Advanced Accounting (Group I) Model Test Paper - 3 (Answers) - CA Intermediate PDF Download

 Page 1


ANSWER OF MODEL TEST PAPER 3 
INTERMEDIATE COURSE: GROUP – I 
PAPER – 1 : ADVANCED ACCOUNTING 
1. (i) (b)
(ii) (b)
(iii) (b)
(iv) (d)
2. (i) (b)
(ii) (a)
(iii) (b)
(iv) (b)
3. (i)  (d)
(ii) (c)
(iii) (c)
(iv) (b)
4. (c)
5. (a)
6. (b)
PART II – Descriptive Questions (70 Marks) 
1. (a)  Investment Account for the year ending on 31
st
 December, 2023
Scrip : 8% Convertible Debentures in C Ltd. 
[Interest Payable on 31
st
 March and 30
th
 September] 
Date Particulars Nominal 
value ` 
Interest 
`
Cost `  Date Particulars  Nominal 
Value 
(`) 
Interest 
(`) 
Cost  
(`) 
1.4.23 To Bank 
A/c 
2,00,000 - 2,16,000 30.09.23 By Bank 
A/c 
- 12,000 - 
1.7.23 To Bank 
A/c (W.N.1) 
1,00,000 2,000 1,10,000  [`3,00,000 
x 8% x 
(6/12] 
31.12.23 To P & L 
A/c 
- 14,033 - 1.10.23 By Bank 
A/c 
80,000 84,000 
[Interest]  1.10.23 By P & L 
A/c (loss) 
(W.N.3) 
2,933 
 1.12.23 By Bank 
A/c 
(Accrued 
interest) 
 (` 55,000 x 
.08 x 2/12) 
733 
316
Page 2


ANSWER OF MODEL TEST PAPER 3 
INTERMEDIATE COURSE: GROUP – I 
PAPER – 1 : ADVANCED ACCOUNTING 
1. (i) (b)
(ii) (b)
(iii) (b)
(iv) (d)
2. (i) (b)
(ii) (a)
(iii) (b)
(iv) (b)
3. (i)  (d)
(ii) (c)
(iii) (c)
(iv) (b)
4. (c)
5. (a)
6. (b)
PART II – Descriptive Questions (70 Marks) 
1. (a)  Investment Account for the year ending on 31
st
 December, 2023
Scrip : 8% Convertible Debentures in C Ltd. 
[Interest Payable on 31
st
 March and 30
th
 September] 
Date Particulars Nominal 
value ` 
Interest 
`
Cost `  Date Particulars  Nominal 
Value 
(`) 
Interest 
(`) 
Cost  
(`) 
1.4.23 To Bank 
A/c 
2,00,000 - 2,16,000 30.09.23 By Bank 
A/c 
- 12,000 - 
1.7.23 To Bank 
A/c (W.N.1) 
1,00,000 2,000 1,10,000  [`3,00,000 
x 8% x 
(6/12] 
31.12.23 To P & L 
A/c 
- 14,033 - 1.10.23 By Bank 
A/c 
80,000 84,000 
[Interest]  1.10.23 By P & L 
A/c (loss) 
(W.N.3) 
2,933 
 1.12.23 By Bank 
A/c 
(Accrued 
interest) 
 (` 55,000 x 
.08 x 2/12) 
733 
316
 1.12.23 By Equity 
shares in C 
Ltd. (W.N. 
3 and 4) 
55,000 59,767 
 31.12.23 By Balance 
c/d (W.N.5) 1,65,000   3,300 1,79,300 
3,00,000 16,033 3,26,000  3,00,000 16,033 3,26,000 
SCRIP: Equity Shares in C LTD. 
Date Particulars Cost 
(`) 
Date Particulars Cost 
(`) 
1.12.23 To 8 % 
debentures 
59,767 31.12.23 By balance c/d 59,767 
Working Notes: 
(i) Cost of Debenture purchased on 1
st
 July = ` 1,12,000 – ` 2,000
(Interest) = `1,10,000
(ii) Cost of Debentures sold on 1
st
 Oct.
= (` 2,16,000 + ` 1,10,000) x  80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = ` 2,933
Nominal value of debentures converted into equity shares
=` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x
55,000/3,00,000 = ` 59,767 
(v) 
Cost of closing balance 
of Debentures 
=  (` 2,16,000 + `1,10,000) x 
1,65,000 / 3,00,000 
 =  ` 1,79,300 
(vii) Closing balance of Debentures has been valued at cost.
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767
being lower than the market value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into 
cash, has been received at the time of conversion.  
(b) As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale.  Further, the standard states that what constitutes a
substantial period of time primarily depends on the facts and
circumstances of each case. However, ordinarily, a period of twelve
months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances of
317
Page 3


ANSWER OF MODEL TEST PAPER 3 
INTERMEDIATE COURSE: GROUP – I 
PAPER – 1 : ADVANCED ACCOUNTING 
1. (i) (b)
(ii) (b)
(iii) (b)
(iv) (d)
2. (i) (b)
(ii) (a)
(iii) (b)
(iv) (b)
3. (i)  (d)
(ii) (c)
(iii) (c)
(iv) (b)
4. (c)
5. (a)
6. (b)
PART II – Descriptive Questions (70 Marks) 
1. (a)  Investment Account for the year ending on 31
st
 December, 2023
Scrip : 8% Convertible Debentures in C Ltd. 
[Interest Payable on 31
st
 March and 30
th
 September] 
Date Particulars Nominal 
value ` 
Interest 
`
Cost `  Date Particulars  Nominal 
Value 
(`) 
Interest 
(`) 
Cost  
(`) 
1.4.23 To Bank 
A/c 
2,00,000 - 2,16,000 30.09.23 By Bank 
A/c 
- 12,000 - 
1.7.23 To Bank 
A/c (W.N.1) 
1,00,000 2,000 1,10,000  [`3,00,000 
x 8% x 
(6/12] 
31.12.23 To P & L 
A/c 
- 14,033 - 1.10.23 By Bank 
A/c 
80,000 84,000 
[Interest]  1.10.23 By P & L 
A/c (loss) 
(W.N.3) 
2,933 
 1.12.23 By Bank 
A/c 
(Accrued 
interest) 
 (` 55,000 x 
.08 x 2/12) 
733 
316
 1.12.23 By Equity 
shares in C 
Ltd. (W.N. 
3 and 4) 
55,000 59,767 
 31.12.23 By Balance 
c/d (W.N.5) 1,65,000   3,300 1,79,300 
3,00,000 16,033 3,26,000  3,00,000 16,033 3,26,000 
SCRIP: Equity Shares in C LTD. 
Date Particulars Cost 
(`) 
Date Particulars Cost 
(`) 
1.12.23 To 8 % 
debentures 
59,767 31.12.23 By balance c/d 59,767 
Working Notes: 
(i) Cost of Debenture purchased on 1
st
 July = ` 1,12,000 – ` 2,000
(Interest) = `1,10,000
(ii) Cost of Debentures sold on 1
st
 Oct.
= (` 2,16,000 + ` 1,10,000) x  80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = ` 2,933
Nominal value of debentures converted into equity shares
=` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x
55,000/3,00,000 = ` 59,767 
(v) 
Cost of closing balance 
of Debentures 
=  (` 2,16,000 + `1,10,000) x 
1,65,000 / 3,00,000 
 =  ` 1,79,300 
(vii) Closing balance of Debentures has been valued at cost.
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767
being lower than the market value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into 
cash, has been received at the time of conversion.  
(b) As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale.  Further, the standard states that what constitutes a
substantial period of time primarily depends on the facts and
circumstances of each case. However, ordinarily, a period of twelve
months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances of
317
the case. In estimating the period, time which an asset takes, 
technologically and commercially, to get it ready for its intended use or 
sale is considered. 
It may be implied that there is a rebuttable presumption that a 12 months 
period constitutes substantial period of time.  
Under present circumstances where construction period has reduced 
drastically due to technical innovation, the 12 months period should at 
best be looked at as a benchmark and not as a conclusive yardstick. It 
may so happen that an asset under normal circumstances may take 
more than 12 months to complete. However, an enterprise that 
completes the asset in 8 months should not be penalized for its efficiency 
by denying it interest capitalization and vice versa. 
The substantial period criteria ensures that enterprises do not spend a 
lot of time and effort capturing immaterial interest cost for purposes of 
capitalization.  
Therefore, if the factory is constructed in 8 months then it shall be 
considered as a qualifying asset.  The interest on borrowings for the 
same shall be capitalised although it has taken less than 12 months for 
the asset to get ready to use. 
2.     Balance Sheet of Mehar Ltd. as at 31
st
 March, 2024
Note `
I EQUITY AND LIABILITIES: 
(1) (a) Share Capital 1 1,60,00,000 
(b) Reserves and Surplus 2 110,68,000 
(2) Non-current Liabilities
Long term Borrowings- 
Terms Loans (Secured) 
40,00,000 
(3) Current Liabilities 
(a) Trade Payables 45,80,000 
(b) Other current liabilities 3 8,00,000 
(c) Short-term Provisions (Provision for
taxation)  10,20,000 
Total 3,74,68,000 
II ASSETS 
(1) Non-current Assets 
(a) Property, Plant and Equipment 4 214,00,000 
(b) Non- current Investments 9,00,000 
(2) Current Assets:
(a) Inventories 5 48,00,000 
(b) Trade Receivables 6 48,20,000 
(c) Cash and Cash Equivalents 38,40,000 
318
Page 4


ANSWER OF MODEL TEST PAPER 3 
INTERMEDIATE COURSE: GROUP – I 
PAPER – 1 : ADVANCED ACCOUNTING 
1. (i) (b)
(ii) (b)
(iii) (b)
(iv) (d)
2. (i) (b)
(ii) (a)
(iii) (b)
(iv) (b)
3. (i)  (d)
(ii) (c)
(iii) (c)
(iv) (b)
4. (c)
5. (a)
6. (b)
PART II – Descriptive Questions (70 Marks) 
1. (a)  Investment Account for the year ending on 31
st
 December, 2023
Scrip : 8% Convertible Debentures in C Ltd. 
[Interest Payable on 31
st
 March and 30
th
 September] 
Date Particulars Nominal 
value ` 
Interest 
`
Cost `  Date Particulars  Nominal 
Value 
(`) 
Interest 
(`) 
Cost  
(`) 
1.4.23 To Bank 
A/c 
2,00,000 - 2,16,000 30.09.23 By Bank 
A/c 
- 12,000 - 
1.7.23 To Bank 
A/c (W.N.1) 
1,00,000 2,000 1,10,000  [`3,00,000 
x 8% x 
(6/12] 
31.12.23 To P & L 
A/c 
- 14,033 - 1.10.23 By Bank 
A/c 
80,000 84,000 
[Interest]  1.10.23 By P & L 
A/c (loss) 
(W.N.3) 
2,933 
 1.12.23 By Bank 
A/c 
(Accrued 
interest) 
 (` 55,000 x 
.08 x 2/12) 
733 
316
 1.12.23 By Equity 
shares in C 
Ltd. (W.N. 
3 and 4) 
55,000 59,767 
 31.12.23 By Balance 
c/d (W.N.5) 1,65,000   3,300 1,79,300 
3,00,000 16,033 3,26,000  3,00,000 16,033 3,26,000 
SCRIP: Equity Shares in C LTD. 
Date Particulars Cost 
(`) 
Date Particulars Cost 
(`) 
1.12.23 To 8 % 
debentures 
59,767 31.12.23 By balance c/d 59,767 
Working Notes: 
(i) Cost of Debenture purchased on 1
st
 July = ` 1,12,000 – ` 2,000
(Interest) = `1,10,000
(ii) Cost of Debentures sold on 1
st
 Oct.
= (` 2,16,000 + ` 1,10,000) x  80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = ` 2,933
Nominal value of debentures converted into equity shares
=` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x
55,000/3,00,000 = ` 59,767 
(v) 
Cost of closing balance 
of Debentures 
=  (` 2,16,000 + `1,10,000) x 
1,65,000 / 3,00,000 
 =  ` 1,79,300 
(vii) Closing balance of Debentures has been valued at cost.
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767
being lower than the market value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into 
cash, has been received at the time of conversion.  
(b) As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale.  Further, the standard states that what constitutes a
substantial period of time primarily depends on the facts and
circumstances of each case. However, ordinarily, a period of twelve
months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances of
317
the case. In estimating the period, time which an asset takes, 
technologically and commercially, to get it ready for its intended use or 
sale is considered. 
It may be implied that there is a rebuttable presumption that a 12 months 
period constitutes substantial period of time.  
Under present circumstances where construction period has reduced 
drastically due to technical innovation, the 12 months period should at 
best be looked at as a benchmark and not as a conclusive yardstick. It 
may so happen that an asset under normal circumstances may take 
more than 12 months to complete. However, an enterprise that 
completes the asset in 8 months should not be penalized for its efficiency 
by denying it interest capitalization and vice versa. 
The substantial period criteria ensures that enterprises do not spend a 
lot of time and effort capturing immaterial interest cost for purposes of 
capitalization.  
Therefore, if the factory is constructed in 8 months then it shall be 
considered as a qualifying asset.  The interest on borrowings for the 
same shall be capitalised although it has taken less than 12 months for 
the asset to get ready to use. 
2.     Balance Sheet of Mehar Ltd. as at 31
st
 March, 2024
Note `
I EQUITY AND LIABILITIES: 
(1) (a) Share Capital 1 1,60,00,000 
(b) Reserves and Surplus 2 110,68,000 
(2) Non-current Liabilities
Long term Borrowings- 
Terms Loans (Secured) 
40,00,000 
(3) Current Liabilities 
(a) Trade Payables 45,80,000 
(b) Other current liabilities 3 8,00,000 
(c) Short-term Provisions (Provision for
taxation)  10,20,000 
Total 3,74,68,000 
II ASSETS 
(1) Non-current Assets 
(a) Property, Plant and Equipment 4 214,00,000 
(b) Non- current Investments 9,00,000 
(2) Current Assets:
(a) Inventories 5 48,00,000 
(b) Trade Receivables 6 48,20,000 
(c) Cash and Cash Equivalents 38,40,000 
318
(d) Short-term Loans and Advances 7   17,08,000 
Total 3,74,68,000 
Notes to accounts 
(`) 
1. Share Capital 
 
Authorized, issued, subscribed & called 
up 
1,20,000, Equity Shares of ` 100 each 1,20,00,000 
40,000 10% Redeemable Preference 
Shares of 100 each 
40,00,000 1,60,00,000 
2. Reserves and Surplus 
 
Securities Premium Account 19,00,000 
General reserve  62,00,000 
Profit & Loss Balance  
  Opening balance   - 
Profit for the period    32,00,000 
  Less: Miscellaneous Expenditure 
  written off   (2,32,000) 29,68,000 110,68,000 
3. Other current liabilities 
 
Loan from other parties 8,00,000 
4. Property, plant and equipment 
Plant and Machinery (WDV) 
214,00,000 
5. Inventories 
Finished Goods 30,00,000 
Stores 16,00,000 
Loose Tools  2,00,000 48,00,000 
6. Trade Receivables 
Trade receivables 49,00,000 
Less: Provision for Doubtful Debts (80,000) 48,20,000 
7. Short term loans & Advances 
Staff Advances* 2,20,000 
Other Advances* 14,88,000 17,08,000 
*Considered to be short term.
3. (a) Present value of minimum lease payment  is computed below:
Year MLP 
DF (12.6%) 
PV 
` `
1 50,000 0.890 44,500 
2 50,000 0.790 39,500 
319
Page 5


ANSWER OF MODEL TEST PAPER 3 
INTERMEDIATE COURSE: GROUP – I 
PAPER – 1 : ADVANCED ACCOUNTING 
1. (i) (b)
(ii) (b)
(iii) (b)
(iv) (d)
2. (i) (b)
(ii) (a)
(iii) (b)
(iv) (b)
3. (i)  (d)
(ii) (c)
(iii) (c)
(iv) (b)
4. (c)
5. (a)
6. (b)
PART II – Descriptive Questions (70 Marks) 
1. (a)  Investment Account for the year ending on 31
st
 December, 2023
Scrip : 8% Convertible Debentures in C Ltd. 
[Interest Payable on 31
st
 March and 30
th
 September] 
Date Particulars Nominal 
value ` 
Interest 
`
Cost `  Date Particulars  Nominal 
Value 
(`) 
Interest 
(`) 
Cost  
(`) 
1.4.23 To Bank 
A/c 
2,00,000 - 2,16,000 30.09.23 By Bank 
A/c 
- 12,000 - 
1.7.23 To Bank 
A/c (W.N.1) 
1,00,000 2,000 1,10,000  [`3,00,000 
x 8% x 
(6/12] 
31.12.23 To P & L 
A/c 
- 14,033 - 1.10.23 By Bank 
A/c 
80,000 84,000 
[Interest]  1.10.23 By P & L 
A/c (loss) 
(W.N.3) 
2,933 
 1.12.23 By Bank 
A/c 
(Accrued 
interest) 
 (` 55,000 x 
.08 x 2/12) 
733 
316
 1.12.23 By Equity 
shares in C 
Ltd. (W.N. 
3 and 4) 
55,000 59,767 
 31.12.23 By Balance 
c/d (W.N.5) 1,65,000   3,300 1,79,300 
3,00,000 16,033 3,26,000  3,00,000 16,033 3,26,000 
SCRIP: Equity Shares in C LTD. 
Date Particulars Cost 
(`) 
Date Particulars Cost 
(`) 
1.12.23 To 8 % 
debentures 
59,767 31.12.23 By balance c/d 59,767 
Working Notes: 
(i) Cost of Debenture purchased on 1
st
 July = ` 1,12,000 – ` 2,000
(Interest) = `1,10,000
(ii) Cost of Debentures sold on 1
st
 Oct.
= (` 2,16,000 + ` 1,10,000) x  80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = ` 2,933
Nominal value of debentures converted into equity shares
=` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x
55,000/3,00,000 = ` 59,767 
(v) 
Cost of closing balance 
of Debentures 
=  (` 2,16,000 + `1,10,000) x 
1,65,000 / 3,00,000 
 =  ` 1,79,300 
(vii) Closing balance of Debentures has been valued at cost.
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767
being lower than the market value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into 
cash, has been received at the time of conversion.  
(b) As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale.  Further, the standard states that what constitutes a
substantial period of time primarily depends on the facts and
circumstances of each case. However, ordinarily, a period of twelve
months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances of
317
the case. In estimating the period, time which an asset takes, 
technologically and commercially, to get it ready for its intended use or 
sale is considered. 
It may be implied that there is a rebuttable presumption that a 12 months 
period constitutes substantial period of time.  
Under present circumstances where construction period has reduced 
drastically due to technical innovation, the 12 months period should at 
best be looked at as a benchmark and not as a conclusive yardstick. It 
may so happen that an asset under normal circumstances may take 
more than 12 months to complete. However, an enterprise that 
completes the asset in 8 months should not be penalized for its efficiency 
by denying it interest capitalization and vice versa. 
The substantial period criteria ensures that enterprises do not spend a 
lot of time and effort capturing immaterial interest cost for purposes of 
capitalization.  
Therefore, if the factory is constructed in 8 months then it shall be 
considered as a qualifying asset.  The interest on borrowings for the 
same shall be capitalised although it has taken less than 12 months for 
the asset to get ready to use. 
2.     Balance Sheet of Mehar Ltd. as at 31
st
 March, 2024
Note `
I EQUITY AND LIABILITIES: 
(1) (a) Share Capital 1 1,60,00,000 
(b) Reserves and Surplus 2 110,68,000 
(2) Non-current Liabilities
Long term Borrowings- 
Terms Loans (Secured) 
40,00,000 
(3) Current Liabilities 
(a) Trade Payables 45,80,000 
(b) Other current liabilities 3 8,00,000 
(c) Short-term Provisions (Provision for
taxation)  10,20,000 
Total 3,74,68,000 
II ASSETS 
(1) Non-current Assets 
(a) Property, Plant and Equipment 4 214,00,000 
(b) Non- current Investments 9,00,000 
(2) Current Assets:
(a) Inventories 5 48,00,000 
(b) Trade Receivables 6 48,20,000 
(c) Cash and Cash Equivalents 38,40,000 
318
(d) Short-term Loans and Advances 7   17,08,000 
Total 3,74,68,000 
Notes to accounts 
(`) 
1. Share Capital 
 
Authorized, issued, subscribed & called 
up 
1,20,000, Equity Shares of ` 100 each 1,20,00,000 
40,000 10% Redeemable Preference 
Shares of 100 each 
40,00,000 1,60,00,000 
2. Reserves and Surplus 
 
Securities Premium Account 19,00,000 
General reserve  62,00,000 
Profit & Loss Balance  
  Opening balance   - 
Profit for the period    32,00,000 
  Less: Miscellaneous Expenditure 
  written off   (2,32,000) 29,68,000 110,68,000 
3. Other current liabilities 
 
Loan from other parties 8,00,000 
4. Property, plant and equipment 
Plant and Machinery (WDV) 
214,00,000 
5. Inventories 
Finished Goods 30,00,000 
Stores 16,00,000 
Loose Tools  2,00,000 48,00,000 
6. Trade Receivables 
Trade receivables 49,00,000 
Less: Provision for Doubtful Debts (80,000) 48,20,000 
7. Short term loans & Advances 
Staff Advances* 2,20,000 
Other Advances* 14,88,000 17,08,000 
*Considered to be short term.
3. (a) Present value of minimum lease payment  is computed below:
Year MLP 
DF (12.6%) 
PV 
` `
1 50,000 0.890 44,500 
2 50,000 0.790 39,500 
319
3 50,000 0.700 35,000 
4 50,000 0.622 31,100 
5 50,000 0.552 27,600 
5 25,000 0.552 13,800 
1,91,500 
Present value of minimum lease payment = ` 1,91,500 
Fair value of leased asset = ` 2,00,000 
As per AS 19, on the date of inception of Lease, Lessee should show it 
as an asset and corresponding liability at lower of Fair value of leased 
asset at the inception of the lease and present value of minimum lease 
payments from the standpoint of the lessee. The accounting entry at the 
inception of lease to record the asset taken on finance lease in books of 
lessee is suggested below: 
` `
Asset  A/c Dr. 1,91,500 
  To Lessor (Lease Liability) A/c 1,91,500 
(Being recognition of finance lease as asset 
and liability) 
(b) As per AS 12 ‘Accounting for Government Grants,’ income from Deferred
Grant Account is allocated to Profit and Loss account usually over the
periods and in the proportions in which depreciation on related assets is
charged. Accordingly, in the first two years (` 32 lakhs /4 years) = ` 8
lakhs x 2 years= ` 16 lakhs will be credited to Profit and Loss Account
and ` 16 lakhs will be the balance of Deferred Grant Account after two
years. Therefore, on refund of grant, following entry will be passed:
` ` 
Deferred Grant A/c Dr. 16 lakhs 
Profit & Loss A/c Dr.  16 lakhs 
 To Bank A/c 32 lakhs 
(Being Government grant refunded) 
1. Value of Fixed Assets after two years but before refund of
grant
Fixed assets initially recorded in the books = ` 80 lakhs
Depreciation for each year
= (` 80 lakhs – `8 lakhs)/4 years = ` 18 lakhs per year
Book value of fixed assets after two years
= ` 80 lakhs – (` 18 lakhs x 2 years) = ` 44 lakhs
320