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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2005 ICFAI University M.B.A Suggested Answers Financial Accounting (MB131): April 2005 Question paper
Suggested Answers Financial Accounting (MB131): April 2005
1. Answer : (a)
Reason : Debt-Equity ratio is also called as leverage ratio. Thus, alternative (a) is the correct answer.
Current ratio (b) and Quick ratio (c) are liquidity ratios and not leverage ratios. Earning power (d)
and Inventory turnover ratio (e) are not leverage ratios. Therefore, alternative (a) is the correct
answer.
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2. Answer : (c)
Reason : Intangible assets are amortized like tangible fixed assets. If costs benefit more than one accounting
period, they should be systematically and rationally allocated to all accounting periods. Matching
concept involves recognizing costs as expenses on the basis of direct association with assets. Thus
amortization of intangible assets is the systematic allocation of costs over several periods in
recognition of matching concept. The other concepts do not recognize allocation of costs of fixed
assets. Conservatism concept is not meant to introduce a bias into financial reporting. It is a
prudent reaction to uncertainty to try to ensure that inherent risks in business are adequately
considered. Going concern concept (b) assumes that the business entity is assumed to be a going
concern in the absence of evidence to the contrary. Time Period concept (d) requires accounting
information to be reported at regular intervals to foster comparability. Business entity concept
explains that in accounting business is to be considered as a separate entity from the owner. It does
not speak about amortization.
Thus, alternative (c) is the correct answer.
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3. Answer : (a)
Reason :
Trial Balance of John Vicky as at March 31, 2005
Sl.No Heads of Account
Debt Balance
(Rs.)
Credit Balance
(Rs.)
1. Capital (1st April, 2004) 89,000
2. Drawings 10,000
3. Stock (1st April, 2004) 37,000
4. Purchases 2,31,250
5. Sales 3,94,000
6. Motor Vehicles 14,500
7. Cash in Hand 1,350
8. Sundry Creditors 49,760
9. Sundry Debtors 139,700
10. Bank Overdraft 9,000
11. Administrative over head 76,360
12. Office Equipment 35,000
13. Carriage Outward 2,310
14. Returns Inward 2,050
15. Provision for Bad Debts 4,250
16. Returns Outward 3,160
17. Discount Allowed 2,800
18. Discount Received 3,150
TOTAL 5,52,320 5,52,320
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4. Answer : (e)
Reason : In contract accounting, there is a reasonable certainty that the project would be completed and the
return consideration is realized. In fact, return consideration may begin as soon as the work begins.
So, revenue may be recognized at work-in-progress. This is the exception to the revenue
recognition principle. Other principles stated in (a), (b), (c) and (d) are not correct. Hence, (e) is
true.
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5. Answer : (e)
Reason : Method of providing depreciation ,valuation of inventories, treatment of Goodwill and treatment of
contingent liabilities differ from enterprise to enterprise
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contingent liabilities differ from enterprise to enterprise >
6. Answer : (c)
Reason : Cost of goods = Purchases – Returns outward + Freight in
= Rs.2,10,000 – Rs.22,000 + Rs.30,000 = Rs.2,18,000
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7. Answer : (d)
Reason :
Particulars Rs.
Opening balance of sundry debtors 37,000
Add : Credit sales 6,75,000
7,12,000
Less : Closing balance of Sundry debtors 60,000
6,52,000
Less : Discount allowed 2,800
Cash collected from sundry debtors 6,49,200
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8. Answer : (a)
Reason : Bank reconciliation statement as on March 31, 2005:
Particulars Rs. Rs.
Overdraft as per bank pass book 13,880
Less : Interest on overdraft not entered in cash book 480
Cheques deposited not cleared 1,800
Cheque discounted which was dishonoured 1,000
3,280
10,600
Add : Cheques issued but not presented for payment 2,350
Overdraft as per cash book 12,950
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9. Answer : (a)
Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred for
carrying new assets, it should be capitalized to the assets value. Carrying cost relating to sale of
products, returns outward and return of unsold goods will not be treated as carriage inward
expenses. Hence, (a) is correct.
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10. Answer : (a)
Reason : Advance received from customers is a current liability till the goods are supplied or services are
rendered.
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11. Answer : (c)
Reason : Error of principle is the error of treating revenue items as capital and capital items as revenue. The
purchase of shares by the share broker is to be debited to purchases account and not to investment.
It is error of principle. (c) is the correct answer.
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12. Answer : (b)
Reason : Books of Ramu Enterprises
Dr. Trading Account for the period ending March 31, 2005 Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 27,000 By Sales :
To Purchases Cash 20,000
Cash 70,000 Credit 1,40,000
Credit 20,000 1,60,000
90,000 (–) Returns inward 3,000 1,57,000
(–) Goods lost due to fire 2,000 By Closing stock 40,000
(–) Returns outward (–) 2,000 86,000
To Wages 5,000
(+) Outstanding as on
March 31, 2005
700
5,700
(–) Outstanding as on
April 01, 2004
500
5,200
To Carriage inward 1,000
To Gas, water, fuel 2,000
To Gross Profit 75,800
1,97,000 1,97,000
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13. Answer : (a)
Reason : Insolvency of a debtor is not an extra-ordinary event. Attachment of property, destruction by fire of
factory building, factory building collapsed in earthquake etc. are extra-ordinary items.
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14. Answer : (c)
Reason : The non-current liability is a liability which is not repayable in a period of 12 months or a business
cycle which ever is earlier. Thus, Long-term loans and Debentures are non current liabilities.(c) is
the correct answer.
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15. Answer : (d)
Reason : Acceptance of bills drawn by creditors will not result in any change in the amount of liabilities of
balance sheet, because it will decrease the balance of creditors and increase the balance of bills
payable by the same amount. So (d) is correct, other transactions change the total amount of
liabilities of the balance sheet.
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16. Answer : (b)
Reason : Income received in advance is a liability and should shown on the liability side and not on asset
side. All other statements viz, prepaid expenses shown on asset side, income earned but not
received shown on asset side, income accrued but not due shown on asset side and outstanding
liabilities for expenses shown on liability side are true.
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17. Answer : (c)
Reason : Fixed assets cannot easily be converted into cash. They are acquired for using them in the conduct
of business operations They are not meant for resale to earn profit. Depreciation at specified rates is
to be charged on most of the Fixed Assets. Their utility is not confined to one accounting period.
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18. Answer : (c )
Reason : To increase the profit or reduce the loss made by the enterprise is not an object of keeping
accounts. All others are objects of maintaining accounts.
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19. Answer : (a)
Reason : In a manufacturing company, the perpetual inventory system is called product costing system. In
such system, the cost of each product is accumulated as it flows through the production process.
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20. Answer : (c)
Reason : Research and Development cost cannot directly be attributed to a specific work. Site labor cost,
cost of moving plant and equipment to and from a site , supervision cost and materials used can be
related to specific contract.
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21. Answer : (a)
Reason : The basis for pricing inventory is either cost of production or cost of acquisition. FIFO method of
identifying inventory is based on the assumption that costs are charged against revenue in the order
in which they occur. In case of other methods i.e. LIFO (b) method matches the most recent costs
incurred with current revenue, leaving the first cost incurred to be included as inventory. Weighted-
Average method (c) assumes that costs are charged against revenue based on an average of the
number of units acquired at each price level. Moving average method (d) can be used only with a
perpetual inventory. The cost per unit is recomputed after every addition to the inventory. The
ending inventory is valued at the last moving average unit cost for the period. Base stock method
(e) wherein a minimal level of it is a permanent investment, which is necessary for the normal
business activities. Base stock would be carried at historical cost. Thus, FIFO method is the correct
answer.
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22. Answer : (d)
Reason : The depreciation rate according to units-of-production method is applied to the number of units
produced during an accounting period. Hence, it is related to the usage of the asset. Straight line
method, written down value method, sum-of-the-years’ digits method and double declining method
takes into consideration the cost of the asset, salvage value and useful life but not the output from
the asset. Hence the answer is (d).
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23. Answer : (b)
Reason :
Purchases Issues Balance
Date Quantity
(Kg)
Rate
per kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate per
kg. (Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate
per kg.
(Rs.)
Amount
(Rs.)
1-3-05 500 22.80 11,400
2-3-05 400 24 9,600 900 23.33 21,000
10-03-05 600 25 15,000 1,500 24.00 36000
25-03-05 1,000 24 24,000 500 24.00 12,000
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24. Answer: (d)
Reason: Both direct and indirect labour as well as power and light form part of the manufacturing cost.
Advertising expenses come under selling and distribution cost and hence not a manufacturing cost
to be included in the cost of goods sold.
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25. Answer : (b)
Reason : Although patent is a capital expenditure, renewal fee paid for patent is treated as revenue
expenditure.
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26. Answer : (e)
Reason : Cost of purchase of raw-material is purchase price plus duties and taxes plus freight inward minus
discount and duty draw back.
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27. Answer : (c)
Reason : Long term investment is not a fixed asset. Buildings, Furniture, Equipment and Machinery are
fixed assets which also referred to as property.
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28. Answer : (a)
Reason : When goods are sold subject to approval by buyer, revenue should be recognized when goods have
been formally accepted by the buyer.
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29. Answer : (d)
Reason : Stock of cars is a current asset for a car manufacturing company. Land and Building, machinery,
office furniture and Patents are fixed assets.
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30. Answer : (b)
Reason : Payment of Municipal taxes is a revenue expenditure.
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31. Answer : (a)
Reason : Purchase of a truck is a capital expenditure. Replacement of old tyres and tubes, cost of repair, and
road tax paid are revenue in nature.
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32. Answer : (c)
Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is the
correct answer. It is not a source of working capital. Therefore, alternative (a) is not the correct
answer. It is shown as increase in cash (b), is also not a correct answer. Does not affect the working
capital (d) is also not a correct answer, since it is affecting the working capital. Is not shown either
as a source or a use of funds (e) is also not the correct answer. Therefore, alternative (c) is the
correct answer.
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33. Answer : (c)
Reason : Window-dressing implies showing a better position than the true and fair view of accounts.
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34. Answer : (b)
Reason :
Rs.
Profit for the year 2004-2005 2,30,000
Add: Rent (not relevant if the owner of the premises operates the business) 1,20,000
Adjusted maintainable profits 3,50,000
Capital employed by Dinakar 20,00,000
Add: Value of premises 4,00,000
Total capital employed 24,00,000
Normal profit (12% of Rs.24,00,000) 2,88,000
Super profits (Rs.3,50,000 – Rs.2,88,000) 62,000
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35. Answer : (e)
Reason : Current assets include cash and cash equivalents, inventories, accounts receivable, bills receivable,
and prepaid expenses. Income received in advance is a liability.
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and prepaid expenses. Income received in advance is a liability.
36. Answer : (b)
Reason : Accounting Standard Board was set up by the Institute of Chartered Accountants of India
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37. Answer : (c)
Reason :
Particulars Rs. Rs.
Total Purchase price 22,50,000
Less: Cash at bank
Cash on hand
Accounts receivable
Other identifiable assets
23,750
12,250
80,000
18,50,000
19,66,000
Goodwill 2,84,000
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38. Answer : (c)
Reason : Corrected Trial Balance
Particulars Debit (Rs.) Credit
(Rs.)
Provision for doubtful debts 2,000
Bank overdraft 16,540
Sundry debtors 29,830
Discount received 2,520
Drawings 12,000
Office furniture 21,550
Purchases 1,09,230
Rent and rates 3,140
Salaries 25,200
Opening stock 24,180
Provision for depreciation on furniture 3,640
Capital 45,910
Sundry creditors 16,370
Discount allowed 7,330
General expenses 8,290
Returns inward 3,300
Cash sales 60,800
Credit sales 1,08,020
Total 2,44,050 2,55,800
Suspense (Debit) Rs.2,55,800 – Rs.2,44,050 = Rs.11,750.
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39. Answer : (e)
Reason : (No. of shares)
Particulars Anil Vimal Sunil Total
Liability 30,000 40,000 30,000 1,00,000
Less: Unmarked applications in the
ratio of 3:4:3
4,800 6,400 4,800 16,000
25,200 33,600 25,200 84,000
Less: Marked (Stamped) applications 22,000 24,000 28,000 74,000
3,200 9,600 (2,800) 10,000
Less: Division of Sunil’s surplus
(in the ratio of 3:4)
1,200
1,600
2,800
–
Final liability of each underwriter 2,000 8,000 Nil 10,000
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40. Answer : (b )
Reason : Since a transaction altogether has been omitted both debit and credit aspects have not been
recorded. Hence the trial balance cannot disclose the existence of the above error.
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41. Answer : (c)
Reason : If a company reissues the forfeited shares at a discount, that discount amount will be debited to
forfeited share account.
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According to the Companies Act, the company cannot debit share capital account, profit and loss
account, capital redemption reserve account and capital reserve account for the amount of discount
allowed on reissue of forfeited shares.
42. Answer : (d)
Reason : The users of accounting information of a company are investors, bankers, creditors, shareholders,
management, employees, customers, government and regulatory agencies who are interested in the
affairs of a company. The means of communicating information are financial statements; (d) i.e.
profit and loss account and balance sheet. These are the means through which inferences like ratio
analysis are drawn. Prospectus (a) is the document inviting the public to subscribe to its securities
and there may be certain accounting statistics, which are useful to the users. But it is not
comprehensive. Hence it is false. Trial balance (b) is a summary of all ledger accounts prepared in
a tabular form from which no useful inference can be drawn. Hence, it is not the correct answer.
Bank reconciliation statement (c) is a statement prepared by a business only in the event of
difference between balance as per bank statement and bank column of cashbook, which has no
relevance to the users. Hence, it is false. Statement of cash flow (e) is the statement depicting
inflow and outflow of cash irrespective of nature of source and relevance of period. It is more or
less of receipts and payments account of non-profit organization which has no significance to the
users and it is false.
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43. Answer : (a)
Reason : Balance Sheet of Universe Ltd. as on March 31, 2005
Liabilities Rs. Assets Rs.
Share capital 5,00,000 Land & building 4,90,000
Less calls in arrears 30,000 4,70,000 Plant and machinery 2,20,000
Capital reserve 90,000 Investments 60,000
P & L A/c 50,000 Sundry debtors 1,20,000
Secured loans
3,00,000
Less provision for
doubtful debts 10,000
1,10,000
Term Loan from Bank 1,00,000 Stock 96,000
Sundry creditors 90,000 Loans to employees 50,000
Outstanding expenses 500 Cash 4,000
Interest received in advance 700 Bank 40,000
Insurance premium paid in
advance
1,200
Preliminary expenses 30,000
11,01,200 11,01,200
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44. Answer : (c)
Reason : In the books of the Company
Cash Book (Bank Column only)
Date Particulars Rs. Date Particulars Rs.
2004
May 11
To Share Application A/c (Being
application money received on 50,000
shares @ Rs.5 each including
premium of Rs.2 per share)
2,50,000 2004
Dec 31
By
Balance
c/d
5,96,100
June 30 To Share Allotment A/c
(Being allotment money received on
49,500 shares @ Rs.3 each)
1,48,500
Sept. 30 To Share First Call A/c
(Being First call money received on
49,500 shares @ Rs.2 each)
99,000
Dec. 31 To Share Final Call A/c
(Being Final Call money received on
49,300 shares @ Rs.2 each)
98,600
5,96,100
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45. Answer : (e)
Reason : The equity shareholders get the dividend, depending on the income the company made and there is
no fixed amount and the share premium received on issue of shares can be utilized in writing off
the preliminary expenses of the company. Hence, alternative II and III are not correct and the
answer is (e).
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46. Answer : (c)
Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not
issued by a newly formed company (a) They are not the shares issued to the public at large. They
are issued only to the existing shareholders. (b). It does not indicate the right of redemption of
shares issue (d). These are not the shares with cumulative dividend right.
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47. Answer : (d)
Reason : The discount on issue of debentures is a capital loss which will be written off over a period of time.
(d) is the correct answer.
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48. Answer : (a)
Reason : Value of right =
r
(M S)
N r
??????????-
Where r = No of rights issued
N = No of old shares
M = Market price
S = Issue price of rights
??Value of rights =
2
(Rs.560 Rs.410)
3 2
??????????-?= Rs.60
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49. Answer : (d)
Reason : When share is issued at less than par value, the difference is debited to an appropriately titled
discount account, which is a contra equity share account. The discount account is not an expense
account nor does it appear on the income statement.
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50. Answer : (e)
Reason : Debentures can be redeemed
I. At par
II. At a premium
III. At a discount
IV. By conversion into stock.
Thus, (e) the combination of (I), (II), (III) and (IV) is the correct answer.
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51. Answer : (b )
Reason : The cash book is to record all cash receipts and payments and the balance in cash book shows the
cash on hand.
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52. Answer : (b)
Reason : The profits earned by a subsidiary company before the holding company acquiring control over it is
known as capital profit. Any profit before acquisition date is the capital profit. Other profits
mentioned in (a), (c), (d) and (e) are not true.
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53. Answer : (c)
Reason : Profit and Loss Appropriation Account of Wye Ltd. for the year ended March 31, 2005
Particulars Rs. Particulars Rs.
To Income Tax Provision for the previous year 58,800 By Balance B/d 2,30,000
To General Reserve 2,50,000 By Net Profit 6,62,800
To Sinking Fund 1,50,000
To Proposed dividend 1,00,000
To Balance c/d 3,34,000
8,92,800 8,92,800
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54. Answer : (b)
Reason: Net income is equal to revenues minus expenses. In this case, revenues equal Rs.48,200 and
expenses equal Rs.23,750 (Rs.13,200 + Rs.5,750 + Rs.1,100 + Rs.3,700). Net income is Rs.24,450
(Rs.48,200 – Rs.23,750).
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55. Answer : (d)
Reason: Of the Rs.1,20,000 paid, Rs.40,000 was paid toward dividends in arrears and Rs.80,000 was paid
toward dividends for 2004-05. Of the Rs.80,000, Rs.45,000 was paid to preference stockholders
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toward dividends for 2004-05. Of the Rs.80,000, Rs.45,000 was paid to preference stockholders
(5,000 shares x Rs.100 per share x .09), leaving Rs.35,000 to be paid to common stockholders
(Rs.80,000 – Rs.45,000).
56. Answer : (b)
Reason :
Trading Account for the year ended
Dr Cr
Particulars Amount
(Rs)
Amount
(Rs)
Particulars Amount
(Rs)
Amount
(Rs)
1,90,000
7,90,000
5,87,000
13,50,000
2,17,000
To Opening Stock
To Purchases
Less: Distribution of
free samples
Add: Sale wrongly
credited to purchases
To Gross Profit
7,80,000
18,000
7,62,000
28,000
15,67,000
By Sales
Add: Amount
wrongly credited
to purchases
By Closing Stock
13,22,000
28,000
15,67,000
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57. Answer : (d)
Reason : A company’s system of accounting for maintaining books of accounts must be on the accrual basis
and according to the double entry system of accounting. The systems in other alternatives are no
systems at all or not recognized under the Act. Thus, alternative (d) is the correct answer.
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58. Answer : (e)
Reason : Called up capital The directors of the company called Rs.5 per share on 60,000 shares =
Rs.3,00,000
Less calls in arrear on 5,000 shares at the rate of Rs.2 = 10,000
Paid-up capital to be considered for dividends = Rs.2,90,000
Thus, (e) is the correct answer.
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59. Answer : (e)
Reason : Balance as on 31st March 2005 Rs.29,25,000
Issue of debentures 12,000 Rs.12,00,000
Less: discount 2.5% Rs. 30,000 Rs.11,70,000
Issued preference shares 25,000 R s.25,00,000
Rs.65,95,00 0
Less: Redemption of 30,000 6% preference shares Rs.30,00,000
Premium on redemption Rs. 1,50,000
Dividend for one month R s. 15,000 Rs.31,65,000
Balance as on 30 th April 2005 Rs.34,30,000
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60. Answer : (b)
Reason : Once the unclaimed dividend is transferred to General Revenue a/c of the Central Government, any
shareholder entitled can claim such dividend from the Central Government.
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61. Answer: (c)
Reason: Dr. Creditors A/c Cr.
Particulars Rs. Particulars Rs.
To Cash 1,85,000 By Balance b/d 3,40,000
To Purchases Returns 8,000 By Purchases 2,47,000
To Cash Discount 4,800 By Bills Payable 8,000
To Balance C/d 3,97,200
5,95,000 5,95,000
By Balance b/d 3,97,200
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62. Answer : (a)
Reason : Dr. Stock account Cr.
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Particulars Rs. Particulars Rs.
To Opening balance 6,00,000
To Purchases 34,00,000
By Cost of goods sold
(Rs.48,00,000 ??75%)
36,00,000
By Missing inventory (balancing figure) 75,000
By Closing balance (physical count) 3,25,000
40,00,000 40,00,000
The estimated cost of missing inventory is Rs.75,000.
63. Answer : (e)
Reason : Under First in First out method of inventory valuation, the sale of 32 units will be accounted as,
15 Units @ Rs.400 = Rs. 6,000
17 Units @ Rs.450 = Rs. 7,650
32 = Rs.13,650
The balance of inventory is,
3 Units @ Rs.450 = Rs. 1,350
10 Units @ Rs.460 = Rs. 4,600
Value of closing inventory Rs. 5,950
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64. Answer : (a)
Reason : Average Trading Profit Rs.2,58,900
Normal Profits (-) Rs.2,23,800
Super profits Rs. 35,100
Value of goodwill = 3 x Rs.35,100 = Rs.1,05,300
Amortisation – in five years = Yearly amortisation = Rs.1,05,300/5 = Rs.21,060.
The journal entry will be
Profit and Loss a/c. Dr. Rs.21,060
To Goodwill a/c. Rs.21,060.
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65. Answer : (d)
Reason : Intangible assets are classified as either identifiable or unidentifiable. Goodwill (d), arising out of
payment for reputation, brand name, location, loyality, etc. is an unidentifiable intangible asset.
Hence, alternative (d) is false. It is described as a momentum or push (a) like the momentum of a
body that continues its motion against a retarding force. It, though caused by factors which cannot
be easily and accurately quantified, must be assigned a value (a). It is a payment for something
which places the payer in the position being able to earn more than he would be able to do by his
own unaided efforts (b). It is the difference between the value of a business as a whole and the
aggregate of the fair value of its net assets (c). The basic characteristic of an asset is said to have
productivity. Since the goodwill helps in extra earnings, it is said to be a store of prospective
revenue (e). Thus, alternatives (a), (b), and (e) are true.
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66. Answer : (c)
Reason :
No of shares
Applied
No of
Shares
allotted
Amount
paid
Amount adjusted
towards
application
Amount
available
Amount
refunded
Rs. Rs. Rs. Rs.
20,000 20,000 60,000 60,000 - -
80,000 60,000 2,40,000 1,80,000 60,000 -
20,000 - 60,000 - - 60,000
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67. Answer : (a)
Reason : The journal entry passed at the time of receipt of application money is
Bank account Dr. Rs.12,00,000
To Share application account Rs.12,00,000
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68. Answer : (b)
Reason : When redeemable preference shares are due for redemption, the entry passed is debit Redeemable
preference share capital account; Credit Redeemable Preference shareholders account.
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69. Answer : (e)
Reason : After the life of the debenture no entry on account of discount on its issue should be shown in the
books of accounts. Capital profit can be used to convert partly paid shares to fully paid shares and
bonus shares cannot be made on partly paid-up shares. Hence, the answer is (e).
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70. Answer : (b)
Reason : In financial accountancy, a record is made only when the information can be expressed in monetary
terms. Recording, classification and summarization of business transactions requires a common
unit of measurement, which is taken as money. If events cannot be quantified in monetary terms,
then they do not facilitate accounting. Hence, human resource cannot be taken as asset in
accounting books.
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71. Answer : (e)
Reason : If a transaction of cash purchase of stationery has not been entered in the cashbook it is an example
of complete omission. (e) is the correct answer.
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72. Answer : (d)
Reason : Opening stock + Purchases = Cost of goods sold + closing stock
= Rs.40,000 + Rs.1,10,000 = Rs.1,50,000
Cost of goods sold = Rs.1,50,000 less closing stock = Rs.1,50,000 – Rs.30,000 = Rs.1,20,000
Sales are at a margin of 25% = 125 x Rs .1,20,000/100 = Rs.1,50,000.
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73. Answer : (e)
Reason : Net worth includes equity, general reserve, capital reserve and balance in Profit & Loss A/c.
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74. Answer : (c)
Reason : The damaged inventory should be valued at its net realizable value. Hence the answer is (c). The
cost price or market price whichever is lower is used in case of normal inventory but not in case of
damaged inventory. The market value is not used in any case. The acquisition cost is used for
valuing fixed assets. The nominal value is not at all considered.
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75. Answer : (e)
Reason : AS-10 deals with the recognition of assets, determination of carrying amounts, depreciation
impairments to the carrying amounts. The cost should include expenses directly attributable to the
asset and which result in an increase in the economic life of the asset. The financing costs relating
to deferred credits or to borrowed funds are not capitalized to the extent that such costs relate to
periods after such assets are ready to put to use. All other expenses stated in other alternatives are
capitalized.
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