Mock Test Paper - Series II: August, 2025

Date of Paper: 4 th August, 2025

Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (c) : The error shall be corrected by retrospectively restating the figures for
financial year 20X2-20X3 and also by presenting a third balance sheet as at
1 st April, 20X2 which is the beginning of the earliest period presented in the financial
statements.
2. Option (c): Present a third balance sheet as at the beginning of the preceding period
(i.e., as at 1 st April, 20X2) wherein it should recognise the provision for bonus and
restate the retained earnings.
3. Option (b) : Revenue can be recognized at ` 6,857 approx. per membership and
remaining ` 643 per membership should be recorded as contract liability.
4. Option (b) : ` 33,57,900
5. Option (c) : ` 13,43,160
6. Option (a) : ` 71,56,840
7. Option (d) : ` 10.85 Cr
8. Option (a) : ` 1.4 Cr
9. Option (b) : 0.3%
10. Option (a) : 0.15%
11. Option (c) : ` 16,000
12. Option (b) : ` 3,84,000
13. Option (a) : Sales A/c by ` 160,000
14. Option (b) : Customer-related intangible assets arising from a restated business
combination
15. Option (c) : Disclosure may be required or appropriate when mandated by law,
permitted by law with client authorization, or when there is a professional duty or right
to disclose not prohibited by law.

1
 ANSWERS OF PART – II : DESCRIPTIVE QUESTIONS

1. Consolidated Balance Sheet of DEF Ltd. and its subsidiary, XYZ Ltd.

as at 31 st March, 20X2
Particulars Note No. `
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment 1 86,00,000
(2) Current Assets
(i) Inventories 2 17,14,000
(ii) Financial Assets
(a) Trade Receivables 3 9,98,000
(b) Cash & Cash equivalents 4 2,25,000
Total Assets 1,15,37,000
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 5 50,00,000
(ii) Other Equity 6 49,92,000
(2) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 7 7,45,000
(b) Short term borrowings 8 8,00,000
Total Equity & Liabilities 1,15,37,000

Notes to Accounts
`
1. Property Plant & Equipment
Land & Building 43,00,000
Plant & Machinery 43,00,000 86,00,000
2. Inventories
DEF Ltd. 12,00,000
XYZ Ltd. 5,14,000 17,14,000
3. Trade Receivables
DEF Ltd. 5,98,000

2
 XYZ Ltd. 4,00,000 9,98,000
4. Cash & Cash equivalents
DEF Ltd. 1,45,000
XYZ Ltd. 80,000 2,25,000
7. Trade payable
DEF Ltd. 4,71,000
XYZ Ltd. 2,74,000 7,45,000
8. Shorter-term borrowings
Bank overdraft 8,00,000
Statement of Changes in Equity:
1. Equity share Capital
Balance at the beginning Changes in Equity share Balance at the end of
of the reporting period capital during the year the reporting period
50,00,000 0 50,00,000

2. Other Equity
Share Equity Reserves & Surplus Total
application component Capital Retained Other
money of reserve Earnings Reserves
pending compound
allotment financial
instrument
Balance at the
beginning 0 24,00,000 24,00,000
Total
comprehensive
income for the
year 0 5,72,000 5,72,000
Dividends 0 (2,00,000) (2,00,000)
Total
comprehensive
income
attributable to
parent 0 3,35,000 3,35,000
Gain on Bargain
purchase 18,85,000 18,85,000
Balance at the
end of reporting
period 18,85,000 7,07,000 24,00,000 49,92,000

3
It is assumed that there exists no clear evidence for classifying the acquisition of the
subsidiary as a bargain purchase and, hence, the bargain purchase gain has been
recognized directly in capital reserve. If, however, there exists such a clear evidence,
the bargain purchase gain would be recognized in other comprehensive income and
then accumulated in capital reserve. In both the cases, closing balance of capital
reserve will be ` 18,85,000.
Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of XYZ Ltd. would stand in the books at ` 14,25,000 on
1 st October, 20X1, considering only six months’ depreciation on ` 15,00,000 total
depreciation being ` 1,50,000. The value put on the assets being
` 20,00,000 there is an appreciation to the extent of ` 5,75,000.
2. Acquisition date profits of XYZ Ltd. `

Reserves on 1.4.20X1 10,00,000

Profit & Loss Account Balance on 1.4.20X1 3,00,000
Profit for 20X2:
Total ` 8,20,000 less ` 1,00,000 (3,00,000 – 2,00,000) i.e.
` 7,20,000; for 6 months i.e. up to 1.10.20X1 3,60,000
Total Appreciation including machinery appreciation (10,00,000
1,50,000 + 5,75,000 – 1,00,000) 16,25,000
Share of DEF Ltd. 32,85,000
3. Post-acquisition profits of XYZ Ltd. `

Profit after 1.10.20X1 [8,20,000-1,00,000]x 6/12 3,60,000

Less: 10% depreciation on ` 20,00,000 for 6 months less
depreciation already charged for 2 nd half of 20X1-20X2
on ` 15,00,000 (1,00,000-75,000) (25,000)
Share of DEF Ltd. 3,35,000
4. Consolidated total comprehensive income `
DEF Ltd.
Retained earnings on 31.3.20X2 5,72,000
Less: Retained earnings as on 1.4.20X1 (0)
Profits for the year 20X1-20X2 5,72,000

4
 Less: Elimination of intra-group dividend (2,00,000)
Adjusted profit for the year
XYZ Ltd. 3,72,000
Adjusted profit attributable to DEF Ltd. (W.N.3) 3,35,000
Consolidated profit or loss for the year 7,07,000

5. No Non-controlling Interest as 100% shares of XYZ Ltd. are held by DEF Ltd.
6. Gain on Bargain Purchase `
Amount paid for 34,00,000
20,000 shares Par value of shares 20,00,000
DEF Ltd.’s share in acquisition date profits of XYZ Ltd. 32,85,000 (52,85,000)
Gain on Bargain Purchase 18,85,000

7. Value of Plant & Machinery `

DEF Ltd. 24,00,000
XYZ Ltd. 13,50,000
Add: Appreciation on 1.10. 20X1 5,75,000
19,25,000
Add: Depreciation for 2nd half charged on pre-
revalued value 75,000
Less: Depreciation on ` 20,00,000 for 6 months (1,00,000) 19,00,000
43,00,000
8. Consolidated retained earnings `
DEF Ltd. XYZ Ltd. Total
As given 5,72,000 8,20,000 13,92,000
Consolidation Adjustments:
(i) Elimination of pre-acquisition (6,60,000)
element [3,00,000 + 3,60,000] 0 (6,60,000)
(ii) Elimination of intra-group dividend (2,00,000) 2,00,000 0
(iii) Impact of fair value adjustments 0 (25,000) (25,000)
Adjusted retained earnings consolidated 3,72,000 3,35,000 7,07,000

Assumptions:
1. Investment in XYZ Ltd is carried at cost in the separate financial statements of
DEF Ltd.

5
 2. Appreciation of ` 10 lakhs in land & buildings is entirely attributable to land
element only.
3. Depreciation on plant and machinery is on WDV method.
4. Acquisition-date fair value adjustment to inventories of XYZ Ltd. existing at the
balance sheet date does not result in need for any write-down.
2. (a) This is a compound financial instrument with two components – liability
representing present value of future cash outflows and balance represents
equity component.
a. Computation of Liability & Equity Component
Date Particulars Cash Discount Net present
Flow Factor Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability 502,823.25
Component
Total Proceeds 1,500,000.00
Total Equity 997,176.75
Component (Bal
fig)

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 502,823 10,056 492,767
Equity Component 997,177 19,944 977,233
Total Proceeds 1,500,000 30,000 1,470,000

c. Accounting for liability at amortised cost:

➢ Initial accounting = Present value of cash outflows less
transaction costs
➢ Subsequent accounting = At amortised cost, ie, initial fair value
adjusted for interest and repayments of the liability.

6
 Opening Interest Cash Closing
Financial Flow Financial
Liability Liability
A B C A+B-C
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -

d. Journal Entries to be recorded for entire term of arrangement are

as follows:
Date Particulars Debit Credit
01-Apr-20X1 Bank A/c Dr. 1,470,000
To Preference Shares Liability A/c 492,767
To Equity Component of 977,233
Preference shares A/c
(Being compulsorily convertible
preference shares issued. The same are
divided into equity component and liability
component as per the calculation)
31-Mar-20X2 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of
10% paid to the shareholders)
31-Mar-20X2 Finance cost A/c Dr. 78,153
To Preference Shares Liability A/c 78,153
(Being interest as per EIR method
recorded)
31-Mar-20X3 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of
10% paid to the shareholders)
31-Mar-20X3 Finance cost A/c Dr. 66,758
To Preference Shares Liability A/c 66,758
(Being interest as per EIR method
recorded)
31-Mar-20X4 Preference shares Liability A/c Dr. 150,000

7
 To Bank A/c 150,000
(Being Dividend at the coupon rate of
10% paid to the shareholders)
31-Mar-20X4 Finance cost A/c Dr. 53,556
To Preference Shares Liability A/c 53,556
(Being interest as per EIR method
recorded)
31-Mar-20X5 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of
10% paid to the shareholders)
31-Mar-20X5 Finance cost A/c Dr. 38,260
To Preference Shares Liability A/c 38,260
(Being interest as per EIR method
recorded)
31-Mar-20X6 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of
10% paid to the shareholders)
31-Mar-20X6 Finance cost A/c Dr. 20,506
To Preference Shares Liability A/c 20,506
(Being interest as per EIR method
recorded)
31-Mar-20X6 Equity Component of Preference shares 977,233
A/c Dr.
To Equity Share Capital A/c 50,000
To Securities Premium A/c 927,233
(Being Preference shares converted in
equity shares and remaining equity
component is recognised as securities
premium)

(b) (a) The loan is not due for payment at the end of the reporting period. The
entity and the bank have agreed for the said roll over prior to the end of the
reporting period for a period of 5 years. Since the entity has an
unconditional right to defer the settlement of the liability for at least twelve
months after the reporting period, the loan should be classified as non-
current.
(b) Yes, the answer will be different if the arrangement for roll over is agreed
upon after the end of the reporting period, since assessment is required

8
 to be made based on terms of the existing loan facility. As at the end of
the reporting period, the entity does not have an unconditional right to
defer settlement of the liability for at least twelve months after the
reporting period. Hence the loan is to be classified as current.
(c) Yes, loan facility arranged with new bank cannot be treated as
refinancing, as the loan with the earlier bank would have to be settled
which may coincide with loan facility arranged with a new bank. In this
case, loan has to be repaid within a period of 9 months from the end of
the reporting period, therefore, it will be classified as current liability.
(d) Yes, the answer will be different and the loan should be classified as
current. This is because, as per paragraph 73 of Ind AS 1, when
refinancing or rolling over the obligation is not at the discretion of the
entity (for example, there is no arrangement for refinancing), the entity
does not consider the potential to refinance the obligation and classifies
the obligation as current.
3. (a) As per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’,
closure of a division is a restructuring exercise. Ind AS 37 states that a
constructive obligation to proceed with the restructuring arises when at the
reporting date the entity has:
– Commenced activities connected with the restructuring; or
– Made a public announcement of the main features of the restructuring to
those affected by it. In this case a public announcement has been made
and so a provision will be necessary at 31 st March, 20X2.
This will result in the following charges to the Statement of Profit and Loss:
(i) Estimate of redundancy costs of ` 1.9 million is the best estimate of the
expenditure at the date the financial statements are authorized for issue.
Changes in estimates after the reporting date are taken into account for
this purpose as an adjusting event after the reporting date. No charge is
necessary for the retraining costs as these are not incurred in 20X1-20X2
and cannot form part of a restructuring provision as they are related to
the ongoing activities of the entity.
(ii) Impairment of plant and equipment of ` 6.5 million is although not strictly
part of the restructuring provision the decision to restructure before the
year-end means that related assets need to be reviewed for impairment.
In this case the recoverable amount of the plant and equipment is only
` 1.5 million. As per Ind AS 36 ‘Impairment of Assets’, property, plant and

9
 equipment should be written down to this amount, resulting in a charge of
` 6.5 million to the income statement.
(iii) For compensation for breach of contract of ` 0.55 million, same principle
applies here as applied to the redundancy costs.
(iv) No charge is recognized in 20X1-20X2 with respect to future operating
losses of 20X2-20X3. Future operating losses relate to future events and
provisions are made only for the consequences of past events.
(iv) Ind AS 37 states that an onerous contract is one for which the expected
cost of fulfilling the contract exceeds the benefits expected from the
contract. Provision is made for the lower of the expected net cost of
fulfilling the contract and the cost of early termination (not available in this
case).
The net cost of fulfilling the contract is ` 4.51 million [` 1.5 million x 4.32 –
` 0.3 million x 0.95 – ` 0.5 million x (4.32 – 0.95)].
(b) (i) Para 47 of Ind AS 21 requires that goodwill arose on business
combination shall be expressed in the functional currency of the foreign
operation and shall be translated at the closing rate in accordance with
paragraphs 39 and 42. In this case the amount of goodwill in EURO will
be as follows:
Net identifiable asset Dr. 23 million
Goodwill (bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x ` 84
= ` 117.6 million
(ii)
Particulars EURO in million
Sale price of Inventory 4.20
Unrealised Profit [a] 1.80
Exchange rate as on date of purchase of Inventory [b] ` 83 / Euro
Unrealized profit to be eliminated [a x b] ` 149.40 million

10
 As per para 39 of Ind AS 21 “income and expenses for each statement of
profit and loss presented (ie including comparatives) shall be translated
at exchange rates at the dates of the transactions”.
In the given case, purchase of inventory is an expense item shown in the
statement profit and loss. Hence, the exchange rate on the date of
purchase of inventory is taken for calculation of unrealized profit which is
to be eliminated while preparation of financial statements.
4. (a) Since the earnings of the entity is non-market related, hence it will not be
considered in fair value calculation of the shares given. However, the same will
be considered while calculating number of shares to be vested.
Workings:
20X1 20X2 20X3
Total employees 500 500 500
Employees left (Actual) (29) (58) (79)
Employees expected to leave in the
next year (31) (23) -
Year end – No of employees 440 419 421
Shares per employee 100 100 100
Fair value of share at grant date 122 122 122
Vesting period 1/2 2/3 3/3
Expenses-20X1 (Note 1) 26,84,000
Expenses-20X2 (Note 2) 7,23,867
Expenses-20X3 (Note 3) 17,28,333

Note 1:
Expense for 20X1 = Number of employees x Shares per employee x Fair value
of share x Proportionate vesting period
= 440 x 100 x 122 x ½ = 26,84,000
Note 2:
Expense for 20X2 = (Number of employees x Shares per employee x Fair value
of share x Proportionate vesting period) – Expense recognized in year 20X1
= (419 x 100 x 122 x 2/3) – 26,84,000 = 7,23,867

11
 Note 3:
Expense for 20X3 = (No of employees x Shares per employee x Fair value of
share x Proportionate vesting period) – Expense recognized in year 20X1 and
20X2
= (421 x 100 x 122 x 3/3) – (26,84,000 + 7,23,867) = 17,28,333.
Journal Entries
31 st December, 20X1
Employee benefits expenses (transfer to Dr. 26,84,000
P/L)
To Share-based payment reserve (equity) 26,84,000
(Equity settled shared-based payment expected
vesting amount)
31 st December, 20X2
Employee benefits expenses (transfer to Dr. 7,23,867
P/L)
To Share-based payment reserve (equity) 7,23,867
(Equity settled shared based payment expected
vesting amount)
31 st December, 20X3
Employee benefits expenses (transfer to Dr. 17,28,333
P/L)
To Share-based payment reserve (equity) 17,28,333
(Equity settled shared-based payment expected
vesting amount)
Share-based payment reserve (equity) Dr. 51,36,200
To Share Capital / Securities Premium 51,36,200
(Share capital Issued)
(b) (i)
` in ‘000
Situation Sun Ltd. Earth Ltd.
1 Software Dr. 500 Telecommunication license Dr. 520
To Telecommunication license 500 To Software 10
To Profit on Exchange Nil To Profit on Exchange 510
2 Software Dr. 490 Telecommunication license Dr. 490

12
 Loss on Exchange Dr. 10 To Software 10
To Telecommunication license 500 To Profit on Exchange 480
Note: The company may first
recognize Impairment loss and then
record an entry. The effect is the
same as impairment loss will also be
charged to Income Statement.
3 Software Dr. 500 Telecommunication license Dr. 10
To Telecommunication license 500 To Software 10

(ii)
Particulars Factory Building Office Building
Borrowing Costs (10,00,000 x 9%) (20,00,000 x 9%)
90,000 1,80,000
Less: Investment Income (5,00,000 x 7% x 6/12) (10,00,000x7% x 6/12)
(17,500) (35,000)
72,500 1,45,000
Cost of the asset:
Expenditure incurred 10,00,000 20,00,000
Borrowing Costs 72,500 1,45,000
Total 10,72,500 21,45,000
5. (a) Journal Entries showing accounting for the significant financing
component:
(i) Recognize a contract liability for the ` 4,000 payment received at contract
inception:
Cash Dr. ` 4,000
To Contract liability ` 4,000
(ii) During the two years from contract inception until the transfer of the
asset, the entity adjusts the promised amount of consideration and
accretes the contract liability by recognizing interest on ` 4,000 at 6% for
two years:
Interest expense Dr. ` 494*
To Contract liability ` 494
* ` 494 = ` 4,000 contract liability × (6%
interest per year for two years).

13
 (iii) Recognize revenue for the transfer of the asset:
Contract liability Dr. ` 4,494
To Revenue ` 4,494

(b) Determination of Enterprise Value of XYZ Ltd.

Particulars ` in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320

Determination of subsequent measurement of XYZ Ltd.

Particulars ` in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount (1.6)
(5%+5%=10%)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4
(c)
`
Purchase price (1,000 x 1,200 x 95%) 11,40,000
Import duties (1,000 x 60) 60,000
Delivery cost 5,000
Cost of inventory 12,05,000

Note: The intention to take settlement discount is irrelevant.

6. (a) Either
Entity Y would calculate the right-of-use asset as follows: `
Initial measurement of lease liability 8,50,000
Lease payments made to Entity Z at or before the 10,000
commencement date
Lease incentives received from Entity Z (50,000)
Initial direct cost 1,000
Initial measurement of right-of-use asset 8,11,000

14
 Or
Paragraph 15 of Ind AS 105 states that an entity shall measure a non -current
asset (or disposal group) classified as held for sale at the lower of its carrying
amount and fair value less costs to sell.
Further, paragraph 17 of Ind AS 105 states that when the sale is expected to
occur beyond one year, the entity shall measure the costs to sell at their present
value. Any increase in the present value of the costs to sell that arises from the
passage of time shall be presented in profit or loss as a financing cost.
Company X has identified a disposal group and is committed to sell the same.
The sale is expected to be completed after a period of one year hence, it will
measure the costs to sell such disposal group at present value as per paragraph
17 of Ind AS 105.
A. On 30th September, 20X1
The disposal group will be measured at fair value less costs to sell which
will be as follows:
Fair value: ` 400.00 crores
PV of costs to sell: (` 8.67 crores) (` 10 crores x 0.867)
Total: ` 391.33 crores

B. On 31 st March, 20X1
The disposal group will be measured at fair value less costs to sell
which will be as follows:
Fair value: ` 400.00 crores
PV of costs to sell: (` 9.09 crores) (10 x 0.909)
Total: ` 390.91 crores
The increase in costs to sell the division by ` 0.42 crore (` 9.09 crores –
` 8.67 crores) will be recognised in profit and loss as financing cost in
accordance with paragraph 17 of Ind AS 105.
(b) In view of the cybersecurity attacks and threats, it is important to taking
proactive measures to mitigate cybersecurity risks as listed below:
i. Password management: Strong passwords are critical for protecting
sensitive financial data. Accounting professionals should ensure that all
passwords are complex and changed regularly.

15
 ii. Encryption: Encryption can be used to protect sensitive data during
transmission and storage. The IT Team of an organization should
ensure that all sensitive data is encrypted using appropriate methods.
iii. Access control: Access control is critical for preventing unauthorized
access to financial data. Accounting professionals should ensure that
access to sensitive data is limited to authorized personnel and that
appropriate access controls are in place. The access controls should be
continuously reviewed and updated based on any changes in the
management or employee structure.
iv. Network security: Network security is critical for protecting financial
data from cyberattacks. It should be ensured that firewalls and other
security measures are in place to prevent unauthorized access to the
network.
v. Employee training: Employee training is critical for ensuring that all
staff members are aware of the importance of cybersecurity and
understand how to protect sensitive financial data.
vi. Data backup: Regular data backups are critical for ensuring that
financial data is not lost in the event of a cyberattack. Accounting
professionals should ensure that data backups are performed regularly
and that backups are stored securely.
vii. Incident response planning: Accounting professionals should have a
clear incident response plan in place in the event of a cyberattack. This
plan should include procedures for detecting, containing and mitigating
the impact of a cyberattack.
(c) The revenue from sale of goods shall be recognised at the fair value of the
consideration received or receivable. The fair value of the consideration is
determined by discounting all future receipts using an imputed rate of interest
where the receipt is deferred beyond normal credit terms. The difference
between the fair value and the nominal amount of consideration is recognised as
interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is
calculated as follows: `
Year Consideration Present Present value of
(Installment) value factor consideration
Time of sale 3,33,333 - 3,33,333

16
 End of 1 st year 3,33,333 0.949 3,16,333
End of 2 nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000

The Company that agrees for deferring the cash inflow from sale of goods will
recognise the revenue from sale of goods and finance income as follows:
Initial recognition of sale of goods ` `
Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt
of second installment
Cash Dr. 3,33,333
To Interest Income 33,053
To Trade Receivable 3,00,280
Recognition of interest expense and
payment of final installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 16,947
To Trade Receivable 3,16,387

17