Page 5 - 22. COMPILER QB - INDAS 34

MTP QUESTIONS

Q4 (APRIL 2021 - 5 Marks)

ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of Rs. 20,00,000 for the
third quarter of 20X1.
Following adjustments are made while computing the net profit:

(i) Bad debts of Rs. 1,00,000 incurred during the quarter. 50% of the bad debts have been deferred to the

next quarter.
(ii) Additional depreciation of Rs. 4,50,000 resulting from the change in the method of depreciation.

(iii) Exceptional loss of Rs. 28,000 incurred during the third quarter. 50% of exceptional loss have been
deferred to next quarter.

(iv) Rs. 5,00,000 expenditure on account of administrative expenses pertaining to the third quarter is deferred
on the argument that the fourth quarter will have more sales; therefore the fourth quarter should be

debited by higher expenditure. The expenditures are uniform throughout all quarters.
Analyze and ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to be

presented to the Board of Directors.
SOLUTION

In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34, Interim

Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
i) The treatment of bad debts is not correct as the expenses incurred during an interim reporting period

should be recognised in the same period. Accordingly, Rs. 50,000 should be deducted from Rs. 20,00,000.

ii) Recognising additional depreciation of Rs. 4,50,000 in the same quarter is correct and is in tune with Ind
AS 34.
iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire amount of Rs.

28,000 incurred during the third quarter should be recognized in the same quarter. Hence Rs. 14,000 which

was deferred should be deducted from the profits of third quarter only.
iv) As per Ind AS 34 the income and expense should be recognised when they are earned and incurred

respectively. As per Ind AS 34, the costs should be anticipated or deferred only when:
a) it is appropriate to anticipate or defer that type of cost at the end of the financial year, and

b) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of Rs. 5,00,000 is not correct as expenditures are uniform

throughout all quarters.
Thus, considering the above, the correct net profits to be shown in the Interim Financial Report of the third

quarter shall be Rs. 14,36,000 (Rs. 20,00,000 -Rs. 50,000 - Rs. 14,000 - Rs. 5,00,000).

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