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ACCOUNTING STANDARDS

ACCOUNTING STANDARD -10

Answer to Ques 1:
The expenditure in remodelling the store will create future economic benefits
(in the form of 15% of increase in sales) and the cost of remodelling can be
measured reliably, therefore, it should be capitalised.
Answer to Ques 2:
De-recognition of the carrying amount occurs regardless of whether the cost of
the previous part/inspection was identified in the transaction in which the item
was acquired or constructed.
Answer to Ques 3:
It may use the cost of the replacement or the estimated cost of a future similar
inspection as an indication of what the cost of the replaced part/existing
inspection component was when the item was acquired or constructed.
Answer to Ques 4:
Constructing or acquiring a new asset may result in incremental costs that
would have been avoided if the asset had not been constructed or acquired.
These costs are not to be included in the cost of the asset if they are not
directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management. The costs to be incurred by the company are in the nature of
costs of relocating or reorganising operations of the company and do not meet
the requirement of AS 10 (Revised) and therefore, cannot be capitalised.
Answer to Ques 5:
Management should capitalise the costs of construction and remodelling the
supermarket, because they are necessary to bring the store to the condition
necessary for it to be capable of operating in the manner intended by
management. The supermarket cannot be opened without incurring the
remodelling expenditure, and thus the expenditure should be considered part
of the asset.
However, if the cost of salaries, utilities and storage of goods are in the nature
of operating expenditure that would be incurred if the supermarket was open,
then these costs are not necessary to bring the store to the condition necessary
for it to be capable of operating in the manner intended by management and
should be expensed.

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ACCOUNTING STANDARDS

Answer to Ques 6:
The net operating costs should not be capitalised, but should be recognised in
the Statement of Profit and Loss.
Even though it is running at less than full operating capacity (in this case 80%
of operating capacity), there is sufficient evidence that the amusement park is
capable of operating in the manner intended by management. Therefore, these
costs are specific to the start-up and, therefore, should be expensed as
incurred.
Answer to Ques 7:
Since the transaction has commercial substance. The plant and machinery
would be recorded at ₹ 25,00,000, which is equivalent to the fair value of the
land of ₹ 45,00,000 less the cash received of ₹ 20,00,000.
Answer to Ques 8:
The entity recognises the assets received at the book value of car X. Therefore,
it recognises cash of ₹ 15,000 and car Y as PPE with a carrying value of ₹
12,85,000.
Answer to Ques 9:
Entity A's management can apply the revaluation model only to the office
buildings. The office buildings can be clearly distinguished from the industrial
buildings in terms of their function, their nature and their general location.AS
10 (Revised) permits assets to be revalued on a class by class basis.
The different characteristics of the buildings enable them to be classified as
different PPE classes. The different measurement models can, therefore, be
applied to these classes for subsequent measurement.
However, all properties within the class of office buildings must be carried at
revalued amount.

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ACCOUNTING STANDARDS

Answer to Ques 10:

The depreciable amount of a tangible fixed asset should be allocated on a
systematic basis over its useful life. The depreciation method should reflect the
pattern in which the asset's future economic benefits are expected to be
consumed by the entity.
Useful life means the period over which the asset is expected to be available for
use by the entity. Depreciation should commence as soon as the asset is
acquired and is available for use. Thus, the policy of Entity A is not acceptable.
Answer to Ques 11:
The entity has charged depreciation using the straight-line method at ₹10,000
per annum i.e (1,00,000/10 years).
On 1st January 2017, the asset's net book value is [1,00,000 – (10,000 x 4)] ₹
60,000. The remaining useful life is 4 years.
The company should amend the annual provision for depreciation to charge the
unamortised cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at ₹ 15,000
per annum i.e. (60,000 / 4 years).
Note: Depreciation is recognised even if the Fair value of the Asset exceeds its
Carrying Amount. Repair and maintenance of an asset do not negate the need
to depreciate it.
Answer to Ques 12:
The entity should begin charging depreciation from the date the machine is
ready for use – that is, 1st
November 2016.The fact that the machine was not used for a period after it
was ready to be used is not relevant in considering when to begin charging
depreciation.

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ACCOUNTING STANDARDS

Answer to Ques 13:

Case (a)
The company considers that the residual value, based on prices prevailing at
the balance sheet date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is correctly zero.
Case (b)
The company considers that the residual value, based on prices prevailing at
the balance sheet date, will be ₹ 9,00,000 and the depreciable amount is,
therefore, ₹ 1,00,000. Annual depreciation (on a straight line basis) will be ₹
5,000 [{10,00,000 – 9,00,000} ÷ 20].
Answer to Ques 14:
The straight-line depreciation method should be adopted, because the
production output is consistent from year to year.
Factors such as maintenance costs or technical obsolescence should be
considered in determining the blending machines’ useful life.
Answer to Ques 15:
Entity A should account for a loss in the Statement of Profit and Loss on de-
recognition of the carrying value of plant and machinery in accordance with AS
10 (Revised).
Entity A should separately recognise a receivable and a gain in the income
statement resulting from the insurance proceeds under AS 29 (Revised) once
receipt is virtually certain. The receivable should be measured at the fair value
of assets that will be provided by the insurer.

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ACCOUNTING STANDARDS

Answer to Ques 16:

According to AS 10 (Revised), these costs can be capitalized:

Cost of the plant ₹ 25,00,000

Initial delivery and handling costs ₹ 2,00,000
Cost of site preparation ₹ 6,00,000
Consultants’ fees ₹ 7,00,000
₹ 3,00,000
Estimated dismantling costs to be incurred after 7 years
₹ 43,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the
plant (not a qualifying asset) of ₹ 2,00,000 and operating losses before
commercial production amounting to ₹ 4,00,000 are not regarded as directly
attributable costs and thus cannot be capitalised. They should be written off to
the Statement of Profit and Loss in the period they are incurred.
Answer to Ques 17:
Statement showing amount of depreciation as per Componentization Method

Component Depreciation (Per annum)

(₹)
Land Nil
Roof 40,000
Lifts 25,000
Fixtures 50,000
Remainder of Building 1,00,000
2,15,000
Note: When the roof requires replacement at the end of its useful life the
carrying amount will be nil. The cost of replacing the roof should be recognised
as a new component.

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ACCOUNTING STANDARDS

Answer to Ques 18:

As per provisions of AS 10, any cost directly attributable to bring the assets to
the location and conditions necessary for it to be capable of operating in the
manner indicated by the management are called directly attributable costs and
would be included in the costs of an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and
remodelling the restaurant, because they are necessary to bring the restaurant
to the condition necessary for it to be capable of operating in the manner
intended by management. The restaurant cannot be opened without incurring
the construction and remodelling expenditure amounting ₹ 30,00,000 and thus
the expenditure should be considered part of the asset.
However, the cost of salaries of staff engaged in preparation of restaurant ₹
7,50,000 before its opening are in the nature of operating expenditure that
would be incurred if the restaurant was open and these costs are not necessary
to bring the restaurant to the conditions necessary for it to be capable of
operating in the manner intended by management. Hence, ₹ 7,50,000 should
be expensed.

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ACCOUNTING STANDARDS

Answer to Ques 19:

Computation of amount of depreciation as per AS 10

₹
(i) Machinery purchased on 1/4/15 for ₹ 10 Nil
lakhs (having residual value of ₹ 10 lakhs)
Reason: The company considers that the residual value,
based on prices prevailing at the balance sheet date, will
equal the cost. Therefore, there is no depreciable amount and
depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore,
it is not depreciated.
(iii) Machinery constructed for own use (₹ 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from
the date the machine is ready for use i.e. 1st April,2019. The
fact that the machine was not used for a period after it was
ready to be used is not relevant in considering when to begin
charging depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the
straight-line method at ₹ 10,000 per annum i.e (50,000/5
years). On 1st April,2019 the asset's net book value is
[50,000 – (10,000 x 2)] i.e. ₹ 30,000.
The remaining useful life is 2 years as per revised estimate.
The company should amend the annual provision for
depreciation to charge the unamortized cost over the revised
remaining life of 2 years. Consequently, it should charge
depreciation for the next 2 years at
₹ 15,000 per annum i.e. (30,000 / 2 years).

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ACCOUNTING STANDARDS

Answer to Ques 20:

Statement showing amount of depreciation as per Componentization
Method

Component Depreciation (Per

annum)
(₹)
Land Nil
Roof 40,000
Lifts 25,000
Fixtures 50,000
Remainder of Building 1,00,000
2,15,000
Note: When the roof requires replacement at the end of its useful life the
carrying amount will be nil. The cost of replacing the roof should be recognized
as a new component.
Answer to Ques 21:
According to AS 10 on Property, Plant and Equipment, the costs which will be
capitalized by ABC Ltd.:

₹
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants’ fees 6,50,000
Estimated dismantling costs to be incurred 2,50,000
after 5 years
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to ₹ 3,75,000
will not be capitalized as per AS 10. They should be written off to the Statement
of Profit and Loss in the period they are incurred.

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ACCOUNTING STANDARDS

Answer to Ques 22:

According to AS 10 (Revised), these costs can be capitalised:

1. Cost of the plant ₹

50,00,000
2. Initial delivery and handling costs ₹ 4,00,000
3. Cost of site preparation ₹
12,00,000
4. Consultants’ fees ₹14,00,000
5. Estimated dismantling costs to be ₹
incurred after 7 years 6,00,000
₹
86,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the
plant (not a qualifying asset) of ₹ 4,00,000 and operating losses before
commercial production amounting to ₹ 8,00,000 are not regarded as directly
attributable costs and thus cannot be capitalised. They should be written off
to the Statement of Profit and Loss in the period they are incurred.
Answer to Ques 23:
Calculation of Cost of Fixed Asset (i.e. Machinery)

Particulars ₹
Purchase Price Given (₹ 158,34,000 x 1,41,37,500
100/112)
Add Site Given 1,41,870
: Preparation
Cost
Technician’s Specific/Attributable 1,35,000
Salary overheads for 3 months
(See Note) (45,000 x3)
Initial Delivery Transportation 55,770
Cost
Professional Architect’s Fees 30,000
Fees for
Installation
Total Cost of Asset 1,45,00,140

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ACCOUNTING STANDARDS

Answer to Ques 24:

Calculation of Cost of Machinery

Particulars ₹
Purchase Price Given 1,58,00,000
Add: Site Preparation Given 1,40,000
Cost
Technician’s Specific/Attributable 1,35,000
Salary overheads for 3 months
(45,000 x3)
Initial Delivery Transportation 50,000
Cost
Professional Fees Architect’s Fees 30,000
for Installation
Total Cost of Asset 1,61,55,000

Answer to Ques 25:

Constructing or acquiring a new asset may result in incremental costs that
would have been avoided if the asset had not been constructed or acquired.
These costs are not be included in the cost of the asset if they are not directly
attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management.
The costs to be incurred by the company are in the nature of costs of reducing
or reorganizing the operations of the accompany. These costs do not meet that
requirement of AS 10 “Property, Plant and Equipment” and cannot, therefore,
be capitalized.

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ACCOUNTING STANDARDS

Answer to Ques 26:

As per AS 10 Property, Plant and Equipment Bearer plant is a plant that
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
(d) The following are not bearer plants:
(i) plants cultivated to be harvested as agricultural produce (for example, trees
grown for use as lumber);
(ii) plants cultivated to produce agricultural produce when there is more than a
remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales (for example, trees
that are cultivated both for their fruit and their lumber); and
(iii) annual crops (for example, maize and wheat).
When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap, for example, for use as firewood. Such incidental scrap sales
would not prevent the plant from satisfying the definition of a bearer plant.
Biological Asset is a living animal or plant.
Answer to Ques 27:
As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book
value arising on revaluation of fixed assets should be credited to owner‟s
interests under the head of „revaluation reserve, except that, to the extent that
such increase is related to and not greater than a decrease arising on
revaluation previously recorded as a charge to the profit and loss statement, it
may be credited to the profit and loss statement. A decrease in net book value
arising on revaluation of fixed assets is charged directly to profit and loss
statement except that to the extent such a decrease is related to an increase
which was previously recorded as a credit to revaluation reserve and which has
not been subsequently reversed or utilized , it may be charged directly to that
account.

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ACCOUNTING STANDARDS

Answer to Ques 28:

As per para 39 of AS 10 “Accounting for Fixed Assets”, following information
should be disclosed in the financial statements:
1. Gross and net book values of fixed assets at the beginning and at the end of
an accounting period showing additions, disposals, acquisitions and other
movements.
2. Expenditure incurred on account of fixed assets in the course of
construction or acquisition; and
3. Revalued amounts substituted for historical costs of fixed assets, the
method adopted to compute the revalued amounts, the nature of indices used,
the year of any appraisal made, and whether an external valuer was involved,
in case where fixed assets are stated at revalued amounts.
Answer to Ques 29:
As per para 12.1 of AS 10 „Accounting for Fixed Assets‟, expenditure that
increases the future benefits from the existing asset beyond its previously
assessed standard of performance is included in the gross book value, e.g., an
increase in capacity. Hence, in the given case, Repairs amounting ₹ 5 lakhs
and Partial replacement of roof tiles should be charged to profit and loss
statement. ₹ 10 lakhs incurred for substantial improvement to the electrical
writing system which will increase efficiency should be capitalized.
Answer to Ques 30:
As per para 12.1 of AS 10 “Accounting for Fixed Assets”, only those
expenditures that increase the future benefits from the existing assets, is to be
included in the gross book value. Example: Increase in capacity.
Hence, in the given case, amount of ₹ 3.25 lacs spent on repairs and partial
replacement of a part of the machinery should be charged to Profit and Loss
Account as they will help in maintaining the capacity but will not improve the
efficiency of the machine. However, ₹ 7 lacs incurred on replacement of a part
of the machinery, which will increase the efficiency, should be capitalized by
inclusion in the gross book value of assets.

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ACCOUNTING STANDARDS

Answer to Ques 31:

AS 10, „Accounting for Fixed Assets‟, clearly states that the gross book value of
the self constructed fixed asset includes the cost of construction that relate
directly to the specific asset and the costs that are attributable to the
construction activity in general can be allocated to the specific asset. If any
internal profit is there it should be eliminated. Thus, only ₹ 4,50,000 should be
debited to the factory building account and not ₹ 6,00,000. Hence, the
contention of the directors of the company to capitalize ₹ 6,00,000 as cost of
factory building, on the ground that the company is fully entitled to employ an
outside contractor is not justifiable.
Answer to Ques 32:
As per para 11 of AS 10 “Accounting for Fixed Assets”, fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at
its fair market value, or the fair market value of the securities issued,
whichever is more clearly evident. Since, in the given situation, the market
value of the shares exchanged for the asset is more clearly evident, the
company should record the value of machinery at ₹ 7,12,500 (i.e., 7,500 shares
x ₹ 95 per share) being the market price of the shares issued in exchange.
Answer to Ques 33:
Calculation of cost of fixed asset

₹
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ₹ 6,00,000) 40,000
Office and administrative expenses (4% ₹ 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000

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ACCOUNTING STANDARDS

Answer to Ques 34:

Calculation of Cost of Fixed Asset (i.e. Machine)

Particulars ₹
Purchase Price Given 52,78,000
Add: Sales Tax at 4% ₹ 52,78,000 x 4% 2,11,120
Site Preparation Cost Given 47,290
Technician‟s Salary Specific/Attributable 30,000
overheads for 2 months (See
Note)
Initial Delivery Cost Transportation 18,590
Professional Fees for Architect‟s Fees 10,000
Installation
Total Cost of Asset 55,95,000
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not
relevant under AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost
of Fixed Assets.
(iii) It has been assumed that the purchase price of ₹ 52,78,000 excludes
amount of sales tax.

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ACCOUNTING STANDARDS

Answer to Ques 35:

Statement showing treatment and value of various items of Fixed Assets

Item of Fixed Assets Amount Amount Narration Book Value as

(₹) Debited on 31.3.2014
to P& L to be shown in
in the Financial
2013- Statements
14

(i) Goodwill
Book value as on 1.4.2013 0
Balance as on 31.3.2014 0
(See Note 1)
(ii) Office Equipment
Balance as on 1.4.2013 1,20,000
Less: Retired from use (Book value 20,000
on 1.4.2013)
1,00,000
Less: Depreciation for 2013-14
@ 15% WDV 15,000 15,000 Depreciation
Balance as on 31.3.2014 85,000 85,000
Office Equipment (Retired from
use)
Book Value as on 1.4.2013 20,000
Less: Book Value as on 31.3.2014 2,000 2,000
(at NRV)(See Note 2)
Loss on retirement charged to P&L 18,000 18,000 Loss on
(iii) Plant and Machinery retirement of
Book Value as on 1.4.2013 7,20,000 asset
Add: Machine purchased on 60,000
01.08.2013 (See Note 3)
7,80,000
Less: Depreciation
Original machine for
whole year 72,000
New machine for 8 months 4,000 76,000 76,000 Depreciation

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ACCOUNTING STANDARDS

Balance as on 31.3.2014 7,04,000 7,04,000

1,09,000 7,91,000
Note:
1. As per para 16 of AS 10 „Accounting for Fixed Assets‟ goodwill is to be
recorded only when some consideration in money or money‟s worth has been
paid for it. Since the goodwill is self generated and no money or money‟s worth
has been paid for the same, therefore, it is not to be recorded in the books.
2. Office equipment having book value of ₹ 20,000 as on 1.4.2013 has been
retired from use. It has been recorded at Net Realisable Value (NRV) as the NRV
is lower than the book value and shown separately in the financial statements.
This is in consonance with the provisions stated in para 14 of AS 10.
3. As per para 11 of the standard, the new machine has been recorded at the
Fair Market Value of the securities issued as it is more clearly evident.
Answer to Ques 36:
Calculation of Cost of Fixed Asset (i.e. Machine)

Particulars ₹
Purchase Price Given 4,80,000
Add:
Site Preparation Cost Given 21,000
Labour charges (66,000/600x2 22,000
00)
Spare parts Given 6,000
Supervisor‟s Salary 25% of ₹ 24,000 6,000
Administrative costs 1/10 of ₹ 3,200
32,000
Test run and experimental production Given 23,000
charges
Architect Fees for set up Given 9,000
Depreciation on assets used for Given 12,000
installation
Total Cost of Asset 5,82,200
Less: Cenvat credit receivable 50% of ₹ 40,000 20,000
5,62,200
Note: Expenses of ₹ 19,000 from 15.1.2015 to 1.2.2015 to be charged to profit
and loss A/c as plant were ready for production on 15.1.2015.

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ACCOUNTING STANDARDS

Answer to Ques 37:

Treatment of given items
• As per AS 10 “Accounting for Fixed Assets”, goodwill, in general, is recorded
in the books only when some consideration in money or money‟s worth has
been paid for it.
In the given situation, the company has valued its goodwill which will be
considered as earned over the years i.e. it is self-generated goodwill. Therefore,
the same shall not be recorded in the books, as consideration in money or
money‟s worth has not been paid for it. Thus raising goodwill by giving
corresponding credit to Reserve is incorrect.
• Only expenditure that increases the future benefits from the existing asset
beyond its previously assessed standard of performance is included in the
gross book value, e.g., an increase in capacity. The cost of an addition or
extension to an existing asset which is of a capital nature and which becomes
an integral part of the existing asset is usually added to its gross book value.
Any other expenses incurred, though substantial, on machine towards its
repairs and maintenance should not be capitalized but charged to profit and
loss account since it does not increase capacity.
• If the interval between the date a project is ready to commence commercial
production and the date at which commercial production actually begins is
prolonged, all expenses incurred during this period are charged to the profit
and loss statement. However, the expenditure incurred during this period is
also sometimes treated as deferred revenue expenditure, to be amortized over a
period not exceeding 3 to 5 years, after the commencement of commercial
production. Thus the amount of ₹ 10 lakh should either be charged to profit
and loss statement in the year ended
31st March, 2015 or may be amortized for a future period not exceeding 3 to 5
years after the commencement of commercial production i.e. 1.6.2014.

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