1. Foxtrot Corporation wants to setup a factory producing tires. The factory would be constructed in two years post which it will start production. Foxtrot takes a loan to part-fund the factory construction cost for 100 cr at 10% interest with interest payable yearly in cash. At the end of the first year, the company pays Rs 10 cr as interest to the bank. At this stage, from an accounting perspective, Foxtrot has to make a choice. It can either show the interest paid as an expense in the Income Statement for year 1, or it can add the interest paid to the book value of the factory. In the latter case, the book value of Foxtrot will be increased to Rs 110 cr that will now include Rs 10 cr as interest that the company paid to the bankers? Which of the two do you think is more consistent with the principles of accounting?
2. The balance in the accumulated depreciation account of Golf Corporation as on April 1st 2011 was Rs 2,00,000 when the original cost of assets was Rs 10,00,000. The company charges 10% depreciation on a straight-line basis. One such asset costing Rs 5,00,000 (and having an accumulated depreciation of Rs 80,000) was sold for Rs 4,20,000 at the beginning of the year. What is the balance of the accumulated depreciation account on March 31st 2012?
3. Echo Corporation is into farming tractor-manufacturing business. At the end of year 1, their retained earnings are $250, and cash is $100. In year 2, Echo makes a net loss of $30. In year 3, Echo makes a net profit of $50 and also issues dividends of $25 to its shareholders. Due to these transactions, what will be the Retained Earnings on Echo’s Balance Sheet after Year 3? What will be cash after year 3?