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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Ganga Pharma Ltd. is preparing financial statements and has ₹3,00,000 of expenditure on staff training. Management argues it will benefit future years but cannot identify any resource controlled by the company. Separately, Ganga holds inventory costing ₹7,00,000 with a net realisable value of ₹6,20,000. Applying the Framework's recognition and measurement ideas, what is the correct treatment of the two items?

Training cost of ₹3,00,000 is expensed because it gives no controlled resource and fails asset recognition. Inventory is carried at the lower of cost and net realisable value, so it is written down to ₹6,20,000, recognising a loss of ₹80,000.

  1. ACapitalise training ₹3,00,000 as an asset; carry inventory at ₹7,00,000
  2. BExpense training ₹3,00,000; write inventory down to ₹6,20,000 with a loss of ₹80,000Correct
  3. CCapitalise training ₹3,00,000; write inventory down to ₹6,20,000
  4. DExpense training ₹3,00,000; carry inventory at ₹7,00,000 and disclose the NRV

Explanation

Training cost fails the asset definition because no controlled resource exists, so it is expensed. Inventory is stated at lower of cost and net realisable value under prudence-based AS 2 measurement, so it is written down from 7,00,000 to 6,20,000, a loss of 80,000. Carrying it at cost would overstate the asset.

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