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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Anand Pharma Ltd. reports the following items in its statement of profit and loss: (i) a fire loss of ₹4,00,000 on a warehouse, which is a normal risk event of its business and arises from ordinary activities; (ii) an omission found that the previous year's rent of ₹60,000 was not provided; (iii) a change in the estimate of bad debts of ₹30,000. Under AS 5, which statement is correct?

The omitted ₹60,000 rent is a prior period item because it stems from an omission in prior statements. AS 5 requires it to be included in current period profit or loss and disclosed separately, not adjusted against reserves.

  1. AThe ₹60,000 rent is a prior period item only if it arises from an error or omission in preparing prior period statements, and is disclosed separately in current profit or lossCorrect
  2. BThe ₹60,000 rent is adjusted against opening reserves with no current-year effect
  3. CThe ₹30,000 bad debt estimate change is a prior period item
  4. DThe ₹4,00,000 fire loss must be shown as an extraordinary item below net profit

Explanation

Under AS 5, prior period items are income or expenses arising from errors or omissions in prior period statements; they are included in the current period's determination of profit or loss and disclosed separately. Opening-reserve adjustment is not permitted. Estimate changes are not prior period items. The fire loss arises from ordinary activities so it is not extraordinary.

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