Kagaz Limited, Chennai purchased a modern offset manufacturing machine from a supplier at Mumbai for 20.00 lakhs being Maximum Retail Price (MRP) on…

CA Final · Financial Reporting · PYQS · January 2026
Kagaz Limited, Chennai purchased a modern offset manufacturing machine from a supplier at Mumbai for 20.00 lakhs being Maximum Retail Price (MRP) on the following terms and conditions: The supplier would buy-back the existing machine of Kagaz Limited. The carrying value of the existing machine is 6.60 lakhs.The supplier would give a special discount of 5%;A cash payment of 15 lakhs would be made by Kagaz Limited to the supplier;Kagaz Limited will purchase from local market all accessories required to operate the machine at 3.00 lakhs (inclusive of all taxes);The supplier will, however, deliver free of cost certain heavy-duty cables etc., having MRP of 2.00 lakhs, required to install and operate the machine;Transit insurance will be borne by Kagaz Limited @ 3% of MRP of the machine only;Freight and other incidentals of 1.00 lakh is borne by Kagaz Limited. Compute as per applicable Ind AS : the cost of the new machine for Kagaz Limited;the profit (loss) incurred by Kagaz Limited on the buy-back arrangement. Also pass necessary journal entries in the books of Kagaz Limited. Ignore any impact of GST.

Suggested Answer and Working Notes:

(i) Computation of cost of new machine ₹ in lakhs MRP of Machine 20.00 Less: Special discount @ 5% of MRP (1.00) 19.00 Add: MRP of cables 2.00 Add: Accessories 3.00 Add: Transit Insurance Cost (3% of 20lakh) 0.60 Add: Freight and other incidental amount 1.00 25.60 (ii) Computation of Profit /Loss incurred on buy-back arrangement ₹ in lakhs Discounted price of new machine (20.00 – 1.00) 19.00 Add: Fair value of heavy – duty cables 2.00 Fair value of the machine acquired 21.00 Less: Cash portion thereof (15.00) Total fair market value of new machine after deduction of cash consideration 6.00 Less: Book value thereof (6.60) Loss on Buy back (0.60) (iii) Journal Entries ₹ in lakhs ₹ in lakhs New Machine A/c Dr. 19.60 To Cash A/c 19.60 (Being the expenses incurred for purchase of New Machine - cash payment - 15.00 lakh + accessory - 3.00 lakh + transit insurance - 0.60 lakh + freight - 1.00 lakh) New Machine A/c Dr. 6.00 Loss on buy back of old machine A/c Dr. 0.60 To Old Machine A/c 6.60 (Being the transfer of fair market value of 4.00 lakhs of old machine to new machine under buy-back scheme and recognition of loss on buy back) Note: It is assumed that the cash payment of 15.00 lakhs is the full and final payment to the supplier for the new machine.

Topics: Ind AS 16

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic