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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

Which of the following is an extraordinary item under AS 5 for a manufacturing company?

Loss of an entire plant due to an earthquake is extraordinary. Under AS 5 such items arise from events clearly distinct from ordinary activities and are not expected to recur frequently or regularly, whereas write-downs, bad debts and routine asset sales are ordinary.

  1. ALoss on sale of a machine regularly replaced in the course of business
  2. BWrite-down of inventories to net realisable value
  3. CLoss of an entire plant by an earthquake, an event clearly distinct from ordinary activities and not expected to recur frequentlyCorrect
  4. DBad debts written off in the normal course

Explanation

Extraordinary items are income or expenses arising from events clearly distinct from the ordinary activities of the enterprise and not expected to recur frequently or regularly. An earthquake destroying a plant fits this. The other options arise in the ordinary course of business.

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