PAPER – 1 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions may be made and indicated in
answer by the candidates.
Working Notes should form part of the answer.
Question 1
(a) On 1st April, 2023, Green Limited started the construction of an Office
Building (qualified asset). The land under the building is regarded as a
separate asset and is not a part of qualifying asset.
For the purpose of construction of building, the company raised a specific
loan of ` 14 lakhs from a Bank at an interest rate of 12% per annum. An
interest income of ` 15,000 was earned on this loan while it was held in
anticipation of payments.
The company's other outstanding loans on 1 stApril, 2023 were as follows:
Amount of Loan Rate of Interest per annum
` 20,00,000 15%
` 30,00,000 8%
The construction of building started on 1 stApril, 2023 and was completed on
31st January, 2024 when it was ready for its intended use. Up to the date of
completion of the building, the following payments were made to the
contractor:
Payment date Amount in `
1st Apirl,2023 4,00,000
1st August,2023 10,00,000
1st December,2023 25,00,000
st
31 January,2024 5,00,000
, SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024
The life of building is estimated to be 20 years and depreciation is calculated
on straight line method.
You are required to:
(i) Calculate the amount of borrowing cost to be capitalized.
(ii) Pass initial journal entry to recognise the cost of building.
(iii) Depreciation on building for the year ending 31 st March, 2024.
(iv) Carrying value of building as on 31 st March, 2024.
(b) Well Wear Limited is a Textile Manufacturing Company and engaged in the
production of Polyester (P) and Nylon (N). While manufacturing the main
products, a by-product Fiber (F) is also produced. Details of the cost of
production are as under:
Purchase of Raw Material for manufacturing process of
30,000 units ` 3,50,000
Wages paid ` 1,60,000
Fixed overheads ` 1,20,000
Variable overheads ` 60,000
Output:
Polyester (P) 12,500 Units
Nylon (N) 10,000 Units
Fiber (F) 3,200 Units
Closing Inventory:
Polyester (P) 1,600 Units
Nylon(N) 400 Units
Average market price of Polyester and Nylon is ` 100 and ` 60 per unit
respectively, by-product Fiber is sold@ ` 40 per unit. There is a profit of
` 8,000 on sale of by-product after incurring separate processing expenses of
` 10,000 and packing charges of ` 9,000. ` 5,000 was realized from sale of
scrap.
On the basis of the above information, you are required to compute the value
of closing inventory of Polyester and Nylon. (7 + 7 = 14 Marks)
2
, SUGGESTED ANSWER
ADVANCED ACCOUNTING
Answer
(a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average
accumulated expenses
Date of Amount Financed Calculation `
incurrence of spent through
expenditure
1st April 2023 4,00,000 Specific 4,00,000 x 40,000
borrowing 12% x 10/12
1st August 10,00,000 Specific 10,00,000 x 1,00,000
2023 borrowing 12% x 10/12
1st December 25,00,000 General 25,00,000 x
2023 borrowing 10.8% x 2/12 45,000
31st January 5,00,000 General 5,00,000 x Nil
2024 borrowing 10.8% x 0/12
1,85,000
Less: interest income on borrowing (15,000)
Total amount borrowing cost to be capitalized 1,70,000
(ii) Journal Entry
Date Particulars ` `
31.1.2024 Building account Dr. 45,70,000
To Bank account 44,00,000
To Interest payable 1,70,000
(borrowing cost)
(Being expenditure incurred
on construction of building
and borrowing cost thereon
capitalized)
Note: In the above journal entry, it is assumed that interest amount
will be paid at the year end. Hence, entry for interest payable has
been passed on 31.1.2024.
3
, SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024
Alternatively, following journal entry may be passed if interest is paid
on the date of capitalization:
Date Particulars ` `
31.1.2024 Building account Dr. 45,70,000
To Bank account 45,70,000
(Being expenditure incurred
on construction of building
and borrowing cost thereon
capitalized)
(iii) Depreciation on building for the year ending 31.3.2024
Cost of building 45,70,000
Life of building = 20 years
Depreciation = (45,70,000/20) x 2/12 = 38,083.33
(iv) Carrying Value of Building on 31st March 2024:
Carrying Value = Cost of Building - Accumulated Depreciation
= 45,70,000- 38,083.33
= 45,31,917
Working Notes:
1. Calculation of capitalization rate on borrowings other than
specific borrowings
Amount of loan (`) Rate of Amount of
interest interest (`)
20,00,000 15% = 3,00,000
30,00,000 8% = 2,40,000
50,00,000 5,40,000
Weighted average rate of = 10.8%*
5,40,000
interest ( × 100)
50,00,000
4
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions may be made and indicated in
answer by the candidates.
Working Notes should form part of the answer.
Question 1
(a) On 1st April, 2023, Green Limited started the construction of an Office
Building (qualified asset). The land under the building is regarded as a
separate asset and is not a part of qualifying asset.
For the purpose of construction of building, the company raised a specific
loan of ` 14 lakhs from a Bank at an interest rate of 12% per annum. An
interest income of ` 15,000 was earned on this loan while it was held in
anticipation of payments.
The company's other outstanding loans on 1 stApril, 2023 were as follows:
Amount of Loan Rate of Interest per annum
` 20,00,000 15%
` 30,00,000 8%
The construction of building started on 1 stApril, 2023 and was completed on
31st January, 2024 when it was ready for its intended use. Up to the date of
completion of the building, the following payments were made to the
contractor:
Payment date Amount in `
1st Apirl,2023 4,00,000
1st August,2023 10,00,000
1st December,2023 25,00,000
st
31 January,2024 5,00,000
, SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024
The life of building is estimated to be 20 years and depreciation is calculated
on straight line method.
You are required to:
(i) Calculate the amount of borrowing cost to be capitalized.
(ii) Pass initial journal entry to recognise the cost of building.
(iii) Depreciation on building for the year ending 31 st March, 2024.
(iv) Carrying value of building as on 31 st March, 2024.
(b) Well Wear Limited is a Textile Manufacturing Company and engaged in the
production of Polyester (P) and Nylon (N). While manufacturing the main
products, a by-product Fiber (F) is also produced. Details of the cost of
production are as under:
Purchase of Raw Material for manufacturing process of
30,000 units ` 3,50,000
Wages paid ` 1,60,000
Fixed overheads ` 1,20,000
Variable overheads ` 60,000
Output:
Polyester (P) 12,500 Units
Nylon (N) 10,000 Units
Fiber (F) 3,200 Units
Closing Inventory:
Polyester (P) 1,600 Units
Nylon(N) 400 Units
Average market price of Polyester and Nylon is ` 100 and ` 60 per unit
respectively, by-product Fiber is sold@ ` 40 per unit. There is a profit of
` 8,000 on sale of by-product after incurring separate processing expenses of
` 10,000 and packing charges of ` 9,000. ` 5,000 was realized from sale of
scrap.
On the basis of the above information, you are required to compute the value
of closing inventory of Polyester and Nylon. (7 + 7 = 14 Marks)
2
, SUGGESTED ANSWER
ADVANCED ACCOUNTING
Answer
(a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average
accumulated expenses
Date of Amount Financed Calculation `
incurrence of spent through
expenditure
1st April 2023 4,00,000 Specific 4,00,000 x 40,000
borrowing 12% x 10/12
1st August 10,00,000 Specific 10,00,000 x 1,00,000
2023 borrowing 12% x 10/12
1st December 25,00,000 General 25,00,000 x
2023 borrowing 10.8% x 2/12 45,000
31st January 5,00,000 General 5,00,000 x Nil
2024 borrowing 10.8% x 0/12
1,85,000
Less: interest income on borrowing (15,000)
Total amount borrowing cost to be capitalized 1,70,000
(ii) Journal Entry
Date Particulars ` `
31.1.2024 Building account Dr. 45,70,000
To Bank account 44,00,000
To Interest payable 1,70,000
(borrowing cost)
(Being expenditure incurred
on construction of building
and borrowing cost thereon
capitalized)
Note: In the above journal entry, it is assumed that interest amount
will be paid at the year end. Hence, entry for interest payable has
been passed on 31.1.2024.
3
, SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024
Alternatively, following journal entry may be passed if interest is paid
on the date of capitalization:
Date Particulars ` `
31.1.2024 Building account Dr. 45,70,000
To Bank account 45,70,000
(Being expenditure incurred
on construction of building
and borrowing cost thereon
capitalized)
(iii) Depreciation on building for the year ending 31.3.2024
Cost of building 45,70,000
Life of building = 20 years
Depreciation = (45,70,000/20) x 2/12 = 38,083.33
(iv) Carrying Value of Building on 31st March 2024:
Carrying Value = Cost of Building - Accumulated Depreciation
= 45,70,000- 38,083.33
= 45,31,917
Working Notes:
1. Calculation of capitalization rate on borrowings other than
specific borrowings
Amount of loan (`) Rate of Amount of
interest interest (`)
20,00,000 15% = 3,00,000
30,00,000 8% = 2,40,000
50,00,000 5,40,000
Weighted average rate of = 10.8%*
5,40,000
interest ( × 100)
50,00,000
4
