickly we finish off as24 talks about discontinuing operation just just now we discussed okay as24 talks about discontinuing operation fun of the standard is very simple so suppose you bought tataka share you bought tataa 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 a reason you bought their shares okay now wasu problem or whatever problem tataa plans to discontinue the steel 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 purchase T share will you keep it or will you sell it off we 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 plan 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 goal 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 asset separately division means it'll have only assets or or also some liabilities liabilities also so that division 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 car assets 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'll 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 discontinuing operation so what is discontinuing operation again if you want to call an operation is dis 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 bangaluru Chennai and Hyderabad sir 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- toase 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 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 to case 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 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 find find out whether it is a do or not do means discontinuing 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 if you remember the standard is over rest everything is CH okay yeah that one so let's go back now and revisit this what is 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 assets separately settle division car liabilities separately or simply terminate by abandonment okay that is one and then if you want to call an operation as a discontinue 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 which you are discontinued 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 du what may not be a 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 of Applause to you okay good all right but excuse me normally now majority of the population prefers what phone smartphone let's say no company earlier they were a big players in normal phone now what sir do they manufacture the major of their manufacturing is towards normal phone or smartphones that means they're shifting there gradually they're facing out they 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 new newspaper now correct no physical newspaper hardly people buy it's all sof most of them are wanting 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 may 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 my earlier I used to produce One lakh units in Chennai I used to produce One 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 sh 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 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 rzu limited is in the business of manufacturing passenger cars and commercial vehicles company 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 is plan 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 do 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 a discontinuing operation like that you need to conclude is that fine with you what the answer okay coming back to the question now sir if it is Doo what you will do sir if it is do what you will do sir sir check this PN Dela format are you able to see this p and Dela format what is p and 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 operations sir expense income of discontinuing operation data need not be disclosed expense income date of discontinuing operation need not be disclosed what do you need to disclose sir only three things related to discontinuing operation you need to show it separately first have you shown continuing operation data already yeah three things more you show it 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 coka data then show DOA 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 is this okay sir so you have to give it not in the noes to accounts directly on the face of P that is a significance on understood uh 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 factory means Factory will have thousands of assets it'll have hundreds of liability thousands of workers hundreds of creditors 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 7 eight 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 ID comes into picture disclosure starts when ID IDE 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 you say ID has occurred when one of the following events is occurred 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 have to give some information in notes stockes 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 discontinue steel card 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 and notes to accounts because actual discontinuing will happen in this year or maybe two three years later on maybe two 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 State 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 not stock done now that means what we'll give it in pnl sir the year you discontinue the year you discontinue and that year you'll inur some income and expenses that income and expense data of discontinuing operation you need not give it separately you only give three data of disc 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 p8 before that you go on disclosing in your notes to accounts like this comfortable so when does a disclosure starts when I D 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 e as 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 exis 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 D okay all wait before they start drilling one more will finish out now they are less know because they'll finish that area and come to this area so before that we will finish we'll finish one more standard and then take a break better uh one second uh as25 as25 apologies a little people that drilling is putting me a little off hope online people are fine no because sometimes the continuous noise no it kind of disturbs your flow okay so I hope online everything is going smooth all good give me a quick confirmation okay great uh let's go for the next standard which talks about which is as25 which talks about interim financial reporting interim financial reporting now first of all as25 is not mandatory sir as25 is not mandatory that means why are we studying sir marks sir okay so as25 is not mandatory at all and as25 does not also say which company has to prepare interim financial statements how often should you prepare interim financial statement also is not specified what as25 says is if at all company prepares interim financial statement how it should be prepared I will tell that's all so as25 is telling what I am not mandatory okay you can prepare interim financial statements whenever you want which company has to prepare it I don't know don't ask me is what he has 25 is saying as25 is telling only one thing which is what if at all you prepare interim financial statements I will tell you how to prepare it that's that is a fun all this may come as an McQ question done now sir what is interim period sir what is an interim period sir any period lesser than 12 months any period lesser than 12 months is what we call it as interim period any period lesser than 12 months we call it as interim period so interim period does not mean 3 months normally we have a notion in our logic in our mind we we give public companies give quarterly financial statements to se no yes sir yeah that is not interim financial statements because interim period means any period lesser than 12 months even two months can be interim period 8 months can be interim period 10 months can also be interim period because any months lesser than 12 months is an interim period that is one okay so what is interim financial statement any financial statements prepared for interim period any financial statements prepared for interim period is what we call it as interim financial statement or interim financial reporting understood so how you will prepare that financial statement sir standard gives a leway either you can give let's say you're preparing financial statements on a quarterly basis you're preparing financial statements on a quarterly basis is quarterly financial statement same as annual financial statements or it's an interim financial statement it's an interim financial statement because annual financial statements means it is a financial statement for the whole year here you're preparing financial statements for the whole year or only for three months three months so it is what sir interim financial statements or interim financial reporting what as25 says is you're preparing annual financial statements in a particular format that format schedule three of companies's act gives you can use the same format for IFR also you can use the same format for interim financial reporting also same ditto ditto whatever you're using there in the same format you can also prepare quarterly financial statements also meaning you can give a complete set of financial statement you can give a complete set of financial statement like annual financial statement that means we'll give 12 months data ah you'll give only three months data but in what format you present annual financial statement in the same format you can prepare quarterly financial statements also that's what we mean by complete set of financial statements understood yeah or you can give something called condensed set of financial statement you have a choice company has a choice either to give a complete set of financial statement or condensed set of financial statement complete set of financial statement means like schedule three of company's act whatever format is there use that if it is condens financial statement what to do I will tell you done okay uh maybe we'll discuss this only complete set of financial statement you can use annual uh data as a base if you're using condensed set of financial statement what as25 says is the heading and subtotal heading and subheading rather total should be as for the latest annual financial statement The Heading and the subheading should be as for the latest annual financial statement like what does this mean sir visualize your asset side what is the main heading you'll write Roman letter to assets under assets what will you write in fact you'll write non-current assets first yes no under non-current assets you'll write PP like this and then you'll write current assets yes no sir like this under under current assets you will give various breakup so main heading is assets okay under that sub heading is non-current assets under non-current assets subheading is PP so they're saying main heading and subheading should be as for the main financial statements but additional line item under current assets you will give inventory dear prepaid expense all that no that is optional that is optional so what how what does cond financial statement means the heading and subheading should be as for the latest annual financial statements okay but the additional line item whatever you give additional line item means under current assets you will get various disclosure no this and all we call it as additional line item additional line item company has to decide whether if they want it they can disclose it or if they want they can simply show current assets one rupees and move on with that is that okay that's what we mean by condensed set set of financial statement understood that's all this only the format this is a company choice so Company still wants to show additional item can they show yeah if the company wants to show this additional line item they can otherwise they need not show this additional line item that's the whole fund of about condensed set of financial statement not that important for examination according to me yes sir according to me examination I think they will ask three things one of the three things I feel will come from this particular topic one is this period this according to me has one possibility of coming in your uh examination what is this so let's say company is preparing financial statements on a quarterly basis they're preparing financial statements on a quarterly basis uh year begins on 1 April so let's say we are in the second quarter can you tell me second quarter period what is it April May June is first quarter then July August September is a second quarter correct now let's say we are in 2025 so the period is July 2025 to September 2025 this is your Quarter Two now you're preparing interim financial statements what are the components of financial statements sir balance sheet pnl cash flow statement notes to accounts it's okay balance sheet so you leave it you'll learn it only in C final don't bring that in here okay balance sheet p and Cash Flow State the question now is if you are preparing second quarter quarter number two financial statements what and all balance sheet data you need to give what and all pnl data you need to give what and all cash flow statement data you need to give so this is important first when it comes to balance sheet if you're preparing second quarter balance sheet second quarter what is the ending date sir when is that second quarter ending September 30th 2025 one balance sheet you need to prepare on 30th September 2025 because that particular quarter is ending on that particular date that is one okay so this particular Year is already ended this particular year has already ended or we are in the second quarter we are in the second quarter you also need to give an annual financial statement you need to give an annual balance sheet sir this year annual balance sheet is already ready or not ready not ready that means you need to give previous year balance sheet current year is beginning on which date what does the current year how by the way 1st April 2025 to 31st March 26 correct no current year is already over or is still running running so that means annual balance sheet is ready or not ready current year annual balance sheet is not ready that means you will give balance sheet of which year previous year previous year is ending on which date 31st March 2025 so along with 30th September balance sheet you also need to give 31st March balance sheet for comparison purpose this is one is that okay they'll simply give you a data and ask you to ask questions like this only me give for what period you will prepare balance sheet like that straightforward question will come done D done G everybody good this is one so balance sheet at the the period ending as well as previous year annual balance sheet you need to give for comparison purpose this is about balance sheet next what comes pnl sir pnl we prepare as on a particular date or for a particular period p andl is always for a particular period so this quarter period is what sir July 2025 to September 2025 for this three months you need to prepare a PN for this three months you need to prepare a PN same 3 months P you need to prepare of the last year same 3 months P you need to prepare for the last year for comparison purpose current quarter 3 months P you need to prepare as well as last year same quarter P you need to give it for comparison purpose last year same quarter period is what July 2024 to September 2024 is that okay with you that is period not only this you also need to give something called YTD data YTD means year to dat year to date so this quarter is beginning on which date July July 1st but is the year beginning on July only quarter only quarter is beginning on July but year is starting from which date 1 April you are on which date now you are on 30th September that means year to date means from 1st April to 30th September that means whd information means from 1st April to 30th September so you need to prepare another Pendle for 6 months of the current year from the year beginning till the second quarter ending that particular period of pnl you need to prepare of the current year that we call it as what sir YTD as an year to date that is one same YTD information you have to also give it for last year for comparison purpose so what will be last year YTD April 2024 to September 2024 understood okay this what do we call it as this we call it as year to date information so P andl you have to give it for the period also you have to give year to date also only of the current year or last year also last year also this is about pnl next will be for cash flow statement for cash flow statement give only whtd data whtd data means from year beginning till quarter ending year is beginning on which date 1st April 2025 this quarter is ending on which date 30th September 20125 that means 6 months of the current period cash flow statement you need to give same six months yd data you give it for previous year these are the information you need to give it an interim financial report understood so people will prepare all this sir a25 mandatory or not mandatory not mandatory I means all this will happen practically no so public company will prepare no a public company will prepare financial statements as per listing agreement that is to meet sea requirement and SE only tells what format I want prepare it in that format and they will give it to you so that means all these are for the for the probably for the sake of marks in exam but important is that okay let's see how will you understood sir current year is 1st April 2024 to 31st March 2025 okay let's say the period we are talking about is quarter number three we talking about quarter number three so first quarter will be from April May June second quarter will be July August September third quarter will be 1st October 2024 to 31st December 20124 okay you have to tell me when will you prepare balance sheet first you'll prepare balance sheet as on which state the current quarter ending date so you'll prepare first balance sheet on 31st December 2024 this is one okay that's all no also previous year balance sheet previous year balance sheet is 31st March 2024 this is one date D this is about balance sheet next will be for pnl for p andl what information you have to give sir first P andl you need to give it for current quarter when is the current quarter 1st October 2024 to 31st December 2024 this is nothing but current period information only you'll give current period information or same period information of previous year same 1st October 2023 to 31st December 2023 this 2023 correct no that information you'll give this is for the three months of the current year this is the three months of the previous year this is the period we want only period or year to date also we want year to date also year to date means from the year beginning till the quarter ending year is beginning on which date 1st April 2024 quarter is ending on which date this quarter 31st December 2024 that means this period will be for 9 months 9 months of for current year same 9 months information you have to prepare for previous year so it will be 1st April 2023 to 31st December 2023 this is the 9 months of the previous year this is about pnl information correct last will be for cash flow statement what is the cash flow statement cash flow statement you will only give what information year to date information of the current year and previous year current year will be what sir uh 1st April 2024 to 31st December 2020 4 then it'll be 1 April 2023 to 31st December 2023 this is what you need to go like this question can come for five marks from this topic according to me easy that's can I go for the next one okay second question that can come from this topic is revenue recognition Okay I will only do that h okay so what is this information is Sir you know they will give you one question and they will say let's say you're preparing pnl for second quarter they will say uh expense of the second quarter we will not recognize in the second quarter we will recognize it in the third year some advertisement expenditure is you are in which quarter second quarter in second quarter may you have incurred some advertisement expenditure of 10 lakh the company in the adjustment they will tell you second qu advertisement expenditure I will book it in third quarter I will not book it in second quarter I'll book it in third quarter their justification they are saying is third quarter will have a higher sales third quarter will have higher sales so I will book higher expenditure in third quarter you have to tell whether it is acceptable or not acceptable acceptable not acceptable not acceptable that is what those sort of questions come from this particular aspect what is this aspect is this the whole line think one line how to remember I'll take you through that one question what the overall fun of that particular concept is think sir if you are preparing an annual financial statements if you're preparing not inter financial statements if you are preparing annual financial statements while preparing annual financial statements if you can delay or defer the income or expensed in annual financial statements May if you can defer the expenditure or defer the revenue then interim financial statements may also you can defer it in if you preparing annual financial statements and if you cannot defer the revenue then in interim financial statements also you cannot defer it the same way you're preparing annual financial statements in that same pattern income and expense also should be recognized is that fine with you now this advertisement expenditure if you incur advertisement in the current year will you book it in current year or next year current year only yes no will you defer it or recognize it immediately immediately so in annual financial statements May are you deferring or recognizing immediately recognizing immediately that means in interim financial statements may can you defer it or not allowed not allowed that's all overall fun understood now let's come to one question and we'll take up through that here check an bharati limited reported a profit before tax of four lakhs so they have reported a profit before tax for which quarter third quarter this is the profit they have found out as per their methodology all we need to tell is whatever profit they found out is correct or incorrect if it is incorrect we have to find out the revised profit so let's get started how much is the profit they have given sir four crores take your calculator all of you that's that's good enough we'll just do we'll have to do some some plus minus here that's all okay check here sir dividend income of 4 lakh is received during the quarter but it has been recognized only to the extent of 1 lakh so how much dividend income did you receive in the current quarter 4 lakh dividend income is an income income should be transferred to pendl they received 4 lakh but how much they accounted it as an income one lakh that means three lakh of income did they recognized or they deferred deferred they deferred it in quarterly financial statements acceptable or not acceptable not acceptable if you're preparing annual financial statements this year if you have received dividend okay will you account it next year or this year itself this year itself so that means is deferment allowed in annual financial statements no that means an interim financial statement is deferment allowed or not allowed not allowed but what has the company done they have deferred how much revenue have they deferred three lakh because four lakh you received but you have recognized only 1 lakh how much dividend income is not recognized 3 lakh can we defer it or we should recognize we should recognize if you recognize when income pnl balance will be same or it will increase so what we should do for this adjustment you have to add three lakh that's all simply we have to plus or minus over here so due to this adjustment you need to add three lakh so 4 lakh profit they give that is not the correct profit from 4 lakh add 3 lakh like this three four adjustment is there can we F run through 80% of sales promotion expenditure of 15 lakh incurred in third quarter okay has been deferred to the one second how much sales promotion expenditure have you incurred in this quarter 15 stop there sales promotion expenditure is like your advertisement if you have incurred any advertisement in the current year will you defer it to next year or book it in current year only book it in current year only so in annual financial statements may can you defer it no that means an interim financial statement May is deferment acceptable or not acceptable not acceptable what but what has a company done 80% of sales promotion expense in the has been deferred so calculate 15 lakh 80% is how much 12 lakh 12 lakh what have they done they have recognized or deferred they have deferred it to the fourth quarter we are in which quarter now third quarter they are saying I will book this 12 lakh not in this year not in this quarter but in the next quarter acceptable not acceptable not acceptable but have they have they book this expenditure no so what we have to do we have to find out the correct profit so this 12 lakh expenditure should we book this quarter yes so if you book an expenditure what will happen to your profit it'll be same or it'll reduce reduce I means because of the adjustment profit will reduce by 12 lakh yes no because 12 lakh they have not recognized they are saying we'll book it in the next quarter not acceptable right so this 12 lakh we have to account it as expense now only three lakh they already accounted yes no sir can I move on what in the third quarter company changed the depreciation method from wdv to slm which is resulted in excess depreciation of 12 lakh so stop there only so change in depreciation method is an accounting policy change or estimate change accounting estimate change accounting estimate changed are always done prospectively the day you change the day you change whatever extra you get book it in that year correct no so that means what sir 12 lakh excess depreciation you got when should you book this third quarter only can you defer it or third quarter only third quarter only entire amount has been debited in the third quarter okay what they've done is wrong or correct only they've done correct only that means any any mistake here no that means You' have to do anything or correct treatment correct treatment no no pluses no minus because it's a change in accounting estimate due to change in accounting estimate if you are getting excess depreciation or less depreciation doesn't matter you accounted that day itself because accounting estimate change are always accounted prospectively so they have accounted it fully that means what treatment they have given is correct only awesome two lakhs of extraordinary gain extraordinary income received in the third quarter was allocated equally to third and fourth so if you have received some extraordinary gain maybe Lottery income or whatever some extraordinary gain you have received now think if you prep in annual financial statements if you receive one gain will you account it next year or this year only this year only now this gain relates to which quarter third quarter but what is the company saying I will book equally in third quarter and fourth quarter not me company is saying this acceptable not acceptable not acceptable but they have already done how much is the total gain 2 lakh out of this 2 lakh gain one lakh they booked it in third quarter another one lakh they want to book it in fourth quarter acceptable or this also has to be booked in third only this one one lakh also you should book it in third quarter only so this is a loss or a gain gain some gain you have to book it now means they have not booked we have to book it now so if you have toook if you have to book again what will happen to your profit it'll be same or it'll increase so due to this particular adjustment your profit again will increase by 1 lakh rupees that's a treatment yes yes people okay cumulative loss resulting from the change in the method of inventory valuation so one again sir accounting policy change accounting policy change agreed cumulative loss resulting from change in the method of inventory valuation they said inventory method you have changed inventory method change means F4 to weighted average weighted average to F4 all that is what sir F4 weighted average and all is not accounting estimate change it is a policy change we already studied as4 and five and all any policy change has to be accounted retrospectively correct okay check you did some policy change and you suffered a loss of how much 3 lakh the cumulative loss resulting from the change in the method of inventory valuation was recognized in the third quarter to the extent of 3 lakh out of this loss one lakh relates to previous quarter accounting policy change can be do prospectively or retrospectively retrospectively entire three lakh loss relates to quarter number three or some portion relates to quarter one how much relates to previous quarters they're saying one lakh of this relates to previous quarter that means this one lakh can you book it in current quarter or it should be booked in previous quarter only it should be booked in previous quarter only but what did the company do they booked this one lakh in the current quarter they booked this one lakh in the current quarter this one lakh is a gain or a loss this one lakh is a gain or a loss guys loss check here only cumulative loss you change some method of inventory valuation and you got a loss how much loss you got three lakh what did the company do entire three lakh loss they booked it in the third quarter itself okay but this is what sort of change accounting estimate change or accounting policy change accounting policy change what does policy change rule say you have to account it retrospectively okay so entire three lakh is third quarter loss or they given information out of this three lakh loss one lakh relates to previous quarter if one lakh relates to previous quarter means can you account it in this quarter or previous only previous only yes no that means this one lakh quarter what did the company do they've accounted it in the current quarter but it relates to the previous quarter that means what do we have to do they booked the loss in the current quarter acceptable not acceptable not acceptable you have to accept it in the previous quarter only okay so this's one lakh loss they already booked due to loss what happens to your profit profit reduces now what we have to do reverse it so we'll have to add back because this has to be accounted in previous quarter only like this that's the reason but they accounted in the current quarter that's the reason revers it only one L manageable okay sale of investment in the first quarter when did you sell first quarter and when you sold some investment you got a gain of how much 20 lakh so sir now think if you sell an asset in the current year and if you get a gain of 20 lakhs when will you book that gain next year or current year current year only so when did you sell the asset first quarter first quarter we are in which quarter now third quarter you sold it in first quarter and how much gain did you get it 20 lakh so this 20 lakh ideally should be booked in which quarter quarter number one but what did the company do company had apportioned this equally to four quarters they are saying this entire 20 lakh I will allocate over four quarters that means they are booking how much gain they're booking every quarter 5 lakh rupees that means how much gain they booked in third quarter this is a profit only for third quarter no how much gain they booked it in third third quarter 5 lakh rupees this five lakh this is acceptable not acceptable this is a gain relating to quarter number one so it should be booked in quarter number one itself but this five lakh they booked it in quarter number three so due to this gain what happened to your pendl pendl balance increased acceptable not acceptable not acceptable since what we have to do we have to reduce by five so do this plus minus and finally you will get the adjusted profit they will give you five or six adjustment okay each adjustment maybe will carry half a half a mark okay or maybe some some adjustment may be awarded one Mark also like this okay don't freak out if you lose one or two adjustments it is okay okay some some new comes and give they will always give a step marking there but overall fun of this question is what think you like you're preparing annual financial statements in annual financial statements May if you can defer me means in interim also you can defer if annual financial statements May if you cannot defer income and expenses means interim financial statements also you cannot defer that's the overall fund okay sir keep that in mind and go through this question these are very easy but when you overthink it may instead of plus you may think like ignoring minusing and all that ideas will come so these sort of questions are very simple so go through them once once more okay now you may get it after going home you may get some creative ideas so better just go through it once again all right so one more uh concept may be tested from this particular chapter that is tax you book tax expense you book tax expense correct just now we have S tax expense so in as per as25 tax expense also has to be booked every quarter tax expense also has to be booked in every quarter it has to be booked in interim financial statements usually they we prepare interim financial statements in quarter but is it mandatory or any period is acceptable any period less than 12 months is interim Financial period and interim financial statements can be prepared for that period but usually data will be given quarterly wise that's what I'm saying okay so suppose you preparing quarterly financial statements in that quarterly financial statements also you need to prepare or you need to Account Tax expense how you need to book tax expense is given by something called water not wat nag this is water water means weighted average annual tax rate the tax expense that you book in each quarter should be based on weighted average annual tax rate how do you get this weighted average annual tax rate it's a simple thing expected tax expense in the current year divided by expected accounting income in the current year into 100 expected tax expense in the current year divided by expected accounting income in the current year into 100 we'll apply it in one question and understand it better an Enterprise reports quarterly estimates of annual income how much 10 lakhs assume tax rate on on First rupes 5 lakh is 30 % and on the balance income it is 40% so you are paying tax to the government on a flat rate basis or a slab basis slab basis so it is not acceptable no don't question the question if they say slab rate slab rate a nothing more there so on the first five lakh of income you have to pay a tax at the rate of 30% balance you have to pay 40% the estimated quarterly income they have given so how much is the in fact check over Enterprise reports quarterly estimates of what is this and ual income annual income is how much sir 10 lakhs so annual income is 10 lakhs but I we already discussed now that tax expense in each quarter should be based on something called weighted average annual tax rate or water how do you get that expected tax expense for the current year divided by expected accounting income for the current year so how much is accounting income sir 10 lakh Rupees if they don't give accounting income separately we always assume that taxable income and accounting income are same if at all there is a the difference they will mention in the question if they don't mention accounting income and taxable income we take it as same so how much is expected accounting income 10s correct that's your denominator in the numerator May what we need expected tax expense logical sir they only told tax is payable on flat rate or slab basis your income is 10 lakh they said on the first income of 5 lakh you have to pay tax at the rate of 30% and the balance you have to pay tax at the rate of 40% total income is 10 lakh in that 5 lakh you have taxed at the rate of 30% means balance is how much 5 LH on that 5 lakh you have to pay tax at the rate of 40% so what is your tax sir 5 lakh or 30% is how much one and a half lakh 5 lakh or 40% is how much 2 lakh so what is the tax expense or expected tax expense for the current year three and a half lakh understood expected tax expense in the current year is three and a half lakh so you got your numerator expected tax expense in the current year is 3 and a half lakh divided by expected accounting income is 10 lakh given divided by into 100 you do how much you getting 35% so basically you will book tax expense by using a rate of 35% okay how much is quarter one earnings they give each quarter income they have given how much is first quarter income 75,000 how much tax expense you will recognize not on slab basis now you have to recognize tax expense based on weighted average annual tax rate what is that weighted average annual tax rate 35% how much is the income for first quarter 75,000 75,000 into 35% is how much 26 250 this is first quarter tax expense what is second quarter income 2 and a half lakh 2 and a half lakh into 35% 87500 this is your tax expense similarly third and fourth quarter tax income you take and multiply by water you'll get third and fourth quarter respective tax expense this is if you add everything you going to get the total tax expense for the whole year which is three and a half lakh like this this is another question which is popular from this particular topic understood are three things you need to keep in mind one is the period W question one is the deferment of gain or loss whilea or income and expense whilea concept and another one is the tax tax expense for each quarter but remember the tax expense is not based on actual tax rate it is based on weighted average annual tax rate and how do you get this weighted average annual tax rate expected tax expense in the current year divided by expected accounting income for the year into 100 okay if you do that you're going to get water based on that water car rate go on booking the tax expense for each quarter these are three popular so yeah that that's what I would prioritize from this particular topic yeah with this this particular chapter also we have rised so thank you so can we take about uh break and come back sir the lunch break I think it's about 1 120 can we come back by two yeah I think I have two more topics before they start the drilling my priority not now is the time the priority more is towards their drilling work yeah all right before they get come to this side we have to finish our class I've given I've told them that by 4:35 I'll try to finish after that they may come off this side so you also try to come by 2:00 people so 22 by 4:30 we'll try to finish the session okay so let's uh resume back in about at 3:00 thank you consistency no okay yes people welcome back after that uh 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 dependent 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 or 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 n sir 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 H has sent Goods to the branch that means for ho 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 datar to sale the journal entry will be instead of debiting datar 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 we use when we sell it to an outsider did head office sell the goods to an outsider or their own unit their own unit that means instead of sales they will use Goods sent to Branch account 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 a journal entry for credit purchase purchase account debit to creditors instead of purchase when we say purchase it means like you have purchased the goods from outside here have you purchase 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 ours they will credit hedgeh 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 who money whose money Bal bank balance is reducing Hoka that means H credit bank account what's a journal entry for expense paid expense account debit to bank account whose expense is it Branch car that means who should show that expense branch that means ho will say they will not ho 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 hop 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 datar but who collected that money head office head office collected money from Branch C datar what is the journal entry for moneyed from datar bank account debit to datar account who collected the money head office that means head office will write cash or bank account debit will they credit dears it is whose dears Branch C detar so in of of crediting datar 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 datar account because datas account is maintained who by whom datas account is maintained by whom whose datas is Branch car so that means Branch will credit their datas account since they did not receive money hoed the money so we will write we will pass the journal entry H account debit to datas 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 it needs to be done okay that could be done yearly once quarterly once six 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 credit us paid in cash credits to bank who paid the money now head office so to whom was it paid to Branch so instead of crediting credit ass 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 hon no so Bank to Ho will be the journal entry it's like Branch for branch it will be like money received 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 to the head office who remitted the funds Branch to the head office that means head office is collecting the money so in h 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 that means the journal entry will be H 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 the value of opening stock you know the value of purchase can you find out the value of closing stock restructure 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 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 sir 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 uh 50% whenever they use the word cost here no if they don't tell what sort of cost is this always assume this is a 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 means the profit in this transaction made by Branch will be what 30 is that okay that profit will hold good provided the cost is 100 100 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 is shown at invoice price of how much 2 lakh 20,000 good sent during the year at invoice price how much 11 lakh sales made by the branch how much 12 lakh okay if you just checked 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 know the profit earned by the branch you need to Simply prepare trading P account need to Simply prepare trading and pendl account because they're asking what 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 and all no sir it's internal branch and all Branch data and all is internal records 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 presented as per schedule three 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 pnl first you used to prepare trading account then pnl 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 3 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 missing 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 Pendle together first you don't have to prepare trading and cl if you want you can first prepare trading account close it then prepare pandle 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 utiliz okay like that so how much is the expense of the brand sir 45,000 expense will come on the credit side or debit side debit side accounted yes so the only information is missing if I find that I know Branch 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 Co 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 receive from head office is only like our purchases how much is that 11 lakh added 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 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 there is nothing but your cost of goods so 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 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 you got C GS 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 good 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 Naru any problem or good good okay next what did they ask they asked you stock Reserve what do the 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 perspective 100 but did did the branch send these Goods did the branch send this Goods at 100 120 120 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 360,000 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 rupees of profit element is included in closing stock can I tell like that so it's like that so that means 360,000 represents 120 for 20 how much if you calculate that how much is it into 20 divid 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 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 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 compan 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 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 on included in closing stock is 360,000 minus 3 lakh which will be 60,000 rupe done that is one actually stock Reserve means profit element included in opening stock and closing stock stock Reserve 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 n 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 profit 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 has 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 received 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 12 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 Branch closing stock that's what we need to find out so this 360,000 closing stock is there on which platform it is on 120 because Branch purchases Goods 120 but cost to 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 question more often than not they ask dependent Branch till now what we did Sir independent branch in independent branchman generally they'll ask you to prepare journal entries and they'll ask you to prepare trading pnl account trading pnl account usual we just just did down know same format man 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 these 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 h 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 H great thank you okay so let's go for uh the next one sir head off 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 pendl account because trading pendl is little lendy because you'll have 101 expenditure right hence we have shortcut method the first shortcut method which head office can utilize to no profit or loss made by the branch we call it as datar method we have something called datar method in dear's 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 datar method in datar method what is the shortcut is head office prepares something called Branch account head office prepar something called Branch account they instead of preparing trading pendl they will 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 pendl 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 Machinery datar 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 different way opening balance of all assets where it will come when you prepare data 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 Carri 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 if head office sends the goods to the branch what is the journal entry Branch account debit to Goods s 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 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 account 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 petty 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 incur head office so if head what is the journal entry for branch expense Me by head office Branch expense met by head office what's the journal entry Branch 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'll see it in the question this is one donear okay sir what if some money 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 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 Branch now 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 office 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 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 nobody does okay but uh all that we will not worry about it right now we have to focus on our exam Examination for the sake of marks what needs to be done we will use that okay so now 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 one 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 buy 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 sir to stock reserve on closing stock done aaru only these two or even one more Goods sent to Branch account where is Goods sent to Branch coming on debit side I mean 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 now 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 it as to P account as arrived as balancing figure this is the profit made by the branch a short cut 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 a 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 for opening balance showed on the credit side if liability closing balance will come on the debit side very rare liabilities but still if is there you can bring it then goods and to Branch account will come on the debit side because the journal entry is bank account debit or Branch account debit to Goods s 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 H only is doing the accounting over here 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 s to Branch account where does it come in Branch account on the debit side instead of directly reducing that we write buy Goods s to 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 vishwak Karma of Delhi Branch uh vishwak Karma of Delhi has a branch in jaur 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 branch whatever money Branch gets known 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 Adit 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 Ho 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 paid by the branch from the following information prepare a branch account surrend which method you prepare Branch account datar 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 ask prepare Branch account so let's see sir they've given the data so one good thing is as in when we 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 1ak 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 will 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 data on 1st April and dats on 31st March so dears on 1st April is what sir opening balance dears on 31st March is your closing balance they given opening balance of dears and closing balance of dears where will opening balance of dears come under debit side 63400 take up two balance brought down all assets put together you can write it as two balance brought down one by one is that okay de opening balance 63400 dear closing balance 84 300 given ticked off yes okay next these two over next furniture and fixtures on first April 1 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 Ledger as a working note and get furniture car closing balance we'll come to that as soon 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 lak 2,000 600 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 lakh 2,600 can branch keep this money or they have to give it back they have 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 l2000 600 so I've written by bank over here they've 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 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 lakh 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 science we'll prepare at 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 sale one second hang on sir do you know dear opening balance yes do you know dear 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 Holy 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 debt are 46 800 that do have captured here okay do you know credit sales yeah how much is credit sale 7 lakh 44200 what's the journal entry for credit sale sir data to sales captured okay check anywhere over there have they given bad debt so discount all loo 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 lak 7,600 that's why also should be 8ak 7,600 okay but that's say total is only 84300 there is something as balancing figure how much is balancing figure 7ak 23300 something should come on the credit side what is that sir that is nothing but money received from datar what's a journal entry for money received from dears bank account debit to dears account this is your branch cash understood yes sir if this information was given maybe preparing Branch data account was not necessary since that information was missing we prepared that leer to get it done now okay sir this will affect only datar Ledger or Branch cash Ledger also Branch cash leder 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 has sent the goods to the branch what is a journal entry head office has sent the goods to the branch what is the journal entry Branch account debit to Goods s to Branch account how much value 12 lakh 56,000 so will it come in your branch account yeah write it as Goods into 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 264,000 what is the posting of this entry in Branch account you'll write it as two bank account this is your 2 L6 4,000 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 petty 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 the 2900 balance they will give it to head office understood okay people so who 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 add 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 uze utilize some they have utilized for petty expense for petty expense how much did they utilize 20,00 manageable so that's the reason that's balance will reduce okay s 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 whose Furniture Branch car who paid for that furniture Branch who paid for that Furniture who paid for that here GE G payment was made by the branch Branch does not have money no no no they have money how much money they have 15 lak 25900 so out of 15 lak 25900 20,900 they utilize for petty expense 5,000 they utilized for furniture purchase what's the journal entry for furniture purchase 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 by 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 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 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 expense are there first Branch will adjust that not much from the money balance only they will remit to the head office like this understood sir sir what about this pett expense and all sir it will not come in Branch account no under the shortcut method only whatever we discussed only those will come any expense of branch and all will not come how much is a petty expense of the BR answer 20,900 all that if you just check over will it come in your branch account no okay that all that will not come in your branch account hence that's is 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 to no profit or loss we want to prepare Branch account okay so hence 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 sent 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 is profit element included yes okay now sir how much is the opening stock 1 164,000 so that means this 1ak 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 stock 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 1 lakh 64,000 represents invoice price meaning it it is on what platform 125 we want what we want profit element profit represents how much 25 so for 25 how much 1ak 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 1 lak 64,000 means how much is profit so when you Pro rate how much how do you get X 1ak 64,000 into 25 divided by 125 like this you can do or you can simply do in logic I mean one line 1ak 164,000 is on 125 a platform 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 1 lakh 192,000 directly you'll reduce closing stock and show it on the opposite side showed in the opposite side as what to stock Reserve to stock Reserve this is on the closing stock what is a closing stock of invoice price 1 lak 192,000 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 sent to Branch account did you send Goods to Branch account yes how much did you send 12 lakh 50,000 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 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 51 200 okay yeah thank you so much for your comments PA all right so are we good with this this is the fun okay sir so Suppose there is a Goods returned means what to do sir uh first what you can do is Sir Goods send to Branch account where will you you show debit side so Goods return you'll show it on the opposite side that means on returns if you showing sub if if you're 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 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 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 Ru so anything is missed ticking or everything ticked off everything tick off but one second hang on furniture closing balance we have or we don't have we don't have so Furniture depreciation data theyve given H yeah you have to depreciate office furniture by how much 10% on what basis WB 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'll 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 furniture 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 have 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 at home so remaining is what balancing figure is what closing balance how much is closing balance 4687 sir depreciation will not come sir no under this method no sir under this method expense and all will not be recorded only asset opening and asset car closing what is asset Furniture car closing balance 46870 show that on the credit side is that fine anything else are 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's saying giving look that guy is telling what is your problem let him tell no this time I can't even use the dialogue you paid full fees because you paid no fees revision 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 like 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 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 3 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 this side 4 and a half lakh this side also should be how much sir 4 and a half lakh okay then we have some bad DS let's say 50,000 we have some bad Debs 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 say 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 F how much you going to get 175,000 is a balancing figure what is that balancing figure money received from datas 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 at free of cost 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 sir 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 branch 350,000 minus 75,000 which is how much sir 275,000 understood 275,000 manageable so finally if you receive this Goods at free of cost if you do trading pnl account in normal way you'll get a profit of 275,000 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 do 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 dears 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 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 post it as buy bank account 175,000 yes or S any problem so what is the 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 no goods and 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 270 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 Debs under this method there was bad debts did I post bad debts anywhere here no because under this method expans and all will not post only asset opening asset car 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 example there yes sir work so this is one method this is one shortcut method where BR 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 know 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 Branch car stock account then brancha datar account then we usually prepare branch cash account Goods into to Branch account Branch adjustment account and then finally Branch pnl account these ledgers 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 brand 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 sales sales where it will come credit side so you have to prepare this brand stock account in the same fashion you have to prepare this brand 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 increase increase now when you're preparing this Ledger no 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 one 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 now four lakh that means what happened to Branch car stock same or increased increased so opening balance of stock where it come on the debit side you'll write it as what sir don't write two opening stock because you're not preparing trading account you're preparing Branch stock account in stock account opening stock means it is a opening balance of opening balance of stock opening balance of stock where it will come to balance broad down 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 purchase is where it will come on 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 H that means the goods receed from purch 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 debited 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 received from head office you'll write it as Goods s to Branch manageable that is one after receiving the goods what will a 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 datar to sale you write it as datar to stock datar 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 in 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 sir 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 into 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 it 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 was 120 invoice price for Simplicity is 120 so all the component should be shown at what sir 120 that means lger 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 50 now you tell me this Ledger will match h no opening stock Goods s 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 account 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 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 into to Branch account so Branch will not have purchases rather they will have Goods into to Branch account so where will that Goods into to 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 sale stock value will reduce so show both the components on the credit s okay and closing stock you show it on the credit side is balancing figure so ideally since every component is shown at invoice price The Ledger should match if it 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 account 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 deas on the 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 datar 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've 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 sale car 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 purchase it'll be adjusted from purchase because the 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 s to Branch account is shown at what value invoice price but purchase purchases 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 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 are 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 PM account 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 whe 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 self study they look through the Ledger and they'll be like yappa 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 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 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 Rememberance 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 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 now don't write sales when you sell the good stock value will reduce so if it 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 dats to sale it will be datar to Branch stock account so in your branch stock account the posting will be by branch datar and then closing stock will come as byy 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 datas 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 to Branch account we adjusted with what head office purchased the goods and they sent it to branch that means it is related to what purchases so Goods into to Branch account you adjust it with purchases but Goods will be sent at invoice price purchase is 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 into to Branch account any balancing figure in Branch adjustment account represents the gross profit made by the branch which will be transfer to Branch pendl finally prepare Branch pendl 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 saying 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 the problem in that case may all the things you would have forgotten that's the reason I've given you all notes also entire point of 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 a reason especially you YouTu probably when last you attended class one and a half years back that is a problem okay no issues some of the recorded guys who are watching this class 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 debts 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 Branch account further details are given at the end they're saying what check show the necessary Ledger account according to stock and datar system so clearly mentioned 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 P 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 sent to Branch account how much 50,000 okay so Goods sent 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 s to Branch account but the cat 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% you 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 that's a reason okay so what is the entry for this Branch stock account debit to goods and to Branch account are you opening Goods into to Branch account yes in that ledger what is the posting in Goods into Branch account you'll post it as byy Branch stock 60,000 like that post it off simultaneously otherwise you'll 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 54 sir how much Goods we sent 60,000 how much Branch received 54 that means that 6,000 is a Goods in transit git that Goods is still in Highway okay but anyways these are branch and datar no so 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 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 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 Dar 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 heart over here okay as far as a company is concerned student is separate company is separate correct yes only when the student pays the money then only we will record yes correct but in case of branch and head office there is a they belong to different companies or same company same company so if head office says I've sent 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 in 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 6,000 000 so should we recorded yes should we 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 dats to stock datar to stock so in Branch stock account what will be the posting buy 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 s next s s invoice prices sir yes sales are any which we made at invoice price okay datar as on 31st March datas as in 31st March means it is datar closing balance datar will not have opening balance because branches just started but datas closing balance is given to be 20,800 which we ticked off okay next bad debts and discount return 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 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 P account are you able to see bad debts 200 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 theyve given cash remitted to the 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 ho 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 HED h 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 can write it as by bank if byy bank is confusing for you because there's 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 Branch as on 31st March as on 31st March CL what is this closing balance of cash opening balance of cash cash is zero because branches 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 receive money from head office what's the 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 yes saru so how much money has been received from my 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 receipt side if branch is 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 come in brand stock account as what it will come on the credit side you already as byy 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 s to 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 of 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 and 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 hoo 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 rupees easy s 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's expense where it will go are you preparing any pnl yes expense will come come in pnl yes in P account youed two expense how much 12,000 rupees corresponding posst okay all right anything done or everything accounted everything accounted now now sir here before you close in harar know always check each Ledger will be connected here first let's look at datar Ledger do you know datar opening balance zero not there closing balance Yes Credit sales do you have this Rand 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 sale here credit sale information is given so what is missing cash received from cash receive from datar information is missing what's the journal entry for cash received from datar who will receive head office of Branch will receive Branch so posting will be Branch cash account debit to Branch dears account so you'll write it as what sir by 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 dears so in your branch cash account what will be the posting you'll write it as to Branch datas 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 fromone okay another cash sale either to get cash sale or cash received from datar we prepare this account cash received from datar 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 the 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 posting yes sir all right so all the components has come in Branch stock account ideally Branch 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 this is your profit element here all the profit element are initially transferred to which account Branch adjustment account so you 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 Branch stock account 207,000 yes or saru okay next we have one more account called Goods sent to Branch account I told Goods sent 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 s to 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 into to Branch account Goods sent to Branch account so what is the entry Goods sent to Branch account debit to purchases account is 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 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 in Branch adjustment account here you have written goods and to Branch to Branch adjustment so there you'll post it as what sir by Goods s to Branch account 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 and to Branch what is this 10,000 loading element on goods and to Branch already removed the 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 come on the debit side you'll write it as what to 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 Pendle what will be the posting what will write in Branch P usually write by GP broad down here we'll write by Branch adjustment okay by Branch adjustment 35,000 these two expense you deduct any balancing figure in Branch P account represents what the final net profit made by the branch it 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 chance chance of losing is what very less but the K the whole Crux is to remember and put it across that's the reason I'm given you all those pointers so refer all those pointers in your notebook regular class may have given all that in case if you forget that now Any Which Way 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 one 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 there 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 foreign 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 data 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 Daya exchange rate you have to use and you have to reconvert and for all income and expenses you have to use average dat for integral foreign operation not normally they will 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 PV however if it is all non-integral foreign operation again they started 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 that balancing figure is nothing but exchange gain or loss you'll not transfer that to Pendle your Market 10 fct foreign currency translation so that's so funny now 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 uh New York so it is Dollar to Rupee conversion or rupee to dollar conversion it is rupe to dollar conversion Ulta scenario because head office is there not in India head office is there in New York for online also is it audible drilling sound is it Audible okay for us 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 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 book showed a debit balance of 13,400 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 1750 okay so we'll see this the exchange rate on first 31st December 20 X1 stop they have given the data the the year is ending on which date 31st December 20x 2 they have given here 31st December 20x 1 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've 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 foreign 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 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 up 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 a separate exchange rate or they will only give that converted value here all the rupees we need to convert it into dollar 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 only 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 P account so the first step is to prepare the trial balance convert the trial balance from rupee to dollar 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 2 l34 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 Sal is pnl item for p item you have to use what rate average rate what is the average rate 50 they've converted this rupee into Dollars by multiplying or dividing divide okay dears and credit are Bill receivable bills payable both are what items sir dear credit are Bill reable bills payable they are monitary item all monitor item should be converted using closing rate what is the closing rate 51 that's what they have take 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 the 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 TD are they only converted and given to us next bank account sir 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 hoo 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 hoo account since branch has a liability to pay the head office hoo 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 rupe value but head office will maintain it in rupe 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 same value that means should we have to convert this or already done already done ho is showing it at what 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 13,400 understood us sir for bran 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 is shown under which side credit side that means after conversion also it should be shown under credit side over that's what they've done because for branch this H account is a creditor creditor will have what balance credit balance like this so when you convert this trial 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 car if you get any exchange gain or loss that should be transferred to p and 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 Cod 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 p account 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 pandl not in rupees in dollars what is the opening stock in dollars 4,500 take a yes then what will come purchases do you have purchases yeah purchases how much 31 250 okay sir oh 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 selling 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 s 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 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 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 they've asked you trading pnl as well as balance sheet so the datar and credit where it will come balance sheet datar will come in balance sheet check have they shown datar in balance sheet this is your Branch balance sheet dats at $15,000 what about credit ARS sir what is credits value 10,000 credits where it will come liability side check on the liability side have they shown credit as 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 that trial balance to prepare trading and pnl account and 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 they've 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 Sal salary and wages rent and taxes 2, and 2125 both will come where trading account or P account P account 2, and 2125 in your P account here 22125 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 a bank account bank account where will come balance sheet 11,150 asset side yes sh next what uh New York account sir head office will s Branch account Branch will show New York account at different different value or same 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'll 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 com for a branch it's a DAT for a branch it's a creditor for ho it's a datar 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, 400 understood okay anything else is there exchange loss exchange loss where it comes sir Pendle 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 51 we have to multiply or divide here divide 6 lak 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 D now so trading account all the components you have considered any balancing in trade 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 transferred 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 will do transfer it to Branch P you'll transfer to h p is that okay now here this Branch profit belongs to whom head office branch C 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 is 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 sir Capital will profit will be added to the capital account so how much is Branch profit 17,500 added to the h account because 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 P 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 yes all right so with this Branch car revision also we have completed closing stock is uh stock is is a non-monetary rate 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 only 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 we have one last topic hopefully they will not start drilling okay we'll finish off this topic and then we will take a final break it's okay whatever I'm saying is audible to you if you want you can come a little fr okay if it's like that if the drilling noise is disturbing you too much you can come a little friend one second I'll just tell them for half an hour if they can wait I'll check with them once again just give me 2 minutes I'll just check if they can stop their work for 5 minutes e e [Music] [Music] e the know father spe uh guys uh the they're saying they'll stop the work in another 10 minutes so I think can we do a thing can we take a short break for 10 minutes and then resume would be better no yeah I think because in this noise it's very difficult I think to do the class uh correct so let's probably like take about 10 minutes break and then resume by better 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 PN 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 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 of format heading VI balance sheet of so and so company as on so and so date and that date no particulars note number current column previous year column 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 noncurrent liability long-term borrowings under long-term borrowings you prepare a separate working note for long-term borrowings and you show bank loan debentures etc etc then point number three current liabilities under current liability credits and all the short-term provision short-term borrowings credits 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 you 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 datas etc etc yes so all this is your usual format and then what is the P andela format what is p andela format I don't know whether I have it yeah have it already you know okay P andelka 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 finish Goods minus closing stock of wiip minus closing stock of finished goods so basically all these are trading account components all that trading account components is captured in these three components in your new schedule Thea format yes then you'll capture what sir employee benefit expense employe benefit expense means whatever you pay you 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 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 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 diluted EPS 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 C 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 this 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 pendl 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 pendl component if at all you 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 will red discuss 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 under noncurrent assets we have a category called PP it'll 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'll take off 800 yes this is your note number five land value is how much 800 don't worry about other adjustment as and when we see we'll take off later we'll worry about the other adjustments yes okay okay next is what sir calls in are so what do you do for calls in arear calls in are is deducted from the capital from equity share Capital you'll deduct it yes calls in Aras is related to share Capital no so you'll reduce it from equity share Capital normally we prepar 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 five 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 and cash equivalent cash in hand they've showed it to two comfortable huh 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 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 have 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 dat what do you need to show the working note debts outstanding for more than 6 months and other debts if any datar is not paid you the money for more than 6 months you have to show that dat are separately and other debts 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 does the next component they've given cash at Bank cash at bank will come where in cash and cash equivalent what ises a 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 so 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 sir 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 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 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 balance why because how do you get how do you get adjusted purchase open 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 trial balance easy Okay purchase is how much sir 400 where will purchase come in balance sheet or Pendle P balance sheet or P Pendle in Pendle 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 over here also 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 plus 125 150 check 150 have they shown in other expense in P 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 have 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 uh credit side share Capital where will share Capital come in balance sheet usually we prepare not number one for share Capital what is the value of share Capital here they've told 500 but do we have any calls in areas 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 300 it is fine if you don't have time otherwise prepare a note take a call based on time in examination next what sir General Reserve pnl 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 our 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 P you are still preparing so when you prepare current year P you will get current year profit so that current year profit you need to add here because this is pnl opening balance to this you add current year profit and you'll get pel 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 C working 150 75 and 40 no 15075 and 40 we have ticked off other things we'll see it later next is what sir uh sales sales Val will come in your pendl account check in pendl account have they shown revenue from operations 1,200 revenue from operations 1,200 okay next what sir trade payable trade payable where it will come under current liability 30 check how they shown under current liability 30 in balance sheet this your current liability trade payable 30 okay next what provision for depreciation provision has what balance credit balance provision for depreciation may have a credit balance will you short in the liability side no this provision is related to what assets this this provision is related to assets this is a provision for depreciation you don't know as we can we can account depreciation under two methods charge method and provision method I we already discussed that so this is your they following what method accumulated depreciation method or provision for depreciation method they're following so provision has debit balance what do you or credit 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 dis disclose 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 auth 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 there is any call scenario 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 plus 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 960,000 if you have to represent in th000 what it will become sir 960 correct so revalue 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 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 Reserve 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 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 than 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 they've 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 sold on which date 1 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 beginning 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 pass 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 passed 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 so 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 told asset Ledger will always be shown at original cost because all depreciation you are transferring to ppal Ledger or provision Ledger you are 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 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 close what is accumulated depreciation or provision on this asset 20,000 so original cost is24 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 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 R this is the treatment correct now 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 yeah tell me an 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 debited so provision account will be debited so first entry will be cash account debit provision for depreciation account debit yes sir now as 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 you're 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 you 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 missionary 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 he 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 that 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 pendl 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 in 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 AC provision for depreciation balance should increase or reduce due to this asset is no more there if asset is not there means provision 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 Thousand 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 they reduced yeah is that okay that's another tick mark this 8244 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 is to be provided so already accounted or to be accounted to be accounted at what value depreciation to be accounted on planted machinary at 10% on cost so what is the cost of planted machinary 824 824 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 or 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 per 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 under We are following provision for depreciation method so the journal entry will be dep 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 Pendle 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 pendel we have a separate category called depreciation and amortization check and 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 depreciation you are maintaining a separate note or PP working note come to PP working note and have they added yes they've added okay why have they reduced 20 because this reduction is to planted missionary sold why have they added 80 this is current year de C that's is 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 rupees 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 respect with ABC Bank which is not a scheduled bank so in 28,000 here the total cash and 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 equivalence are we making any note yeah cash and cash equivalence 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 ALS yes sir so means total bank balance is how much sir 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 tck all expense T income minus expense only is profit so calculate tax at 30% 546 30% is how much 16380 correct so what will be profit for the period or profit after tax for tax 163.5 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 382 point2 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 added check note number two reserves in Surplus current year profit have they added current year profit 382.05 all the reserves and surplus has been ticked off so total reserves and surplus is how much 87.2 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 trade receivable is how much 1 lakh or 120 that is in thousands so total tradeable is 120 in that they are saying 50 we we want it 10 thousands 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 debars also you need to give the same disclosure how much debt is outstanding for more than 6 months and other debt 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 here 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 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 it yes first you always present balance sheet in page number one present pendl 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 pendl 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 pendl 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 Andel note will start from note number six then you start PN note number is that okay prepare in this format because usually if you just check company act no part one of company's Act deals with balance sheet part two of schedule three of companies that deals with pnl hence first you'll always have to present balance sheet then you have to present P 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 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 in 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 callaras 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 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 disclosure 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 divid divid sir if any dividend simple thumb roll 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 1st April 2024 to 31st March 2025 this is our current year all right so uh dividend will be declared in agms 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 1st 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 been declared that is good enough that's what I've written over here dividend declared after the balance sheet will not be accounted but only disclosed in not to accounts 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 there 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 Monitor not monitary 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 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 company's 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 inventory 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 some dears so suppose you purchase the goods on 1st April 2023 and you paid 10 lakh Rupees to credit because it's a cash purchase you purchase the goods on first April suppose you sold the goods on 1st July 2024 to your dats on your datar will you make a cash sale or a credit sale usually you'll make a credit sale let's say credit term is 2 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 1 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 a 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'll 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 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 1st January 2025 1st 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'll 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 is if you are expecting that you will receive the payment within 31st March 2025 then the 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 assets 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 know 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 cut off 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 data 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 hence consume also is is used in the definition okay anything which is realized or consumed with an operating cycle is a current assets if it is going beyond means 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 it's fine I discussed you in regular class now I'll not bother too much about it another 5 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 stepwise 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 stepwise marking it's not that balance sheet tallies 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 6 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 Ballance sheet there's 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 five years is that okay loan cut term is five 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 two lakh of principal has to be repaid within 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 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 all 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 2 lakh no sir we call it as current majorities of long-term debt they will give this adjustment in the question current mat maties of long-term 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 settle within 12 months means this 2 lakh you have to show it as what in balance sheet current liability balance 8 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 matori 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 pnl 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 sir 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 Del 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 lakh rupees shortage you know one 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 these 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 pendl 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 planning to declare no should not exceed the the dividend for the last 3 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 on 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 a pass condition pass 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 3 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 up 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 the 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 and 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 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 UN audited for our condition say 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 about last year audited yes auditing is over that means this General Reser 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 una audited 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 General Reserve 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 shares 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 157500 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 lakh profit 157 500 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 and 10% 10% will be applied on what paid up equity share Capital what do 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 lakh 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 is 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 over 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 up cap paid up Capital paid up Capital here it constitutes both equity and preference share so add all this paid up equity share Capital you add preference share Capital you add General Reserve also you add okay sir these two are audited or 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 up how much huh2 1 CR 22 lakh 1 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 25,000 am I withdrawing 12 l25 or just 657 I'm planning to withdraw only 657 so condition is passed or failed condition condition number two is also passed 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 how much you're planning to withdraw 657 500 after you withdraw General Reserve balance will reduce so what is the reduce balance from 20 LH if you withdraw 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 two how much you're going to get 97 lakh 50,000 97 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 62500 after my withdrawal how much balance I am remaining 18 lakh is it coming below 14 lak 60 to 500 or much higher than that much higher so that means is condition failed or passed up condition number three is also passed if all the three conditions are satisfied Can Company utilize General Reserve yes final conclusion is yes company can utilize General Reserve to declare there dividend this is another kind of problem that usually gets asked from this particular topic okay okay so with this all the topics Marathon we have completed okay thank you now I tell a few things I'll not take too much of time then we'll wind up sir yeah thank you so much now sir as much as possible from my end I've done it okay initially the idea was to cover everything within 15 to 18 hours that was my Target but I have almost doubled it off because I thought let's do with problem also what the heck it's fine it may take one or two days it may be so that's the reason I've exceeded that so as much as possible from my end I've tried to pick the most questions or most repetitive question I picked it and those sort of adjustments which generally come also I've tried to cover it as a chartbook adjustment we have covered so maximum possible from my end I've done remaining is your efforts now it's time for you to buckle up okay next one month I think now I think we still have about one 28 days or one month roughly fully the focus only has to be on studies and studies and studies and nothing else okay don't give excuses uh like I can't study Beyond 5 hours I can't study Beyond 8 hours now it's not the time for excuses now it's time for you to execute okay everyone sir at some point in time of their life no you'll have to buckle up and do what is required okay excuses will not work in life okay if you keep giving excuses no you'll have to keep writing the attempts number of attempts will go on increases because nobody at the end of the time will care about your excuses because if you don't put in the efforts you'll not clear the examination and you'll have to write the exams once again so that means if is is exam an activity which you like to do it often no exam all is something which we want to write once and get away with it so please make sure that you give it all your best doesn't matter whether you have to study for 10 hours 12 hours 15 hours I don't know because I don't know where you are standing currently ideally this is a stage one month is a stage where if you have one month left for the examination this is a stage only for revision should have already studied the syllabus once ideal scenario I'm saying you should have already studied the syllabus once on your own not class coaching class is now I'm not talking about coaching class once you should have already studied the syllabus once in this one month May maximum you should focus on the revisions writing mock paper identifying small small mistakes that you're doing I told you know in exams lot of small small mistakes will happen instead of writing on the debit side writing it on the credit side instead of writing one lakh you may write 10,000 like this these mistakes you'll be able to identify only when you write the mock papers now it's ultimately the time for that but unfortunately I know that okay still whatever we say no matter how we tell there will be many students who will have a lot of preparation pending on the for the last minute so if unfortunately if you are in that category it's all right okay because yes I do know that it's not a correct place to be in my opinion okay this is the time for us to revise not to prepare okay but unfortunately if you think you you still your a lot of your preparation if it is spending no issues okay don't freak out yes one month is also possible many people have also cleared examination with just uh one month okay our one of our council member only had given a statement have you seen that in Twitter he told in 3 weeks I cleared examination something like that one of the council member only told okay it is possible many people have cleared but it is just that the amount of pressure will be on the little higher side so no matter what if we in that scenario now let's not stop giving excuses and give complete attention towards that so you figure out how many days you have and how much of syllabus is pending and accordingly you figure it out how many hours a day you need to study now it's for you to make that time table and more importantly not to make the timetable but also to execute it with Precision if you have made a plan to study for 12 hours minimum 12 hours compulsory 11 and a half hours it has to be for 12 hours or more in fact you should exceed your target it's is a time for you to exceed your expectation not to reduce it okay just one month buckle up okay put in your best because once you clear this examination after you you'll go for article ship and see a final you don't have to study for the next two years literally two years you'll be able to get a break so all you have to sacrifice is just a few months one month don't give excuses IPL G and all IPL and all will come every year okay okay so so let's not go into all that mode okay so plan and even if you feel some topics I not I don't have time to prepare it may be possible that within a particular chapter some Concepts you are not confident maybe you have not attended regular class or you have skipped it all together it is fine or if some topic itself you if you skipped that is also okay because then at the end of the day you don't have to get 100 on 100 to clear the examination passing marks is only 40 in individual aggregate level May 50 so have confidence because sometimes wasu can be on our site okay whatever you have studied can also come it has come sometimes whatever we have studied may not come but in sometimes whatever we've studied only can come so if you have studied only 10 topics and skipped three topics the three topics you may not get any questions or 10 from the 10 topics you may get very easy question and you may score 60 or 70 so don't worry about the things you have skipped now okay as much as possible try to cover them up okay but if you're watching these marathons in the last I don't know when you're watching right now still one week is one month is still pending suppose you watching this lectures on last week let's say you have only one week for exam in one week before exam can you learn everything new difficult so some you may have to skip it is fine some of you are skipping take a chance it's okay no problem believe in yourself but the main funa you need to keep in mind is so usually in the old syllabus the paper used to come for 120 marks in that 100 marks you used to answer and 20 marks was optional okay because every question was a 20 marker in our old syllabus I think now it's going to be a 14 marker paper is what I'm thinking let's see see one attempt is not passed so it'll be a little difficult for me to comment on that so what you need to do is okay go with a mindset that one or two question will be a bouncer one or two question will definitely be a bouncer doesn't matter how many rtps how many mtps how much of study material you do one or two question will definitely be a a new question because every attempt make that happens little less at C intermediate level lot higher at CA final level but you can we should expect one or two bounces on one or two tricky questions so the fun is what happens is normally in 15 minutes before only you get the papers so students will go through the paper in the first 15 minutes they'll say two questions I don't know this attempt go the don't come to that conclusion okay there will all Inca examination means it's one of the toughest exams in India you also have to keep in mind that Institute has a moral responsibility you know what that moral responsibility is to make sure that they test the students because why the reason once you qualify that CA examination you put your autograph Left Right Center on many audited financial statements on many financial statements you'll put your signature once the ca has certified sir millions of people will blindly trust they don't even know you just because they hear the term on CA has checked financial statements they'll blindly trust That's The credibility we as child accountants get in the market so Institute also wants to make sure that students are tested and enough only those students who are ready to put in that effort only ultimately qualify as a chatted accountant still you put in that efforts Institute will not make you pass that's the reason Institute main Moto is to make sure that everything has to be done with precession because one small mistakes the amount of weightage we have in the market is very huge one small mistake here and there can bring down the whole profession one small mistake in satam case disregarded a profession in a big way we had a black mark even now people talk about it ca is the culprit there one small we have we audit we audit thousands of companies one company May one auditor did a mistake and it brought the shame to entire fraternity so that is the reason Institute also wants to make sure that you guys are well prepared for it and the only way Institute can test you at your level is through examination so don't blame saying Institute gave a tricky paper they give a lengthy paper and all that stuff it is expected you not writing childish exam you're writing a one of the most reputable examine in country that's called CA okay it should have some credibility if every Tom Dick and Harry without putting efforts if he qualifies so will the course have value no so that means you need to put in that respective efforts doesn't matter who you are how smart you are it doesn't care okay you have to if you're ready to put that efforts you'll come out with flying flying colors otherwise go through the process again okay so so have that confidence in yourself it's all right if you skip few things so the way you can plan out here is if three to four questions like in 100 marks no sir in 100 marks you can think about it like 30 marks will be mostly tricky or lengthy or new you can go with this mentality if you go in this mentality when you see the new question paper it will not freak you out because you are already expecting what 30 marks a new question so remaining is how much sir 70 what you need to do is score heavily here in this 70 marks you should try to score 50 to 60 pinpoint precession you want it here no silly mistakes no doing unnecessary mistakes everything whatever is Paka try to answer these questions pakka and try to answer these questions first try to score maximum here in this new question even if you get four to five marks even if you just get four to five marks 60 here four or five year Aram say 605 that is what you need to plan for you need to plan and prepare for this you need to plan and prepare for this 70 marks you need to manage this you need to just manage this in exam so ultimately prepare well and write this 70 marks content with Precision initially and with great speed the writing speed has to be really good the ones you are able to tackle this once you know that in the 70 marks I've attempted it very nicely confidence level automatically will increase so some more you will be able to answer something in that 30 marks in that 30 marks if the confidence is Good from 4 to five marks you may get seven to eight marks also some extra thing May click because at the end of the day CA examination is about what sir Confidence Game if your confidence is high though some extra jugar will be able to think some new point will click some extra working note will come something will put and we may get extra one or to marks so that from 65 your marks will become 70 so that is where you need to prepare of okay so I ideally plan for this don't freak out by looking at this new question doesn't matter whether you are at intermediate level or final level new question will always come in your paper okay some new questions will always be there some tricky question will always be there paper could also be lenier okay so go without expectation and prepare well for this okay as much as possible keep your confidence high and keep your eating habits also very fine people I've seen at least here only now in Academy okay one or two students have told me I didn't write exam because I fell I had diarrhea I had fever that the last thing you want as a student missing out on exam because not because you are underprepared because your health is not good so take care of your health I know that many of your students are still staying in PG and all be careful about what you eat that is very very important because you don't want to fall sick and miss out the exam because of that okay so make your plan properly whatever that your whatever plan you have made stick to your plan every day even single day Target should not be missed in fact you should exceed it if you you should like you should always pat yourself every day I planned for 12 I executed 13 hours like that that that level of commitment is required from now onwards till the examination day and once the examination is over don't refer that paper don't evaluate that paper don't sit with the paper and say this I will get two marks this I will get three marks you know keep the paper aside prepare for the next examination okay after all the examination is there whatever evaluation you want to do you do it no problem because your evaluation and final evaluation May there will be a lot of difference I've seen many students who say I will only get 3540 ended up getting 5560 many students who say I'll get 70 get gets end up getting 30 old so your valuation and their standard is lot more different and you don't know what sort of creative mistakes you are done in exam because many thing as we have seen here only in a class I'll say one thing I'm writing something else because it happens because constantly we are thinking ahead so don't worry about evaluation that is not your job if you want to do it do it only after you have written all the examination do not Mis attempting your examination doesn't matter how your preparation is because once you have registered for the examination it is as whats an attempt even if you don't write it it's awarded as fail okay so no matter what don't give up go ahead have that guts to go and write the examination doesn't matter how your preparation is but try your best to cover as much as possible in this one month okay I'm pretty sure you will come out with flying colors all of us have cleared all of us have gone through that little pressure moment I know that examination last one or two months is definitely pressures okay we'll have a lot of pressure I do understand because you have social expectation you have family expectation too many things but it is okay because CA journey is like that it is not just you alone all of us also went through the same Journey have you not passed yes you believe that I passed yeah I means I also believe in you that you will also definitely each one of you will also definitely pass just that you need to believe in yourself don't worry about what your friend says what others think about you and that is irrelevant what you think about yourself is what matters you believe that you can you will definitely will you will definitely clear the examination okay so I want each and every one of you to write the attempt and I want to hear good news from you okay doesn't matter what the result is give your preparation wise give it your best at the end of the day efforts is what matter if you give your 100% in my books you are a winner because at the end of the day what matters is the your effort like here Marathon I gave it my best that's all I can do my best may be good enough for your exam or may not be good enough I don't know if same question comes I will get a lot of appreciations or whatever your thought came many people will say but if nothing comes means maybe deep they not they not comment but deep down they may be giving GES to me okay he taught something but nothing came but sir whatever possible best from my side I executed this is all best I could do like that your best you do so that at the end if you have given your best result will not be a problem because you know that whatever was possible from your end you have given it all so nothing more can be done so that's all M matters at the end of the day okay so I wish you all the very best take care write the exam and more importantly stay safe till the examination date all the examination date watch out for that okay okay so thank you so much for watching and I know that many of you are attending online so you've been continuously coming so it's not an easy job to attend online class for morning till evening so you been showing us a lot of support so thank you for that and I wish you all the very best again guys take care stay safe bye-bye