CA Final May 2026 Suggested Answers Paper 1 Financial Reporting

FOR CA FINAL EXAM PREPARATION

CA Final 2026
Suggested Answers ·
Paper 1 Financial
Reporting
EXAM YEAR TYPE SUBJECT

CA Final 2026 Suggested Answers Paper 1 Financial Reporting
DATE

May 2026

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 1 : FINANCIAL REPORTING
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Case Scenario - I

laandLtd.industrial
is a manufacturing company and engaged in the manufacturing ofa g
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Aakash
agrowth during last appliance
home products. The company has made considerable
few years as demand of its products has increased
substantially. Aakash Ltd. is a diversified group having manufacturing units in
different cities of India and other countries.
Following information is available in respect of Aakash Ltd. for the year ended on
31st March, 2026:
(1) Aakash Ltd. has two Cash Generating Units viz., CGU '1' and CGU "2" with
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the carrying value of ` 80 lakhs and ` 120 lakhs respectively. It has a
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corporate office building having carrying value of ` 40 lakhs which is not

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included in the carrying value of CGU '1' and CGU '2'. The recoverable

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amount, based on Value in use is ` 72 lakhs for CGU '1' and ` 152 lakhs for
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CGU '2'.
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(2) Aakash Ltd. is having a plot of land which is vacant and the use of this land
is not yet determined. The land is situated in the prime area of the city where
lot of commercial complexes are coming up without any legal restriction to
convert the land into commercial land. Aakash Ltd. has not yet thought of
constructing commercial complex on the land as it is not in its business
objectives. Aakash Ltd. has let out this land for the purpose of parking lot for

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the commercial complexes around. The company has classified this property

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(land) as investment property.
c o
. Aakash
c. o (3) Aakash m
eThe net assets
Ltd. acquired 90% stake in subsidiary Oil Ltd. a few years ago.
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em of Oil Ltd. are ` 1,500 lakhs and the NCI in Oil Ltd. isla` 200 lakhs. The
Ltd. now sells its entire investment in Oil Ltd. for ` 2,000 lakhs.

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cumulative exchange difference that has arisen aduring Aakash Ltd.'s
ag ownership are gains of ` 300 lakhs, resulting in Aakash Ltd.'s foreign currency
translation reserve in respect of Oil Ltd. having a credit balance of

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FINAL EXAMINATION: MAY 2026

` 270 lakhs, while the cumulative amount of exchange differences that have
been attributable to NCI is ` 30 lakhs.
(4) In the financial year 2022-2023, Aakash Ltd. obtained a term loan of
` 25 Crores from DXE Bank. In May 2025, the company availed a fresh loan
from BXE Bank to prepay the outstanding facility with DXE Bank. In this
process, Aakash Ltd. paid ` 5,00,000 to DXE Bank to extinguish the old
liability as prepayment charges. Additionally, it also paid 1% of the new loan
amount to BXE Bank as origination/processing fees.
(5) On 1st October, 2025 Aakash Ltd. subscribes 1,000 convertible preference
shares of Hawk Limited at ` 100 each.
• The preference shares are convertible in the ratio of 10: 1 i.e.10 equity
shares for each convertible preference share held.
• On a fully diluted basis, Aakash Ltd. is entitled to 25% stake in Hawk
Limited.
• The agreement stipulates that if Hawk Limited subsequently issues
equity shares at a price lower than ` 10 per share, the conversion ratio
will be adjusted to ensure Aakash Ltd. maintains a 25% stake in Hawk
Limited on a fully diluted basis.
On the basis of information provided in the above case scenario, you are required
to choose most appropriate answer to the below mentioned questions from 1 to 5.
1. What is the correct treatment of impairment loss?
(A) ` 20 lakhs for CGU '1' and ` 40 lakhs for CGU '2'
(B) ` 24 lakhs for CGU '2'
(C) Assets in CGU '1'` 4 lakhs: Corporate Office Building ` 20 lakhs
(D) Assets in CGU '1' ` 20 lakhs: Corporate Office Building ` 4 lakhs (2 Marks)
2. The CFO of Aakash Ltd. seeks your advice for the basis on which will the land
be fair valued under Ind AS 113?
(A) Quoted Price
(B) Cost Approach
(C) Highest and Best use
(D) Income Approach (2 Marks)
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3. What is the amount of Aakash Ltd.'s gain on disposal of its investment in
Oil Limited?

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(A) ` 970 lakhs

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(B) ` 1,770 lakhs
(C) `m
e` 770 lakhs
500 lakhs
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(D) (2 Marks)

a4. What will be the treatment of prepayment premium and processing fee of
new loan in the financial statements of Aakash Ltd. as per Ind AS 109?
(A) Both Prepayment premium and processing fee of new loan would be
considered as transaction cost in the nature of origination fees of the
new loan and will be included while calculating effective interest rate as
per Ind AS 109.

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(B) Prepayment premium shall be recognised as part of the gain or loss on

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extinguishment of the old loan and processing fee of new loan would be

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considered as transaction cost in the nature of origination fees of the

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new loan and will be included while calculating effective interest rate as
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per Ind AS 109.
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(C) Both Prepayment premium and processing fee of new loan would be
recognised as part of the gain or loss on extinguishment of the old loan
and required to be charged to the statement of profit and loss.
(D) Prepayment premium would be considered as transaction cost in the
nature of origination fees of the new loan and processing fees of new
loan would be charged to profit and loss account. (2 Marks)

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5. How will the convertible preference shares be classified in the financial

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statements of Hawk Limited?
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(C) Non-current Liability
(D) Financial Liability (2 Marks)

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FINAL EXAMINATION: MAY 2026

Case Scenario - II
Zest Ltd.is engaged in the manufacturing of Automobiles with its registered office
in Pune and is listed on BSE Limited. It also owns a chain of retail stores across
20 different locations in the cities of Pune and Kolhapur. Following are the brief
facts about the transactions entered into by Zest Ltd. for which accounting advice
is sought by the CFO from you:
Zest Ltd. has recently made various acquisitions and details of each of them are
as follows:
(1) Zest Ltd. acquired 45% stake in Sun Ltd. on 1st April, 2025 for ` 50,00,000.
This leads to Zest Ltd. having significant influence on Sun Ltd. Since the date
of acquisition till 31st March, 2026, Sun Ltd. has earned a profit of
` 16,00,000. Also, on 31st March, 2025, Sun Ltd. had revalued one of its
property resulting in increase in the value of property by ` 8,00,000 and
accounted for it in the revaluation reserve in the same financial year. Zest
Ltd. has a policy to value its investment in joint ventures and associates based
on equity method.
(2) Zest Ltd. acquired 40% shares in Large Ltd. on 1st April, 2025 for a
consideration of ` 65,50,000 and balance of retained earnings on the same
date was ` 52,40,000. It is the group's policy to re-measure its non-
controlling interests at fair value and provide for impairment loss, if any, in
the value of investment every year end. The retained earnings and issued
share capital of Large Ltd. on 31st March, 2026 are ` 76,00,000 and
` 40,00,000 respectively.
Large Ltd. have not issued any share capital since the acquisition of
shareholding by Zest Ltd. The fair value of the net assets of Large Ltd. was
the same as their carrying amounts at the date of acquisition. The
recoverable amount of net assets of Large Ltd. has been deemed to be
` 1,15,00,000 as on 31st March, 2026.
On 1st January, 2026, Zest Ltd. sold inventory costing ` 5,00,000 to Large Ltd.
for ` 15,00,000. The inventory was still unsold by Large Ltd. at
31st March, 2026. This inventory was sold by Large Ltd. to third party on
8th April, 2026.

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(3) On 1st April 2025, Zest Ltd. agreed with shareholder of Sour Ltd. to acquire
100% stake in Sour Ltd. for total consideration of ` 200 lakhs which includes
the following:
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(i) Zest Ltd. will reimburse shareholders of Sour Ltd. for the transaction cost
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of ` 4 lakhs.
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(ii) eTwo of the shareholders of Sour Ltd. will work as the general managers, la
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ag for a period of 2 years and for which quarterly salary of ` 40,000 is
provided to each of these individuals.
(iii) Further Sour Ltd. had filed a legal case against Zest Ltd. in the past, which
was not settled till the date of acquisition. Zest Ltd. agreed to settle the
same for ` 2,00,000.
On the basis of information provided in the above case scenario, you are required
to choose most appropriate answer to the below mentioned questions from 6 to 8.
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What is the carrying value of Zest Ltd.'s investment in Sun Ltd. (associate) in

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its books of accounts as on 31st March, 2026?
(A) ` 10,80,000
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(B) ` 23,75,000
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(C) ` 57,20,000
(D) ` 60,80,000 (2 Marks)
7. What will be the impairment loss from investment of Zest Ltd. in associate
Large Ltd. for the year ending 31stMarch, 2026?
(A) ` 46,00,000

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(B) ` 24,94,000
m (C) ` 28,94,000
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(D) ` 49,90,000

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8. Determine the amount of consideration for Business Combination for
acquiring Sour Ltd.
(A) ` 192.40 lakhs
(B) ` 187.60 lakhs

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FINAL EXAMINATION: MAY 2026

(C) ` 200 lakhs
(D) ` 194 lakhs (2 Marks)
Case Scenario - III
ABC Ltd. is a globally diversified business conglomerate with operations spanning
across various business sectors worldwide. The company adheres to Indian
Accounting Standards for maintaining its financial records and annually releases
its financial statements. As the finance team progresses towards finalizing the
financial statements for the fiscal year ending on 31st March, 2026, the team is
stuck up in the accounting of the following transactions:
On 1st June, 2025, ABC Ltd. decided to dispose of the business including current
and non-current assets of one of its divisions related to the Fertilizer business
which it had acquired several years ago. This disposal does not involve ABC Ltd.
withdrawing from a particular market sector. The carrying values on
1st June, 2025 of the assets to be disposed of were as follows:

Particulars ` in Million
Goodwill 20.0
Property, Plant and Equipment 40.0
Patents and trademarks 16.0
Inventories 30.0
Trade Receivables 20.0

None of the assets of the business had suffered impairment as at 1 st June, 2025.
At that date the inventories and trade receivables of the business were already
stated at no more than their recoverable amounts.
ABC Ltd. offered the business for sale at a price of 93 million, which was
considered to be reasonably achievable. ABC Ltd. estimated that the direct costs
of selling the business would be ` 10,00,000. These estimates have not changed
since 1st June, 2025 and ABC Ltd. estimates that the business will be sold by
31st March, 2026 at the latest.
On 30th April, 2026, the Company discovered that the closing inventory for
31st March, 2026 (the previous year) was overvalued by ` 10 Lakhs in its cement
business due to a calculation error. The financials of the company was approved
by competent authority on 15th April, 2026 for the financial year 2025-2026.

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ABC Ltd. enters into an arrangement with a Customer during the year, for
providing customized software. Based on its experience, ABC Ltd. determines that
writing the software will take approximately 200 Hours in total and charges
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` 300 per Man-hour. After incurring 100 hours of time, ABC Ltd. and the customer
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agreed to change in the specification of the Software and thereby increasing the
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estimated Man-hours by another 50 Hours to be charged at the rate of ` 200 per
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Man-hour by ABC Ltd.
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On lthe basis of information provided in the above case scenario, you are requireda
atogchoose most appropriate answer to the below mentioned questions from 9 to 12.
9. Compute the value of Fertilizer division's Goodwill at the date of classification
after re-measurement.
(A) ` 14.6 million
(B) ` 20 million
(C) ` Nil

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(D) ` 16 million
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10. Calculate the closing balance of Fertilizer division's asset - Property, Plant

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and Equipment at the period end.
(A) ` 42 million
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(B) ` 34.72 million
(C) ` 12 million
(D) ` 30 million (2 Marks)
11. How the Inventory valuation error discovered on 30th April, 2026 in respect
of the cement unit should be corrected?

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(A) Adjust the opening balance of retained earnings for the current year
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(April 1, 2026) and restate the comparative figures for the previous year.

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(B) Recognize the ` 10 Lakhs loss in the current year's Profit &

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ag (C) Treat it as a change in accounting estimate and adjust
profit.
(D) No adjustment is needed since the amount is from a previous year and
the books for that year are already closed. (2 Marks)

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FINAL EXAMINATION: MAY 2026

12. What amount of Cumulative Catch Up Adjustment is required to be done in
Revenue of ABC Ltd.?
(A) ` (2,000)
(B) ` (28,000)
(C) ` 30,000
(D) ` 70,000 (2 Marks)
13. Life line Limited has 10,00,000 Ordinary Shares of ` 1 each outstanding. The
company has also issued 2,000, 10% Convertible Bonds of ` 100 each. Each
bond is convertible into 20 Ordinary Shares on demand. For the current
period, Life line Ltd. reported a Profit after Tax of ` 23,25,000. The applicable
Income Tax rate is 25%. The average market price of the equity shares during
the period was ` 5 per share.
Based on Ind AS 33 Earnings Per Share, calculate the Diluted Earnings Per
Share for the period.
(A) ` 2.325
(B) ` 2.25
(C) ` 2.50
(D) ` 2.35 (2 Marks)
14. XYZ Ltd. is a first-time adopter of Ind AS. The company prepares its opening
Ind AS Balance Sheet as at 1st April, 2025. Under previous GAAP, the company
had recognized a provision for a lawsuit of ` 10 Lakhs as at 31st March, 2025
based on the best estimate available at that time. On 15th April, 2026 (before
the approval of financial statements), the lawsuit was settled for ` 15 Lakhs.
This information was not available on the transition. date. How should this
be reflected in the opening Ind AS Balance Sheet?
(A) Adjust the provision to ` 15 Lakhs in the opening Ind AS Balance Sheet.
(B) Keep the provision at ` 10 Lakhs in the opening Ind AS Balance Sheet.
(C) Adjust the difference of ` 5 Lakhs in Retained Earnings.
(D) Reverse the provision and recognize the actual liability of ` 15 Lakhs.
(2 Marks)

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15. Which of the following is not an example of circumstances that might make
a self-interest threat when a chartered accountant -

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(A) Does not have a motive and opportunity to manipulate price-sensitive
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information in order to gain financially.

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(B) Holds a direct or indirect financial interest in the employing organization
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decisions made by the accountant.

be directly affected by decisions made by the accountant.
(D) Holds, directly or indirectly, deferred bonus shares rights or share options
in the employing organization, the value of which might be affected by
decisions made by the accountant. (2 Marks)
Answer Key

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MCQ No. Correct Option
1. (D)
.
2. (C)
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3. (A)
4. (B)
5. (B) OR (D)
6. (C)
7. (B)
8. (B)
9. (C)
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10. (D)
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15. (A)

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FINAL EXAMINATION: MAY 2026

PART – II: Descriptive Questions
Question No.1 is compulsory. Candidates are required to answer any four
questions from the remaining five questions.
Working notes should form part of the answer.
Question 1
Panama Pharma Ltd. is a leading company engaged in the manufacturing of
generic medicines. The company decided to acquire Bio Gen Research Ltd., a
biotech firm specializing in viral vector technology to diversify its portfolio and
enter the high-growth vaccine segment.
To achieve this, Panama Pharma Ltd. initially acquired a 30% stake in Bio Gen
Research Ltd. for ` 15,00,000 on 1st July, 2025.
Subsequently, to gain control, Panama Pharma Ltd. acquired a further 40% stake
on 1st January, 2026 for ` 24,00,000. On the date of acquiring control
(1st January, 2026), the fair value of the previously held 30% equity interest was
determined to be ` 17,50,000.
The summarized Balance Sheets of both the companies as at 1st January, 2026
were as follows:

Note Bio Gen Panama
No. Research Ltd. Pharma Ltd.
` `
ASSETS:
Non-current Assets
Property, Plant and Equipment (Labs) 18,00,000 60,00,000
Financial Assets
Investments in Bio Gen Research - 39,00,000
Limited
Investments in bonds 10,00,000 -
Current Assets
Inventories 5,00,000 15,00,000
Financial Assets
Trade Receivables 4,00,000 8,50,000

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Cash and cash equivalent 2,00,000 12,50,000
Total 39,00,000 1,35,00,000
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EQUITY AND LIABILITIES:
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Equity

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5,000 Equity share capital (of face 5,00,000 50,00,000

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value of ` 100 each)

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Other Equity
a 24,00,000 60,00,000
Non-current Liabilities
Financial Liabilities
Long term Borrowings - 15,00,000
Current Liabilities
Financial Liabilities
Trade payables 10,00,000 10,00,000
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Total 39,00,000 1,35,00,000

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Additional Information:
(i)
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Bio Gen Research Ltd. has developed a proprietary vaccine formula known as

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'Vax-Shield'. This is a self-generated intangible asset and has not been
recognized in the books of Bio Gen Research Ltd. The fair value of 'Vax-Shield'
as at 1st January, 2026, is assessed at ` 8,50,000,
(ii) The Trade Receivables of Panama Pharma Ltd. include ` 1,00,000 due from
Bio Gen Research Ltd. for consultancy services provided in December 2025.
Bio Gen Research Ltd. has recorded this amount in its Trade Payables.
(iii) During the year, Panama Pharma Ltd. sold goods to Bio Gen Research Ltd.

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for ` 2,00,000. The cost of these goods to Panama Pharma Ltd. was
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` 1,50,000. As on 1st January, 2026, 40% of these goods remain in the

c. o (iv) The fair value of the assets of Bio Gen Research Ltd. as on 1seJanuary,
Inventory of Bio Gen Research Ltd.

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was as follows: g
a Fair Value (`)
ag Assets
Property, Plant and Equipment (Labs) 26,00,000
Investment in Bonds 11,50,000

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FINAL EXAMINATION: MAY 2026

(v) The NCI is to be measured at Fair Value. The Fair Value of NCI on the
acquisition date - 1st January, 2026 is ` 16,00,000.
You are required to:
(i) Pass necessary journal entries in the books of Panama Pharma Ltd. to
account for the business combination in accordance with Ind AS 103 as at
1st January, 2026,
(ii) Prepare the Consolidated Balance Sheet of Panama Pharma Ltd. and its
subsidiary as at 1st January, 2026, incorporating all necessary adjustments
for inter-company balances and unrealized profits. Also provide necessary
working notes. Ignore tax implications. (14 Marks)
Answer
(i) Journal entry as on 1st January 2026

Particulars Dr. (`) Cr. (`)

Property, Plant and Equipment Dr. 26,00,000

Intangible Assets Dr. 8,50,000

Investments in bonds Dr. 11,50,000

Inventories Dr. 5,00,000

Trade Receivables Dr. 4,00,000

Cash and Cash Equivalents Dr. 2,00,000

Goodwill (Balancing Figure) Dr. 10,50,000

To Trade Payables 10,00,000

To Purchase consideration 41,50,000

To Non-controlling Interest 16,00,000

(Being assets and liabilities acquired at fair
value and goodwill computed on acquisition of
assets and liabilities)

Trade Payables A/c Dr. 1,00,000

To Trade Receivables 1,00,000

(Being mutual transaction adjusted)

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Investment in subsidiary Bio Gen Research Ltd Dr. 2,50,000
To Retained Earnings (Fair value gain on 30% 2,50,000
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stake of Bio Gen Research Ltd.)

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(Being gain

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recognised)
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Other Dr. 20,000
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a (Being elimination of unrealised profit on 20,000

inventories acquired)

(ii) Consolidated Balance Sheet of Panama Pharma Ltd.
and its subsidiary, Bio Gen Research Ltd. as at 1st January 2026

Note
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Particulars
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No.

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I. Assets
(1) Non-Current Assets se

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(i) Property Plant
(ii) Goodwill (W.N.3)
1 86,00,000
10,50,000
(iii) Intangible Asset (Vax-Shield) 1 8,50,000
(iv) Financial Asset
(a) Investment in Bonds 1 11,50,000
(2) Current Assets

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(i) Inventories 1 19,80,000
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se 11,50,000
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a Total Assets 1,62,30,000

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FINAL EXAMINATION: MAY 2026

II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 50,00,000
(ii) Other Equity (W.N.4) 62,30,000
(2) Non-Controlling Interest 16,00,000
(3) Non-Current Liabilities
(i) Financial Liabilities
(a) Borrowings 1 15,00,000
(4) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 1 19,00,000
Total Equity & Liabilities 1,62,30,000

Notes to Accounts
1. Assets and Liabilities `

Panama Bio Gen
Particulars Pharma Research Adjustment Total
Ltd. Ltd.
Property, Plant and 60,00,000 18,00,000 8,00,000 86,00,000
Equipment
Intangible Assets (Vax- - - 8,50,000 8,50,000
Shield)
Investments in Bonds - 10,00,000 1,50,000 11,50,000
Inventories 15,00,000 5,00,000 (20,000) 19,80,000
Trade Receivables 8,50,000 4,00,000 (1,00,000) 11,50,000
Cash and Cash 12,50,000 2,00,000 - 14,50,000
Equivalents
Borrowings 15,00,000 - - 15,00,000
Trade Payables 10,00,000 10,00,000 (1,00,000) 19,00,000

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Working Notes:
1. Calculation of purchase consideration at the acquisition date
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i.e. 1st January 2026

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eFair value of 30% stake acquired in Bio Gen Research Ltd. 17,50,000 g l a
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Fair value of 40% stake acquired in Bio Gen Research Ltd. 24,00,000

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a 41,50,000

2. Calculation of fair value of net identifiable assets at the acquisition
date i.e. 1st January 2026
`
Property, Plant and Equipment 26,00,000

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Intangible Assets 8,50,000
Investments in Bonds
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Inventories 5,00,000
Trade Receivables
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Cash and Cash Equivalents 2,00,000
Fair value of Total Assets 57,00,000
Less: Trade Payables (10,00,000)
Fair value of Net Identifiable Assets 47,00,000

3. Calculation of Goodwill at the acquisition date - 1st January, 2026

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Purchase consideration (W.N.1)
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41,50,000

c. o Non-controlling Interest at fair value
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se 57,50,000
16,00,000

s em g la
gla Less: Fair value of Net Identifiable Assets (W.N.2)
a (47,00,000)

a Goodwill 10,50,000

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

4. Consolidated Retained Earnings as on 1st January 2026

`
Panama Pharma Ltd. 60,00,000
Add: Gain on fair valuation of previously held 30%
stake (17,50,000 – 15,00,000) 2,50,000
Less: Unrealised gain on sale of inventory [(1,50,000-
1,00,000) x 40%] (20,000)
Retained Earnings as on 1st January, 2026 62,30,000

Question 2
(a) Power-tech Limited issued 50,000, 5-year, 6% convertible debentures on
1st April, 2023. The debentures have a face value of ` 100 each.
The terms of the debentures are as follows:
(i) Total Face Value: ` 50,00,000
(ii) Coupon Rate is 6% per annum which is payable annually on 31st March.
(iii) Conversion Option: At the maturity date (31st March, 2028), the
debenture holder has the option to convert the debentures into 10 equity
shares of Power-tech Limited per debenture.
(iv) Prepayment Option (Put Option): The debenture holder has the right to
demand early repayment of the debentures at the end of the third year
(i.e., on 31st March, 2026). The prepayment amount will be at a premium
of 5% on the face value.
(v) Market Interest Rate: The effective market interest rate for a similar non-
convertible debenture is 10% per annum.
Required:
(i) Analyse the nature of instrument and determine whether it contains a
liability and an equity component as per Ind AS 32.
(ii) Compute the value of the liability component and the equity component
on the date of issue (1st April, 2023) and pass necessary journal entry to
record the issue of the debentures.

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(iii) Assume the debenture holders exercise the prepayment option on
31st March, 2026. Pass the necessary journal entry to record the
de-recognition of the financial liability and the treatment of the equity
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component. Show your workings for any gain or loss.
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(Present value of an annuity of ` 1 for three years @ 10% is 2.4869 and
s em
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present value of ` 1 for 3 years @ 10% is 0.7513) (10 Marks)

l a ag
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(b) Chill-Zone Ltd. is a listed entity manufacturing Air conditioners. The
company prepares its financial statements on a quarterly basis. Mr. Das, the
new Accounts Manager, is finalizing the quarterly Interim Financial Reports
for the year 2025-2026.
During the year, the following three independent issues have arisen:
(i) Due to the summer season, the company earned ` 800 Lakhs in revenue
in Quarter 1 (Apr-June), which constitutes 80% of its total expected
annual revenue. The remaining ` 200 Lakhs turnover is expected evenly

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over the next three quarters. To show a consistent performance trend to

.
investors, the CFO of the company wants to recognize revenue of only

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` 250 Lakhs in Q1 and defer the balance to Q2, Q3, and Q4.

l a s
(ii) The company expects a total pre-tax profit of ` 1 Crore for the full year.

agProfit: ` 40 Lakhs.
• Quarter 1 Actual
• Tax Slab: The tax rate is 25% on the first ` 50 Lakhs of annual profit
and 40% on profit exceeding ` 50 Lakhs.
• Mr. Das has calculated the Quarter 1 tax expense as ` 10 Lakhs,
treating Quarter 1 as a standalone period.
(iii) Change in Estimate (The "Restatement" Error): In Quarter 1, the company

m
estimated a warranty provision at 2% of sales. However, in Quarter 3,

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due to a defect in a batch of compressors, the warranty estimate was
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revised to 5% for the entire year's sales. Mr. Das intends to restate the

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financial statements of Quarter 1 and Quarter 2 to reflect this higher 5%
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rate, believing that the earlier reports are now "incorrect."
Required: As the Statutory Auditor, evaluate each of a
ag the proposals made by
Mr. Das. Advise the correct accounting treatment for each issue in the Interim
Financial Reports as per Ind AS 34. (4 Marks)

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

Answer
(a) (i) Nature of instrument
As per Ind AS 32, a financial instrument is classified as a compound
financial instrument when it contains both a financial liability
component and an equity component.
In the given case, the convertible debentures contain:
(a) Liability component: The company has a contractual obligation
to pay annual coupon interest @ 6% and repay debenture amount
(with 5% premium if put option is exercised). Hence, it contains a
financial liability.
(b) Equity component: The debenture holder has an option to
convert each debenture into 10 equity shares. Since this is a fixed
number of shares for a fixed amount, it satisfies the fixed-for-fixed
criterion. Hence, it contains an equity component.
Thus, the instrument is a compound financial instrument.
(ii) Value of liability and equity component on initial recognition:
Since debenture holders can exercise put option after 3 years, liability
and equity component should be measured considering cash flows up
to 31st March, 2026 `
Present value of interest payments (50,000 7,46,070
debentures x ` 100 x 6% x 2.4869)
Present value of redemption amount including 5%
premium (` 50,00,000 x 105% x 0.7513) 39,44,325
Present value of liability component 46,90,395
Equity component (balancing figure) 3,09,605
Total proceeds 50,00,000

Journal Entry on 1st April, 2023

Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 50,00,000
To Debentures A/c (financial liability component) 46,90,395
To Debentures A/c (equity component) 3,09,605
(Being issue of 50,000 convertible debentures recorded)

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(iii) Derecognition on exercise of Put Option (31st March, 2026)
Year Opening Finance cost Interest @ 6% Closing
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ended on balance @ 10% balance

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31st March

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a b = a x 10% c = 50,00,000 d = a+b-c

s e 2024 x 6%
g l a
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46,90,395 4,69,040 3,00,000 48,59,435
2025 48,59,435 4,85,944 3,00,000 50,45,379
2026 50,45,379 5,04,621* 3,00,000 52,50,000

The difference of ` 83 (5,04,621-5,04,538) is due to rounding off.
Treatment of Equity Component
As per Ind AS 32, equity component is not reclassified to profit or loss.
It is transferred within equity (generally to retained earnings).

o m
Journal Entry on 31st March, 2026

Particulars .
c
m
e component) Dr. 52,50,000
Dr. (`) Cr. (`)

l a s
Debentures A/c (financial liability
Debentures A/c (equitygcomponent)
To Bank A/c
a Dr. 3,09,605
52,50,000
To Retained Earnings (General Reserve) A/c 3,09,605
(Being debentures redeemed on exercise of put
option and equity component transferred within
equity)

(b) (i) Recognition of Seasonal Revenue
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As per Ind AS 34, revenues in interim periods should be recognized

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when they are earned. The standard does not permit anticipation or

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deferral of revenues unless such treatment is appropriate at the year-
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end under applicable Ind AS. Further, seasonal revenues should not be
a
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smoothed over interim periods. Hence, the proposal of CFO to

a recognize only ` 250 lakhs in Quarter 1 and defer the balance revenue
to subsequent quarters to show a consistent performance trend to
investors is not in accordance with Ind AS 34.

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

The company should recognize the entire revenue of ₹ 800 lakhs in
Quarter 1.
(ii) Computation of Income Tax Expense
Mr. Das has computed tax expense for Quarter 1 as ` 10 lakhs by
applying 25% on Quarter 1 profit, treating it as a standalone period.
As per Ind AS 34, income tax expense for an interim period should be
calculated using the estimated average annual effective tax rate
applied to the year-to-date profit.
Computation of AETR:
Estimated annual profit = ₹ 100 lakhs

Tax on first ` 50 lakhs @ 25% ` 12.5 lakhs
Tax on next ` 50 lakhs @ 40% ` 20 lakhs
Total tax = ` 32.5 lakhs

Average tax rate = [(` 32.5 lakhs / ` 100 lakhs) x 100] = 32.5%
Tax Expense for Quarter 1:
Profit of Quarter 1 = ` 40 lakhs
Tax = ` 40 lakhs × 32.5% = ` 13 lakhs
Based on the above computation, it is concluded that calculation of
tax expense, by the Accounts Manager, Mr. Das, of ` 10 lakhs for
Quarter 1 is incorrect. The company should recognize ` 13 lakhs as
tax expense in Quarter 1.
(iii) Change in Estimate (The “Restatement” Error)
As per Ind AS 34 read with Ind AS 8, a change in estimate is not an
error and should be accounted for prospectively. Interim financial
reports are based on estimates available at the reporting date and
revision of estimates does not render earlier reports to be incorrect.
Hence, restatement of financial statements of Quarter 1 and Quarter 2
is not permitted.
Accordingly, the revised estimate of 5% should be applied
prospectively from Quarter 3 onwards and recognise the catch-up
(difference between 5% and 2% already booked) as an expense in

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Quarter 3 itself. The impact of the change should be recognized in
Quarter 3 and future periods, along with appropriate disclosure if
material.
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Question 3

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(a) Electro Drive Ltd. is a manufacturer of specialized electric buses. The
e l a s
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company sells these buses to transport agencies and also offers them on
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lease. On 1st April, 2022, Electro Drive Ltd. entered into a finance lease
agreement with City Transport Corp. for a new model of electric bus.
The details of the arrangement are as follows:
(i) Lease Term is 4 years commencing on 1st April, 2022.
(ii) Annual Lease Rental is ` 18,06,560 payable annually in arrears on
31st March each year.
(iii) The bus cost Electro Drive Ltd. ` 45,00,000 to manufacture.

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(iv) The fair value of the bus at the commencement of the lease is
` 60,00,000.

e m to have a residual value of ` 4,00,000
s
a This residual value is unguaranteed by the
(v) Residual Value: The bus is expected
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at the end of the lease term.
lessee.
a
(vi) Electro Drive Ltd. incurred legal and documentation charges of ` 25,000
to negotiate and arrange the lease.
(vii) The interest rate implicit in the lease is 10%.
(viii)Present value factors at 10% for:

Year 1 0.909

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Year 2 0.826
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Year 3 0.751

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Year 4 0.683
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(ix) The present value of annuity of ` 1 for 4 years @ 10% is 3.170

a You are required to account for this transaction in the books of Electro Drive Ltd.
(Lessor) by calculating the Revenue, Cost of Sales and Selling Profit. Also,

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

provide the Lease Amortization Schedule for the entire lease period assuming
that the lessor classifies the lease as a finance lease. (10 Marks)
(b) PQR Ltd. has identified 4 Operating Segments for which revenue data is given
below:

External Sales Internal Sales Total
(` ) (` ) (` )
Segment L 52,00,000 3,00,000 55,00,000
Segment M 4,00,000 9,00,000 13,00,000
Segment N 17,00,000 2,00,000 19,00,000
Segment O 9,00,000 96,00,000 1,05,00,000
Total Sales 82,00,000 1,10,00,000 1,92,00,000

Additional Information:
Segment N is a new business unit and Management expects this segment to
make a significant contribution to External Revenue in coming years.
You are required to identify reportable segments under Ind AS 108.
(4 Marks)
Answer
(a) (i) Cost of sales = Cost to the lessor + Initial direct costs - Present value
of the unguaranteed residual value
= ` 45,00,000 + ` 25,000 - ` 2,73,200 (i.e. ` 4,00,000 x 0.683)
= ` 42,51,800.
(ii) Revenue = Lower of
(a) Fair Value of assets i.e. ` 60,00,000; and
(b) Present value of the lease payments receivable
= 18,06,560 x 3.170 = ` 57,26,795 say ` 57,26,800
Revenue = ` 57,26,800
(iii) Selling Profit = Revenue - Cost of sale = ` 57,26,800 – ` 42,51,800
= ` 14,75,000

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SUGGESTED ANSWERS FINANCIAL REPORTING

(iv) Net Investment in lease = Present value of the lease payments
receivable + Present value of the unguaranteed residual value
` 57,26,800 + ` 2,73,200 = 60,00,000
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(v) Amortisation Schedule

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Year Lease Lease Interest Decrease In Lease
l a s
l a s receivable at payments Income lease receivable at
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the beginning (10% per receivable the end of
of year annum) year
(`) (`) (`) (`) (`)
(a) (b) (c) (d)=(b)-(c) (e)=(a)-(d)

1 60,00,000 18,06,560 6,00,000 12,06,560 47,93,440

2 47,93,440 18,06,560 4,79,344 13,27,216 34,66,224

3 34,66,224 18,06,560 3,46,622 14,59,938 20,06,286

c om
4 20,06,286 18,06,560 2,00,274* 16,06,286 4,00,000

.
em in the books of Electro Drive Ltd.
*Difference of ` 355 (` 2,00,629- ` 2,00,274) is due to approximation.

la s
(v) Accounting of lease transactions
(lessor)
a g
Year ` `
1.4.2022 Lease receivable A/c Dr. 60,00,000
Cost of sales A/c Dr. 42,51,800
To Inventory A/c 45,00,000
To Revenue A/c 57,26,800
To Creditors/Cash A/c
m 25,000

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(Recording of lease transaction

em
s
at the inception)

s em 31.3.2023 Cash/Bank Dr.
g la 12,06,560
18,06,560

gla To Lease receivable a
a To Interest income 6,00,000
(Being interest income accrued
at the end of the year)

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FINAL EXAMINATION: MAY 2026

31.3.2024 Cash/Bank Dr. 18,06,560
To Lease receivable 13,27,216
To Interest income 4,79,344
(Being interest income accrued
at the end of the year)
31.3.2025 Cash/Bank Dr. 18,06,560
To Lease receivable 14,59,938
To Interest income 3,46,622
(Being interest income accrued
at the end of the year)
31.3.2026 Cash/Bank Dr. 18,06,560
To Lease receivable 16,06,286
To Interest income 2,00,274
(Being interest income accrued
at the end of the year)
31.3.2026 Inventory Dr. 4,00,000
To Lease receivable 4,00,000
(On return of leased electric
bus by the lessee)

(b) Threshold amount is ` 19,20,000 (` 1,92,00,000 × 10%).
Segment L exceeds the quantitative threshold (` 55,00,000 > ` 19,20,000)
and hence reportable segment.
Segment O exceeds the quantitative threshold (` 1,05,00,000 > ` 19,20,000)
and hence reportable segment.

Segment M & N do not meet the quantitative threshold amount and may
not be classified as reportable segment.
However, the total external revenue generated by these two segments L &
O represent only 74.39% [(` 61,00,000 / ` 82,00,000) x 100] of the entity’s
total external revenue. If the total external revenue reported by operating
segments constitutes less than 75% of the entity total revenue, additional
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operating segments should be identified as reportable segments until at
least 75% of the revenue is included in reportable segments.

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In case of PQR Ltd., it is given that Segment N is a new business unit and
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management expect this segment to make a significant contribution to

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external revenue in coming years. In accordance with the requirement of

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Ind AS 108, PQR Ltd. designates this start-up segment N as a reportable
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segment, making the total external revenue attributable to reportable
segments 95.12% [(` 78,00,000/ 82,00,000) x 100] of total entity revenues.

In this situation, Segments L, N and O will be reportable segments and
Segment M will be shown as other segment.
Alternatively, Segment M can be considered as a reportable segment as
well as it meets the definition of operating segment. If Segment M is
considered as reportable segment:

o m
c
External revenue reported = ` 52,00,000 + ` 4,00,000 + ` 9,00,000

m .
e` 65,00,000 / ` 82,00,000 = 79.27%
= ` 65,00,000

l a
% of Total External Revenue = s
Accordingly, Segments aL,g M and O will be reportable segments and
Segment N will be shown as other segment.
Question 4
(a) Saurabh Engineering Ltd. provides the retirement benefit facility to its
employees and prepares its financial statements every year on 31 st March
based on Ind AS. Following information is available in respect of its
employees benefit facility: (` in lakhs)

o m
m
31.3.2024 31.3.2025
c
. 310
31.3.2026

c. o Current service cost 250
s
280
em
s em Benefits paid 260
l a
300
g 180
340

gla Contributions paid 160
a 2,826 200

a Present value of the obligation at
31st March
2,430 3,200

Fair value of plan assets at 31st March 2,294 2,274 2,400

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FINAL EXAMINATION: MAY 2026

Discount rate at the start of the year 11% 10% 9%
Expected return on plan assets 13% 12% 11%

The present value of the obligation and the fair value of the plan assets were
both ` 2,000 lakhs at 1st April, 2023 and there were no actuarial gains or
losses at this date. The average remaining lives of the employees was
estimated to be 15 years.
In respect of each of the three years, you are required to:
(i) Calculate the actuarial gain/loss arising in each of the period.
(ii) Calculate how the gain or loss should be recognised and in which period.
(iii) Calculate the liability to be included in Balance Sheet at each year end.
(iv) Explain the composition of amount recognised in profit and loss.
(6 Marks)
(b) How will you recognize and present the grants received from the Government
in the following cases as per Ind AS 20?
(i) A Ltd. received an amount of ` 40 lakh for immediate start-up of a
business without any condition.
(ii) Government gives a grant of ` 30 lakh to B Limited for research and
development of medicine for lung cancer, even though similar medicines
are available in the market but are expensive. The company is to ensure
by developing a manufacturing process over a period of two years so
that the cost comes down at least to 50%.
(iii) C Ltd. received one acre of land free of cost to set-up a plant in backward
area (fair value of land is ` 15 lakh and acquired value by Government
is ` 5 Lakhs).
(iv) D Ltd. received an amount of loan for setting up a plant at concessional
rate of interest from the Government.
(v) E Ltd. received ` 20 lakh of grant for purchase of machinery costing
` 90 lakh. Useful life of machinery is 10 years. Depreciation on this
machinery is to be charged on straight line basis. (8 Marks)

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Answer
(a) (i) Calculation of Actuarial Gain / (Loss)
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A. Actuarial Gain / (Loss) on Defined Benefit Obligation (` in lakhs)

c.Particulars em
s
2023-2024 2024-2025 2025-2026

em Opening obligation l a
s
2,000 2,430 2,826

l a a g
ag
Add: Interest cost 220 243 254.34
Add: Current service cost 250 280 310
Less: Benefits paid (260) (300) (340)
Expected closing obligation 2,210 2,653 3,050.34
Actual closing obligation (2,430) (2,826) (3,200)
Actuarial (loss) (220) (173) (149.66)

B. Actuarial Gain / (Loss) on Plan Assets (` in lakhs)
Particulars
m
o2,000.00 2,294.00 2,274.00
2023-2024 2024-2025 2025-2026

. c
m 260.00
Opening plan assets
Add: Expected return
Add: Contributions a
s e 275.28 250.14

g l 160.00 180.00 200.00

a
Less: Benefits paid (260.00) (300.00) (340.00)
Expected closing assets 2,160.00 2,449.28 2,384.14
Actual closing assets 2,294.00 (2,274.00) 2,400.00
Actuarial gain/(loss) 134.00 (175.28) 15.86

C. Net Actuarial Gain / (Loss)

Year Actuarial Gain / Actuarial Gain Amount

m
c. o
(Loss) on Defined / (Loss) on (` in lakhs)

m
c. o
Benefit Obligation Plan Assets

m(86) Loss
em se(348.28) Loss
2023-2024 (220) 134.00

s 2024-2025 (173) (175.28)
g l a
gla 2025-2026 (149.66) 15.86a (133.80) Loss
a

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FINAL EXAMINATION: MAY 2026

(ii) Treatment of Actuarial Gain / Loss
As per Ind AS 19 ‘Employee Benefits’, actuarial gain/loss
(remeasurements) shall be recognised immediately in Other
Comprehensive Income (OCI).
(iii) Amount of Liability to be recognised in Balance Sheet (` in lakhs)

Particulars 31.3.2024 31.3.2025 31.3.2026
Present value of obligation 2,430 2,826 3,200
Less: Fair value of plan assets (2,294) (2,274) (2,400)
Net defined benefit liability 136 552 800

(iv) Amount recognised in Statement of Profit and Loss
1. Current Service Cost represents the increase in present value of
the defined benefit obligation resulting from employee service in
the current period. It is charged to Profit and Loss in the year in
which the service is rendered.
2. Net Interest Cost on Net Defined Benefit Liability / Asset- This
is the net financing cost which is calculated as difference of interest
cost on defined benefit obligation and interest income on plan
assets, computed using the discount rate at the beginning of the
period.
Extract of Statement of Profit and loss and OCI (` in lakhs)
Particulars 2023-2024 2024-2025 2025-2026
Current service cost 250 280 310
Interest cost on obligation 220 243 254.34
Less: Interest income on plan
assets (260) (275.28) (250.14)
Net amount recognised in P&L 210 247.72 314.20
Other Comprehensive Income
Net Actuarial Gain / (Loss) (86) (348.28) (133.80)

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(b) Entities should recognise the grants in the following manner:
` 40 lakhs have been received for immediate start-up of business. This
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should be recognised in Statement of Profit and Loss immediately as
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there are no further conditions attached to the grant.

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•
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` 30 lakhs should be recognised in profit or loss on a systematic basis
l a s
l a s over the two-year period, in which the entity recognises as expense the
ag
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related costs for which the grants are intended to compensate,
provided that there is reasonable assurance that B Ltd. will comply with
the conditions attached to the grant.
• Land should be recognised at fair value of ` 15 lakhs and government
grant should be presented in the balance sheet by setting up the grant
as deferred income.
Alternatively, deduct the amount of grant from the cost of the asset.
In the given case, since the land is granted at no cost, it will be

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presented in the books at nominal value.

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• The benefits of a government loan at a below market rate of interest is

s
treated as a government grant. The loan shall be recognized and

l a
measured in accordance with Ind AS 109 “Financial Instruments”. The
g
a
benefit of the below market rate of interest shall be measured as the
difference between the initial carrying value of the loan determined in
accordance with Ind AS 109 and the proceeds received. The benefit is
accounted for in accordance with Ind AS 20. As per Ind AS 109, the
loan should be initially measured at its fair value. The entity should
recognise in profit or loss on a systematic basis over the periods in
which the entity recognise as expense the related costs for which the
grant is intended to compensate.

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` 20 lakhs should be recognised as deferred income and will be
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c. o m
transferred to profit and loss over the useful life of the asset. In this

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case, ` 2 lakhs [` 20 lakhs / 10 years] should be credited to profit and

s
loss each year over a period of 10 years.
g l a
gla a cost of the asset and
Alternatively, ` 20 lakhs will be deducted from the
a depreciation will be charged at reduced amount of ` 7 lakhs [(` 90
lakhs – ` 20 lakhs)/10 every year].

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FINAL EXAMINATION: MAY 2026

Question 5
(a) PQR Ltd. enters into a contract with a customer on 1st April, 2023 for the sale
of a machine and spare parts. The manufacturing lead time for the machine
and spare parts is 3 years.
On completion of manufacturing, PQR Ltd. demonstrates that the machine
and spare parts meet the specifications agreed in the contract. The promises
to transfer the machine and spare parts to the buyer are distinct and result
in two performance obligations each of which will be satisfied at a point in
time.
On 31st March 2026, the customer pays for the machine and spare parts, but
only takes the physical possession of the machine. Although the customer
inspects and accepts the spare parts, the customer requests that the spare
parts be stored at PQR Ltd.'s warehouse because of its close proximity to the
customer's factory.
The customer has legal title to the spare parts and the parts can be identified
as belonging to the customer. PQR Ltd. stores the spare parts in a separate
section of its warehouse and the parts are ready for immediate shipment at
the customer's request. PQR Ltd. expects to hold the spare parts for one to
three years and does not have the authority to use the spare parts or direct
them to another customer.
Determine how the revenue will be recognized by PQR Ltd. for the different
performance obligations as per Ind AS 115? (5 Marks)
(b) On 1st April, 2022, Gama Ltd. issued 1,00,000, 8% convertible, debentures of
face value of ` 100 per debenture at par. The debentures are redeemable at
a premium of 10% on 31st March, 2026 or these may be converted into
ordinary shares at the option of the holder. The interest rate for equivalent
debentures without conversion rights would have been 14%. The date of
transition to Ind AS is 1st April, 2024.
You are required to suggest how Gama Ltd. should account for this compound
financial instrument on the date of transition?
The present value of ` 1 receivable at the end of each year based on discount
rates of 8% and 14% can be taken as

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End of Year 8% 14%
1 0.9259 0.8772
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2 0.8573 0.7695

c. o 34 0.7938 0.6750
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0.7350 0.5921

l a (5 Marks)ag
a(c)g List and explain the enhancing qualitative characteristics of financial
information according to the Ind AS. (4 Marks)
OR
(c) As a general principle, the entities should use the same measurement basis
for initial recognition and subsequent measurement of an asset or a liability
which creates two possible scenarios of 'at-market' transaction and

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'off-market' transactions. Explain both scenarios of initial measurement of an

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asset or a liability. (4 Marks)

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Answer

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(a) PQR Ltd. has made sale of two goods – machine and spare parts, whose

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control is transferred at a point in time. Additionally, company agrees to
hold the spare parts for the customer for a period of one to three years,
which is a separate performance obligation. Therefore, total transaction
price shall be divided amongst three performance obligations –
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
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Recognition of revenue for each of the three performance obligations shall

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occur as follows:
(i) Sale of machinery: Machine has been sold to these
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customer and

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31 March 2026. Accordingly, revenue for saleaof machinery shall be
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recognized on 31st March 2026.
(ii) Sale of spare parts: The customer has made payment for the spare
parts and legal title has been passed to specifically identified goods,

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

but such spares continue to be physically held by the entity. In this
regard, the company shall evaluate if revenue can be recognized on
bill-and-hold basis if all below criteria are met:

Requirement Fact
(a) The reason for the bill-and- The customer has specifically
hold arrangement must be requested for entity to store
substantive (for example, the goods in their warehouse,
customer has requested the owing to close proximity to
arrangement) customer’s factory.
(b) The product must be The spare parts have been
identified separately as specifically identified and
belonging to the customer inspected by the customer.
(c) The product currently must be The spares are identified and
ready for physical transfer to segregated, therefore, ready
the customer for delivery.
(d) The entity cannot have the Spares have been segregated
ability to use the product or to and cannot be redirected to
direct it to another customer any other customer.

Therefore, all conditions of bill-and-hold are met and hence, company
can recognize revenue for sale of spare parts on 31st March 2026.
(iii) Custodial services: Such services shall be given for a period of one to
three years from 31st March 2026. Where services are given uniformly
and customer receives & consumes benefits simultaneously, revenue
for such service shall be recognized on a straight-line basis over a
period of time.
(b) The carrying amount of the debenture on the date of transition under
previous GAAP, assuming that all interest accrued other than premium on
redemption have been paid, will be ` 1,05,00,000 [(1,00,000 x 100)
+ (1,00,000 x 100 x 10/100 x 2/4)]. The premium payable on redemption is
being recognised as borrowing costs as per para 4(b) of AS 16 i.e. under
previous GAAP on straight-line basis.
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments:
Presentation, requires an entity to split a compound financial instrument at

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inception into separate liability and equity components. However, in
accordance with Ind AS 101, a first-time adopter need not separate these
two portions if the liability component is no longer outstanding at the date
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of transition to Ind AS.
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In the present case, since the liability is outstanding on the date of
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transition, Sigma Ltd. will need to split the convertible debentures into debt

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and equity portion on the date of transition.

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Interest payments p.a. on each debenture 8

Present Value (PV) of interest payment for years 1 to 4 (8 x 2.9138) 23.3104

PV of principal repayment (including premium) (110 x 0.5921) 65.1310

Total liability component per debenture 88.4414

Equity component per debenture (Balancing figure) 11.5586
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Face value of debentures
. co 100.0000

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Total equity component for 1,00,000 debentures (1,00,000 x 11,55,860
11.5586)
a
Total debt amount (1,00,000 x 88.4414) 88,44,140

However, on the date of transition, unwinding of ` 88,44,140 will be done
for two years as follows:

Year Opening Finance cost @ Interest Closing
balance 14% paid balance

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` ` ` `

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1 88,44,140 12,38,180 8,00,000 92,82,320

s em97,81,845
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2 92,82,320 12,99,525 8,00,000

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Therefore, on transition date, Gama Ltd. shall –

ag a. Recognise the carrying amount of convertible debentures at
` 97,81,845;

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

b. Recognise equity component of compound financial instrument of
` 11,55,860;
c. Debit ` 4,37,705 to retained earnings being the difference between the
previous GAAP amount of ` 1,05,00,000 and ` 97,81,845 and the equity
component of compound financial instrument of ` 11,55,860; and
d. Derecognise the debenture liability in previous GAAP of ` 1,05,00,000.
(c) Either
List of Enhancing Qualitative Characteristics of Financial Information
The usefulness of financial information is enhanced if it carries following
four characteristics:
• Comparability: Users’ decisions involve choosing between
alternatives. Consequently, information about a reporting entity is
more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another
period or another date.
For information to be comparable, like things must look alike and
different things must look different.
• Verifiability: Verifiability means that different knowledgeable and
independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful
representation.
Verification can be direct or indirect. Direct verification means
verifying an amount or other representation through direct
observation. Indirect verification means checking the inputs to a
model, formula or other technique and recalculating the outputs using
the same methodology.
• Timeliness: Timeliness means having information available to
decision-makers in time to be capable of influencing their decisions.
Generally, the older the information is, the less useful it is. However,
some information may continue to be timely long after the end of a
reporting period because, for example, some users may need to
identify and assess trends.

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• Understandability: Classifying, characterising and presenting
information clearly and concisely makes it understandable. Some
phenomena are inherently complex and cannot be made easy to
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understand. Excluding information about those phenomena from
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financial reports might make the information in those financial reports
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easier to understand. However, those reports would be incomplete and
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l a s therefore possibly misleading. Financial reports are prepared for users
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who have a reasonable knowledge of business and economic activities
and who review and analyse the information diligently. At times, even
well-informed and diligent users may need to seek the aid of an adviser
to understand information about complex economic phenomena.
(c) Or
As a general principle, the entities should use the same measurement basis
for initial recognition and subsequent measurement of an asset or a liability
which creates two possible scenarios of “at-market” transactions and “off-
market” transactions.
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Transactions using currency (i.e.se
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Transactions on market terms (i.e. ‘at-market’ transactions’)

l a cash):

ag of an asset acquired, or of a liability incurred
At initial recognition, the cost
is normally similar to its fair value at that date, unless transaction costs are
significant. Therefore, whether historical cost or current value is used as a
measurement basis subsequently, the same basis is also normally
appropriate at initial recognition.
Exchange of asset or liability
When an entity acquires an asset, or incurs a liability, in exchange for
transferring another asset or liability, the initial measure of the asset
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acquired, or the liability incurred, determines whether any income or
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profit and loss as an income. The reverse will apply for a liability.

las If the asset acquired is subsequently measured at cost, no income or
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ag expenses arise at initial recognition since the asset acquired is initially
measured at cost which is the fair value of the asset transferred i.e. given
up, unless income or expenses arise from the derecognition of the

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

transferred asset or liability, or unless the asset is impaired or the liability
is onerous.
Transactions not on market terms (i.e. ‘off-market’ transactions)
Assets may be acquired, or liabilities may be incurred, as a result of an event
that is not a transaction on market terms. For example:
(a) the transaction price may be affected by relationships between the
parties;
(b) an asset may be granted to the entity free of charge by a government
or
(c) an asset may be donated to the entity by another party;
(d) a liability may be imposed by legislation or regulation; or
(e) a liability to pay compensation or a penalty may arise from an act of
wrongdoing.
In such cases, measuring the asset acquired, or the liability incurred, at its
historical cost may not provide a faithful representation of the entity’s
assets and liabilities and of any income or expenses arising from the
transaction or other event. Hence, it may be appropriate to measure the
asset acquired, or the liability incurred, at deemed cost. In some such cases,
a current value of the asset or liability is used as a deemed cost on initial
recognition and that deemed cost is then used as a starting point for
subsequent measurement at historical cost. Any difference between that
deemed cost and any consideration given or received would be recognised
as income or expenses at initial recognition.
Question 6
(a) Define cloud computing and explain any four common applications of cloud
computing. (5 Marks)
(b) Real Estate Ltd. is a construction company and decided to construct a huge
office building for its use since financial year 2022-2023. The construction of
office building consists of five floors. It is expected that the full office building
will be constructed over several years but floor I, floor II and floor III of the
building will be operational as soon as they are completed. During the initial
stage, the project was funded out of internal accruals. However, the company

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decided to avail a term loan for the project from 1st April, 2025 and load the
same to the project expenses.

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Following are the details of the work done on different floors of the office
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building up to the financial year 2025-2026: (` in lakhs)

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e m Floor I Floor II Floor III Floor Floor V

l a s
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l expenditure
(` ) (` ) (` ) IV (` ) (` )

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g Cash
a Building materials
60
88
40
70
60
74
100
120
120
152
purchased
Total expenditure 148 110 134 220 272
Total expenditure on all 884
phases
Loan taken @ 12% in the
beginning of the year 900

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After taking substantial period for construction, floor I, floor II and floor III
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have become operational, at the mid of the year i.e. on 30th September, 2025.

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The project was continuing for the rest of the floors.

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You are required to find out the total amount to be capitalized and to be
a
expensed during the financial year 2025-2026. (5 Marks)
(c) An asset is sold in two different active markets at different prices. An entity
enters into transactions in both markets and can access the price in those
markets for the asset at the measurement date.
In Market C:
The price that would be received is ` 88, transaction costs in the market are
` 9 and the cost of transport of the asset are ` 6.

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In Market D:
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The price that would be received is ` 85, transaction costs in that market
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` 3 and the costs of transport of the asset are ` 6.

las You are required to calculate:
g
a market, and
ag (i) The fair value of the asset, if market C is the principal
(ii) The fair value of the asset, if none of the markets is principal market.
(4 Marks)

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FINAL EXAMINATION: MAY 2026

Answer
(a) Cloud Computing: Cloud computing refers to the delivery of computing
services over the internet. It allows accountants to access their data and
software from any device with an internet connection.
With the advent of cloud computing, persons could access the systems
from their respective locations, work remotely during the lockdown and
ensure that the accounting process and reporting requirements did not
suffer adversely.
Common Applications of Cloud Computing
1. Cloud Storage: Services like Dropbox, Google Drive, and Microsoft
OneDrive offer cloud storage solutions that allow users to store and
access their files and data from anywhere with an internet connection.
Users can save documents, photos, videos, and other files in the cloud
and synchronize them across multiple devices.
2. Software as a Service (SaaS): SaaS platforms provide cloud-based
software applications that users can access and utilize via the internet.
Examples include Salesforce for customer relationship management
(CRM), Slack for team collaboration, and QuickBooks Online for
accounting and financial management.
3. Infrastructure as a Service (IaaS): IaaS providers offer virtualized
computing resources, including servers, storage, and networking
infrastructure, on a pay-as-you-go basis. Examples include Amazon
Web Services (AWS), Microsoft Azure, and Google Cloud Platform.
These platforms allow businesses to scale their IT infrastructure based
on demand without the need for physical hardware.
4. Platform as a Service (PaaS): PaaS providers offer cloud-based
platforms that enable developers to build, deploy, and manage
applications without the complexity of infrastructure management.
Examples include Microsoft Azure App Service, and Google App
Engine.
5. Cloud-based Communication and Collaboration: Applications like
Microsoft Teams, Google Workspace (formerly G Suite), and Zoom
provide cloud-based communication and collaboration tools that

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facilitate real-time messaging, video conferencing, file sharing, and
project management.

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6. Cloud-based E-commerce: Few platforms enable businesses to set up
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and manage online stores using cloud infrastructure. These platforms

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provide features like product catalogues, payment processing,
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eBig Data Analytics: Cloud computing enables organizations to g l a
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inventory management, and customer analytics.

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l process and analyze large volumes of data efficiently. Services likea
7.
a Amazon Redshift, Google BigQuery, and Microsoft Azure Data Lake
Analytics provide scalable infrastructure for big data processing and
analytics, empowering businesses to derive valuable insights from their
data.
8. Content Streaming Services: Platforms like Netflix use cloud
infrastructure to deliver video and media content globally.

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(b) Table showing computation of interest expenses on floors on whose

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construction is completed and floors whose construction is in progress

s em (All figures are ` in lakhs)

Interest expense on loan l`a900 lakhs at 12%
Total cost of Floors I, a
g
II and III (148 + 110 + 134)
108
392
Total cost of Floors IV and V (220 + 272) 492
Total cost of all 5 floors till 2025-2026 884
Total loan 900
Interest on loan used for Floors I, II & III, based on 47.89 (approx.)
proportionate Loan amount [(108/884) x 392]
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Interest on loan used for Phases IV & V, based on 60.11 (approx.)
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proportionate Loan amount [(108/884) x 492]

em Accounting treatment:
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1. For Floors I, II and III: Since Floors I, II and III have become operational

a at mid of the year, half of the interest amount of ` 23.945 lakhs (i.e.
47.89/2) relating to Floors I, II and III should be capitalized (in the ratio
of asset costs 148:110:134) and added to respective assets in Floors I,
II and III and remaining half of the interest amount of ` 23.945 lakhs

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SUGGESTED ANSWERS
FINAL EXAMINATION: MAY 2026

(i.e. 47.89/2) relating to Floors I, II and III should be expensed off during
the year.
2. For Floors IV and V: Interest of ` 60.11 lakhs relating to Floors IV and
V should be held in Capital Work-in-Progress till assets construction
work is completed and thereafter capitalized in the ratio of cost of
assets. No part of this interest amount should be charged/expensed
off during the year since the work on these phases has not been
completed yet.
3. During the financial year 2025-26, the total interest to be capitalized
will be ₹ 84.055 (23.945 + 60.11) and ₹ 23.945 lakhs will be expensed
to statement of profit and loss.
(c) (i) If Market C is the principal market: If Market C is the principal market
for the asset (i.e., the market with the greatest volume and level of
activity for the asset), the fair value of the asset would be measured
using the price that would be received in that market, after taking into
account transport costs.
Fair Value will be
`
Price receivable 88
Less: Transportation cost (6)
Fair value of the asset 82

(ii) If neither of the market is the principal market: If neither of the
market is the principal market for the asset, the fair value of the asset
would be measured using the price in the most advantageous market.
The most advantageous market is the market that maximizes the
amount that would be received to sell the asset, after taking into
account transaction costs and transport costs (i.e., the net amount that
would be received in the respective markets).

Market C Market D
` `
Price receivable 88 85
Less: Transaction cost (9) (3)

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Less: Transportation cost (6) (6)
Fair value of the asset 73 76
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Since the entity would maximize the net amount that would be
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received for the asset in Market D i.e. ` 76, the fair value of the asset
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eFair value
would be measured using the price in Market D.
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Price receivable 85
Less: Transportation cost (6)
Fair value of the asset 79

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