Developer Page Case Scenario - CA P.S. Beniwal Classes

CASE SCENARIO FOR MAY 2024

1. Ltd, (“RTS” or the “Company”), is engaged in the business of manufacturing of equipment/components. The Company has a contract with the Indian Railways for a brake component which is structured such that:
• The Company’s obligation is to deliver the component to the Railways’ stockyard, while the delivery terms are ex-works, the Company is responsible for engaging a transporter for delivery.
• Railways sends an order for a defined quantity.
• The Company manufactures the required quantity and informs Railways for carrying out the inspection.
• Railways representatives visit the Company’s factory and inspect the components and mark each component with a quality check sticker.
• Goods once inspected by Railways are marked with a hologram sticker to earmark for delivery identification by the customer when they are delivered to the customer’s location.
• The Company raises an invoice once it dispatches the goods.

The management of RTS is under discussion with the auditors of the Company in respect of accounting of a critical matter as regards its accounting with respect subsequent events i.e. events after the reporting period. They have been checking as to which one of the following events after the reporting period provides evidence of conditions that existed at the end of the reporting period?
(i) Nationalisation or privatization by government
(ii) Out of court settlement of a legal claim
(iii) Rights issue of equity shares
(iv) Strike by workforce
(v) Announcing a plan to discontinue an operation
The Company has received a grant of ₹ 8 crores from the Government for setting up a factory in a backward area. Out of this grant, the Company distributed ₹ 2 crores as dividend. The Company also received land, free of cost, from the State Government but it has not recorded this at all in the books as no money has been spent.
RTS has a subsidiary, A Ltd, which is evaluating its production process wherein normal waste is 5% of input. 5,000 MT of input were put in process resulting in wastage of 300 MT. Cost per MT of input was ₹ 1,000. The entire quantity of waste was on stock at the end of the financial year.

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1) Please guide regarding the accounting treatment of both the grants mentioned above in line with the requirements of Accounting Standard 12.

Distribution of dividend out of grant is correct. In the second case also not recording land in the books of accounts is correct.

Distribution of dividend out of grant is incorrect. In the second case, not recording land in the books of accounts is correct.

Distribution of dividend out of grant is correct. In the second case, land should be recorded in the books of accounts at a nominal value.

Distribution of dividend out of grant is incorrect. In the second case, land should be recorded in the books of accounts at a nominal value.

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2) In respect of A Ltd, state with reference to Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006, what would be value of the inventory to be recorded in the books of accounts?

₹ 47,00,000.

₹ 50,00,000.

₹ 49,50,000

₹ 49,47,368.

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3) When should RTS Ltd recognize revenue as per the Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006? Would your answer be different if inspection is normally known to lead to no quality rejections?

Revenue should be recognized on dispatch of components. The assessment would not change even in case where inspection is normally known to lead to no quality rejections.

Revenue should be recognized on completion of inspection of components. The assessment would not change even in case where inspection is normally known to lead to no quality rejections.

Revenue should be recognized on dispatch of components. The assessment would change where inspection is normally known to lead to no quality rejections.

Revenue should be recognized on delivery of the component to the Railways’ stockyard. The assessment would change where inspection is normally known to lead to no quality rejections.

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