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CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions

Kiran Pharma Ltd. incurred Rs 8,00,000 on a major advertising campaign on 1 April 2024, treated as deferred revenue expenditure to be written off equally over 4 years. In addition, it spent Rs 1,50,000 on ordinary advertising during 2024-25 and Rs 2,00,000 on ordinary advertising during 2025-26. Its profit before any advertising charge was Rs 10,00,000 in 2024-25 and Rs 12,00,000 in 2025-26. What is the total profit after advertising charges for the two years combined, and the deferred balance at 31 March 2026?

Combined profit is Rs 14,50,000 and the deferred balance is Rs 4,00,000. Pre-advertising profit of Rs 22,00,000 less ordinary advertising of Rs 3,50,000 and campaign write-offs of Rs 4,00,000 over two years gives Rs 14,50,000. The campaign balance is Rs 8,00,000 less Rs 4,00,000.

  1. AProfit Rs 16,50,000; deferred balance Rs 4,00,000Correct
  2. BProfit Rs 18,50,000; deferred balance Rs 6,00,000
  3. CProfit Rs 14,50,000; deferred balance Rs 4,00,000
  4. DProfit Rs 16,50,000; deferred balance Rs 6,00,000

Explanation

Annual write-off = 8,00,000 / 4 = Rs 2,00,000. Year 1 profit = 10,00,000 - 1,50,000 - 2,00,000 = 6,50,000. Year 2 profit = 12,00,000 - 2,00,000 - 2,00,000 = 8,00,000. Total = 14,50,000. Check: total pre-advertising profit 22,00,000 less ordinary 3,50,000 less write-off 4,00,000 = 14,50,000. Deferred balance = 8,00,000 - 4,00,000 = 4,00,000. So the correct combination is profit 14,50,000 and balance 4,00,000.

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