Question 5: RAJASTHALI Ltd. manufactures a product ‘OM’ using a raw material M1.The company took Bank Overdraft at an interest ... ( DU SOL Financial Accounting Exam)

QUESTION 5 (a) : RAJASTHALI Ltd. manufactures a product ‘OM’ using a raw material M1.The company took Bank Overdraft at an interest 

rate of 15% p.a. specifically for the purpose of purchasing 10,000 kg. of material M1 at ₹ 100 per kg. The purchase price includes 

GST ₹ 10 per kg., in respect of which full credit is admissible. Freight, loading and unloading charges incurred amounted to ₹

40,800. Interest on such Bank Overdraft amounted to ₹ 25,000. Normal Transit Loss is 2%. The company actually received 9,760 

kg. and consumed 9,500 kg. One unit of Finished product requires five units of Raw Material. Direct Labour Cost amounted to ₹

2,28,000,Direct Overheads Cost amounted to ₹ 57,000.Total Fixed Overheads for the year were ₹ 1,20,000 on normal capacity of 

20,000 units of Finished Goods. During the year Sales of product ‘OM’ were ₹ 7,50,000 @ ₹ 750.There were no opening 

inventories. With reference to AS 2 “Valuation of Inventory”, Calculate the amount of Abnormal Loss (if any),Closing Inventory 

of Finished Goods and Raw Material if 

(i) Finished units can be sold @ ₹ 800 subject to payment of 10% brokerage on selling price., Replacement Cost of Raw Material 

is ₹ 90 per kg 

(ii)Finished units can be sold @ ₹ 700 subject to payment of 10% brokerage on selling price, Replacement Cost of Raw Material 

is ₹ 90 per kg [3 x 2= 6 Marks] 

5(b) X Ltd. purchased machinery from Y Ltd. on 30/09/2019. The price was ₹ 522.50 lakhs after charging 10 % GST and giving a 

trade discount of 5 % on the quoted price. Transport charges were 0.25 % on the quoted price and installation charges come to 1% 

on the quoted price. To Finance the purchase of the machinery, company took a term bank loan of ₹ 500 lakhs at an interest rate of 

15% per annum. Fees of Consultants used for advice on the acquisition of the Machine ₹ 6,50,000, Cost of site preparation ₹

4,50,000,Estimated dismantling costs to be incurred after 10 years ₹ 2,50,000.Expenditure incurred on the trial run was: Material 

₹ 5,00,000, wages ₹ 4,00,000 and overheads ₹ 3,00,000.Sale Proceeds of Goods produced during the trial run ₹ 2,00,000. 

Machinery was ready for use on 01/12/2019. However, it was actually put to use only on 01/05/2020. The entire loan amount 

remained unpaid on 01/05/2020. X Ltd. does not intend to utilize the input tax paid on capital good. 

(i)Find out the cost of the machine. [3 Marks]

(ii)Suggest the accounting treatment for the cost incurred during the period between the date the machine was ready for use and 

the actual date the machine was put to use. [1 Mark] 

5(c) SHEENA Ltd acquired machinery on lease from BHARAT Ltd on the following terms: 

Lease Term 5 Years,Fair Value of Machinery (useful life 15 years) ₹ 30 lakhs,Annual Lease Rental payable at ₹ 5 lakhs, ₹ 4 

lakhs, ₹ 3 lakhs, ₹ 2 lakhs, ₹ 1 lakh at the end of each year , 

Implicit Rate of Return (IRR) 15% 


 (a) State with reason whether the Lease is Operating Lease or Finance Lease.Present value. factors @ 15% for years 1 to 5 are 

0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 respectively. [2 Marks] 

 (b) What will be the amount of Depreciation for the First year? What will be the amount of Rental Expense for the First year? 

Lessee follows Depreciation rate@ 10% p.a. on straight line basis. Lessor follows Depreciation rate@ 6-2/3 % p.a. on 

straight line basis. 

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