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CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Mehta Industries Ltd. had these items in the year: profit from ordinary activities before the below items Rs 18,00,000; loss from an earthquake that destroyed an uninsured warehouse (an event clearly distinct from ordinary activities and not expected to recur frequently) Rs 3,00,000; and a Rs 1,20,000 depreciation under-provision of the previous year, found out now. Ignoring tax, what is net profit for the period, and how are the items shown?

Net profit is Rs 13,80,000, being 18,00,000 less the Rs 3,00,000 earthquake loss less the Rs 1,20,000 prior period depreciation. The earthquake loss is shown separately as an extraordinary item and the depreciation shortfall as a prior period item, both included in determining net profit.

  1. ARs 13,80,000, with the earthquake loss as extraordinary and the depreciation as prior period itemCorrect
  2. BRs 15,00,000, with the earthquake loss as extraordinary and the depreciation adjusted to reserves
  3. CRs 16,80,000, with the earthquake loss as ordinary and the depreciation as prior period item
  4. DRs 13,80,000, with both items shown as extraordinary

Explanation

Net profit = 18,00,000 - 3,00,000 (extraordinary) - 1,20,000 (prior period) = Rs 13,80,000. Both items are deducted in arriving at net profit, but each is disclosed separately, extraordinary and prior period respectively. Option B omits the prior period charge and wrongly adjusts reserves. Option C omits the extraordinary loss.

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