A customer of X Ltd. has discontinued his business. He used to purchase 30% of the total goods produced by X Ltd. Is it a relevant information in your opinion and should be disclosed by X Ltd.
Answer
Yes. The information is of material interest to the users of financial statements and must be disclosed as per the Convention of full disclosure.
X Ltd. gets a contract of ₹ 100 crore to build a Shopping-Mal to be completed in 3 years. The management of the company wants to ascertain profit or loss on this contract only when the contract is completed. Is the management justified?
Answer
No, the management is not justified. Although the true profit or loss can be ascertained only after the completion of the contract, it will be divided into time intervals of twelve months for the ascertainment of profit as per Accounting Period Concept.
On 25th March, 2017, a fire broke out in the premises of Kamal Ltd. And destroyed a part of its plant and machinery. On account of this, a sharp decline in production for the next six months is expected. The company did not disclose this fact in its annual report for the year ended 31st March, 2017. What is your opinion about this omission?
Answer
The Company has violated the convention of full disclosure. Loss of Plant and Machinery is a material information and should have been disclosed.
A company purchased goods for ₹ 5,00,000 and sold 80% of such goods during the year. The market value of remaining goods was ₹ 90,000. The company valued the closing stock at cost. Which principle is being violated?
Why is it necessary for accounts to assume that a business entity will remain a going concern?
Answer
This assumption provides the very basis for showing the value of assets in the balance sheet because we assume that these assets are not going to be sold in near future.
During periods of inflation, the figure of net profit will be distorted because depreciation based on historical cost will be charged against revenues at current prices.
R Ltd. purchased 500 Sq. Metre Land for ₹ 1.5 crore to build a factory. At the end of year, the market value of land was ₹ 1.35 crore. R Ltd. treated ₹ 15 Lakh as loss and recorded the land at ₹ 1.35 crore. Is it a correct treatment?
Answer
No. It is not a correct treatment. According to Cost Concept, a fixed asset is recorded in the books at a price it was acquired.