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AFM Paper 3 — AFM Module A — Capital vs Revenue Expenditure, Depreciation Accounting & BRS Weightage: 10 to 15 Marks (Guaranteed Numerical Set in Every AFM Exam) 16 mins study
Depreciation (SLM, WDV, SYD), BRS & Accounting Adjustments
AFM Paper 3 (AFM Module A — Capital vs Revenue Expenditure, Depreciation Accounting & BRS) — 3 Solved Case Sets & Interactive Calculator
Master the #1 highest-scoring numerical module in JAIIB AFM: Capitalized Asset Cost (Freight + Installation + Transit Insurance), Straight Line Method (SLM), Written Down Value (WDV) Book Value after n years, Sum-of-Years-Digits (SYD), Profit/Loss on Asset Disposal, and Overdraft vs Favourable Balance Bank Reconciliation Statement (BRS).
Switch JAIIB Workbook: Depreciation (SLM Bond Valuation: Current Yield Ratio Analysis Retail Banking: Home Loan LTV Slabs
All 4 Workbooks Step 1: Formula & Regulatory Cheat Sheet
Practice Dynamic AFM Paper 3 Case Studies Core Formulas, Accounting Rules & Examiner Traps
| Concept / Metric | Exact Mathematical Formula | Regulatory / Accounting Norm | Common IIBF Examiner Trap |
|---|---|---|---|
| Capitalized Cost of Asset (AS-10 / Ind AS 16) | Total Capitalized Cost = Invoice Price (Net of Trade Discount & Refundable GST/ITC) + Freight/Transit Insurance + Installation & Trial Run Cost | Post-commissioning repairs, annual maintenance contracts (AMC), and financing interest after asset is ready for use are Revenue Expenses (NOT capitalized) | Never include annual insurance or post-commissioning maintenance in the depreciable cost of machinery! |
| Straight Line Method (SLM) & Written Down Value (WDV) | Annual SLM Depr = (Total Cost - Salvage Value) / Useful Life; WDV Book Value after n yrs = Total Cost × (1 - r)^n | Under WDV, Salvage Value is NOT subtracted upfront; the % rate r is applied directly to Opening WDV each year | In WDV questions, examiners give a Salvage Value just to distract you—do NOT subtract salvage value before applying the WDV % rate! |
| Sum-of-the-Years’-Digits (SYD) Method | Sum of Digits (S) = [n × (n + 1)] / 2; Year t Depreciation = [(Remaining Life in Year t) / S] × (Cost - Salvage Value) | For a 5-year asset, S = 5×6/2 = 15; Year 1 fraction is 5/15, Year 2 is 4/15, Year 3 is 3/15 | Unlike WDV, SYD DOES deduct Salvage Value from Cost before multiplying by the fraction! |
| Bank Reconciliation Statement (BRS) Sign Rule | Favourable Cash Book (Dr) Balance vs Overdraft Cash Book (Cr) Balance have OPPOSITE signs for every adjustment | Always ask: "What did the target book (Pass Book) already do?" and move the starting book in that direction | When starting with Overdraft as per Cash Book, Cheques Issued but Not Presented REDUCE the overdraft (subtract!), whereas in a normal Dr balance they are added. |
CASE STUDY SET #1Moderate (IIBF Standard)10 Marks (5 × 2M)
Capitalized Cost, SLM vs WDV Book Value & Profit/Loss on Machinery Disposal
Official IIBF Case Scenario & Financial Data:
On 1st April 2023, M/s Kaveri Textiles Ltd. purchased an imported CNC Loom for an invoice price of ₹42,00,000. The company paid ₹3,00,000 towards customs duty and inward freight, ₹5,00,000 for foundation and installation charges, and ₹1,50,000 for a 1-year post-commissioning maintenance contract. Estimated residual scrap value at the end of its 5-year useful life is ₹5,00,000.
| Expenditure / Parameter | Amount / Value | Accounting Treatment (Ind AS 16) |
|---|---|---|
| Invoice Price of CNC Loom | ₹42,00,000 | Capitalize |
| Customs Duty & Inward Freight | ₹3,00,000 | Capitalize |
| Foundation & Installation Charges | ₹5,00,000 | Capitalize |
| Post-Commissioning Annual Maintenance (AMC) | ₹1,50,000 | Revenue Expense (P&L) — Exclude |
| Estimated Residual / Salvage Value (5-Year Life) | ₹5,00,000 | Deduct for SLM & SYD only |
Question 1.1 • 2 Marks
What is the Total Capitalized Cost of the CNC Loom to be recorded in the Fixed Asset Register on 1st April 2023?
A ₹50,00,000
B ₹51,50,000
C ₹45,00,000
D ₹47,00,000
Correct Answer: Option A — ₹50,00,000
Capitalized Cost = Purchase Price + Non-refundable Duties/Freight + Installation Charges- Step 1: Add eligible capital costs: ₹42,00,000 (Invoice) + ₹3,00,000 (Duty/Freight) + ₹5,00,000 (Installation) = ₹50,00,000.
- Step 2: Exclude ₹1,50,000 post-commissioning AMC (charged directly to P&L as revenue expense).
IIBF Examiner Tip: Only expenses necessary to bring the asset to its working condition and location for intended use are capitalized.
Question 1.2 • 2 Marks
Under the Straight Line Method (SLM), what is the Annual Depreciation Charge and the SLM Depreciation Rate (% of Original Capitalized Cost)?
A ₹9,00,000 per year and 18.00% p.a.
B ₹10,00,000 per year and 20.00% p.a.
C ₹9,30,000 per year and 18.06% p.a.
D ₹8,40,000 per year and 16.80% p.a.
Correct Answer: Option A — ₹9,00,000 per year and 18.00% p.a.
Annual SLM Depr = (Capitalized Cost - Salvage Value) / Useful Life; SLM Rate % = (Annual SLM / Capitalized Cost) × 100- Step 1: Depreciable Base = ₹50,00,000 - ₹5,00,000 (Salvage) = ₹45,00,000.
- Step 2: Annual SLM Depreciation = ₹45,00,000 / 5 Years = ₹9,00,000 per year.
- Step 3: SLM Rate % on Original Cost = (₹9,00,000 / ₹50,00,000) × 100 = 18.00% p.a.
IIBF Examiner Tip: Always divide Annual SLM Depreciation by Original Capitalized Cost (₹50 L), not by Depreciable Base (₹45 L), when finding the SLM rate %.
Question 1.3 • 2 Marks
If the company instead uses the Written Down Value (WDV) method at 20% p.a., what is the Depreciation Charge for Year 3 (FY 2025-26) and the Closing Book Value at the end of Year 3?
A Year 3 Depr = ₹6,40,000; Closing WDV = ₹25,60,000
B Year 3 Depr = ₹5,76,000; Closing WDV = ₹23,04,000
C Year 3 Depr = ₹8,00,000; Closing WDV = ₹24,00,000
D Year 3 Depr = ₹7,20,000; Closing WDV = ₹28,80,000
Correct Answer: Option A — Year 3 Depr = ₹6,40,000; Closing WDV = ₹25,60,000
WDV at end of Year n = Cost × (1 - r)^n; Year n Depr = Opening WDV_n × r- Step 1: Under WDV, apply 20% directly to ₹50,00,000 (do NOT subtract ₹5,00,000 salvage value!).
- Step 2: Year 1 Depr = ₹10,00,000 -> End Y1 WDV = ₹40,00,000.
- Step 3: Year 2 Depr = 20% of ₹40,00,000 = ₹8,00,000 -> End Y2 WDV = ₹32,00,000.
- Step 4: Year 3 Depr = 20% of ₹32,00,000 = ₹6,40,000 -> End Y3 WDV = ₹25,60,000 (or ₹50L × 0.8^3 = ₹25.60L).
IIBF Examiner Tip: Notice how Option B (₹5.76L / ₹23.04L) is the trap answer obtained if you wrongly subtract ₹5L salvage value before applying WDV!
Question 1.4 • 2 Marks
Using the Sum-of-the-Years’-Digits (SYD) method over the 5-year life, what would be the Depreciation Charge for Year 1 and Year 2?
A Year 1 = ₹15,00,000; Year 2 = ₹12,00,000
B Year 1 = ₹16,66,667; Year 2 = ₹13,33,333
C Year 1 = ₹9,00,000; Year 2 = ₹9,00,000
D Year 1 = ₹18,00,000; Year 2 = ₹13,50,000
Correct Answer: Option A — Year 1 = ₹15,00,000; Year 2 = ₹12,00,000
Sum of Digits S = n(n+1)/2 = 15; Year t Depr = (Remaining Life / 15) × (Cost - Salvage)- Step 1: Sum of Digits for 5 years = 5 × 6 / 2 = 15; Depreciable Amount = ₹50,00,000 - ₹5,00,000 = ₹45,00,000.
- Step 2: Year 1 Depreciation = (5 / 15) × ₹45,00,000 = ₹15,00,000.
- Step 3: Year 2 Depreciation = (4 / 15) × ₹45,00,000 = ₹12,00,000.
IIBF Examiner Tip: Notice how SYD depreciation decreases by a constant ₹3,00,000 (1/15 of ₹45L) every year: ₹15L, ₹12L, ₹9L, ₹6L, ₹3L.
Question 1.5 • 2 Marks
Assume the company followed the 20% WDV method and sold the machine at the end of Year 3 (Closing WDV = ₹25,60,000) for ₹22,00,000. What is the accounting result on disposal?
A Loss on Sale of Fixed Asset = ₹3,60,000 (Debited to P&L)
B Profit on Sale of Fixed Asset = ₹3,60,000 (Credited to P&L)
C Loss on Sale = ₹1,00,000 (Compared to SLM WDV of ₹23,00,000)
D Capital Loss debited to General Reserve
Correct Answer: Option A — Loss on Sale of Fixed Asset = ₹3,60,000 (Debited to P&L)
Profit / (Loss) on Disposal = Sale Proceeds - Carrying Book Value (WDV) on Date of Sale- Step 1: Book Value (WDV) at end of Year 3 = ₹25,60,000.
- Step 2: Sale Proceeds realized = ₹22,00,000.
- Step 3: Loss on Sale = ₹22,00,000 - ₹25,60,000 = -₹3,60,000 (Debited to Profit & Loss Account).
IIBF Examiner Tip: Had the company used SLM, Book Value at end of Year 3 would be ₹50L - (3 × ₹9L) = ₹23,00,000, resulting in a ₹1,00,000 loss.
CASE STUDY SET #2Examiner Trap Scenario10 Marks (5 × 2M)
Bank Reconciliation Statement (BRS) — Overdraft Balance vs Favourable Balance
Official IIBF Case Scenario & Financial Data:
On 31st March 2026, the Cash Book (Bank Column) of M/s Bharat Traders shows an Overdraft (Credit Balance) of ₹1,85,000. Upon comparing the Cash Book with the Bank Statement (Pass Book), the following five discrepancies are discovered:
| Item # | Reconciliation Discrepancy on 31st March 2026 | Amount (₹) |
|---|---|---|
| 1 | Cheques issued to suppliers but not yet presented for payment in Bank | ₹45,000 |
| 2 | Cheques deposited into Bank for collection but not yet cleared/credited | ₹62,000 |
| 3 | Bank interest on Overdraft and quarterly ledger charges debited in Pass Book only | ₹8,500 |
| 4 | Customer directly transferred funds via NEFT into the Bank account (unrecorded in Cash Book) | ₹25,000 |
| 5 | A discounted Bill of Exchange dishonoured and debited by Bank (including noting charges) | ₹16,500 |
Question 2.1 • 2 Marks
When starting with Overdraft as per Cash Book (₹1,85,000), how should Item #1 (Unpresented Cheques ₹45,000) and Item #2 (Unclear Deposited Cheques ₹62,000) be treated to arrive at the Pass Book Overdraft?
A Deduct ₹45,000 and Add ₹62,000 (Net +₹17,000 to Overdraft)
B Add ₹45,000 and Deduct ₹62,000 (Net -₹17,000 to Overdraft)
C Add both ₹45,000 and ₹62,000
D Deduct both ₹45,000 and ₹62,000
Correct Answer: Option A — Deduct ₹45,000 and Add ₹62,000 (Net +₹17,000 to Overdraft)
Starting with Cash Book Overdraft: Unpresented Cheques REDUCE Overdraft (-); Uncollected Deposits INCREASE Overdraft (+)- Step 1: When cheques of ₹45,000 were issued, Cash Book Overdraft was increased by ₹45,000, but Bank has not paid them yet -> Deduct ₹45,000.
- Step 2: When cheques of ₹62,000 were deposited, Cash Book Overdraft was reduced by ₹62,000, but Bank has not credited them yet -> Add ₹62,000.
IIBF Examiner Tip: Think of Overdraft as a loan balance: unpresented cheques mean the loan in the bank passbook is LOWER than in your cash book!
Question 2.2 • 2 Marks
How should Item #3 (OD Interest ₹8,500), Item #4 (Direct NEFT Receipt ₹25,000), and Item #5 (Dishonoured Bill ₹16,500) be adjusted to the Cash Book Overdraft?
A Add ₹8,500, Deduct ₹25,000, Add ₹16,500 (Net ₹0 change)
B Deduct ₹8,500, Add ₹25,000, Deduct ₹16,500
C Add all three items (+₹50,000)
D Deduct all three items (-₹50,000)
Correct Answer: Option A — Add ₹8,500, Deduct ₹25,000, Add ₹16,500 (Net ₹0 change)
Bank Debits (OD Interest + Dishonoured Bill) INCREASE Overdraft (+); Bank Credits (Direct NEFT) REDUCE Overdraft (-)- Step 1: OD Interest & Charges (₹8,500) and Dishonoured Bill (₹16,500) were debited by the bank, increasing the Pass Book Overdraft by ₹8,500 + ₹16,500 = +₹25,000.
- Step 2: Direct NEFT credit by customer (₹25,000) reduced the Pass Book Overdraft by -₹25,000.
- Step 3: Net effect of Items #3, #4, and #5 = +₹8,500 - ₹25,000 + ₹16,500 = ₹0!
IIBF Examiner Tip: Grouping bank debits (+OD) and bank credits (-OD) saves time and eliminates sign errors.
Question 2.3 • 2 Marks
What is the final Overdraft Balance as per Pass Book (Bank Statement) on 31st March 2026?
A ₹2,02,000 Overdraft (Debit Balance in Pass Book)
B ₹1,68,000 Overdraft (Debit Balance in Pass Book)
C ₹2,19,000 Overdraft
D ₹1,85,000 Overdraft
Correct Answer: Option A — ₹2,02,000 Overdraft (Debit Balance in Pass Book)
Pass Book Overdraft = Cash Book Overdraft - Unpresented Cheques + Uncollected Cheques + Bank Debits - Bank Credits- Step 1: Starting Overdraft as per Cash Book = ₹1,85,000.
- Step 2: Adjust Items #1 & #2: ₹1,85,000 - ₹45,000 + ₹62,000 = ₹2,02,000.
- Step 3: Adjust Items #3, #4 & #5: ₹2,02,000 + ₹8,500 - ₹25,000 + ₹16,500 = ₹2,02,000 Overdraft (shown as Debit Balance in Pass Book).
IIBF Examiner Tip: Remember: Overdraft is a Credit Balance in the Cash Book and a Debit Balance in the Bank Pass Book!
Question 2.4 • 2 Marks
Before preparing the final Balance Sheet on 31st March 2026, the accountant updates the Adjusted Cash Book for entries not yet recorded by the firm. Which items require actual journal entries in the Adjusted Cash Book?
A Only Items #3, #4, and #5 (Net adjustment ₹0; Adjusted Cash Book OD remains ₹1,85,000)
B Only Items #1 and #2
C All five items #1 to #5
D Only Item #3 (OD Interest)
Correct Answer: Option A — Only Items #3, #4, and #5 (Net adjustment ₹0; Adjusted Cash Book OD remains ₹1,85,000)
Adjusted Cash Book records only omissions/errors of the firm (Bank charges, Direct credits, Dishonours), NOT timing differences (Unpresented/Unclear cheques)- Step 1: Items #1 (Unpresented cheques) and #2 (Unclear deposits) are already recorded in the Cash Book (timing differences only).
- Step 2: Items #3 (₹8,500), #4 (₹25,000), and #5 (₹16,500) are unrecorded in the Cash Book and must be posted to arrive at the Adjusted Cash Book balance.
IIBF Examiner Tip: Frequently asked JAIIB AFM theory-cum-numerical question: Timing differences go to BRS; unrecorded bank entries go to the Adjusted Cash Book.
Question 2.5 • 2 Marks
Suppose the starting balance of ₹1,85,000 was a FAVOURABLE Debit Balance as per Cash Book (instead of an Overdraft), with the exact same 5 items. What would be the Favourable Balance as per Pass Book?
A ₹1,68,000 Favourable (Credit Balance in Pass Book)
B ₹2,02,000 Favourable (Credit Balance in Pass Book)
C ₹1,85,000 Favourable
D ₹1,51,000 Favourable
Correct Answer: Option A — ₹1,68,000 Favourable (Credit Balance in Pass Book)
Favourable Pass Book = Cash Book Dr + Unpresented Cheques (₹45k) - Uncollected Cheques (₹62k) - Bank Debits (₹25k) + Bank Credits (₹25k)- Step 1: Starting Favourable Cash Book Balance = ₹1,85,000.
- Step 2: Add Unpresented Cheques (+₹45,000) and Deduct Uncollected Cheques (-₹62,000) -> ₹1,85,000 - ₹17,000 = ₹1,68,000.
- Step 3: Items #3 (-₹8,500), #4 (+₹25,000), and #5 (-₹16,500) net to ₹0 -> Final Pass Book Favourable Balance = ₹1,68,000.
IIBF Examiner Tip: Notice the symmetry: ₹1,85,000 ± ₹17,000 gives ₹2,02,000 for Overdraft and ₹1,68,000 for Favourable Balance.
CASE STUDY SET #3Advanced (High-Yield Numerical)10 Marks (5 × 2M)
Rectification of Accounting Errors, Suspense Account & Impact on Net Profit
Official IIBF Case Scenario & Financial Data:
While finalizing the Trial Balance of M/s Sterling Traders for FY 2025-26, the Debit total exceeded the Credit total by ₹18,000, which was temporarily placed in a Suspense Account (Credit balance of ₹18,000). Draft Net Profit before rectification was ₹3,40,000. Subsequent audit revealed four errors:
| Error # | Nature of Accounting Error Discovered | Amount (₹) |
|---|---|---|
| Error 1 | Credit sales to Ramesh were correctly recorded in Sales Book but posted to the Debit of Ramesh’s A/c as ₹12,000 instead of ₹30,000 | Short Debit ₹18,000 |
| Error 2 | Overhaul of second-hand machinery purchased today was debited to Repairs & Maintenance A/c instead of Machinery A/c (ignore depreciation) | ₹40,000 |
| Error 3 | Goods costing ₹15,000 (selling price ₹20,000) taken by proprietor for personal use were wrongly credited to Sales A/c (Debited to Drawings A/c at ₹15,000, causing ₹5,000 difference, or both debited/credited at ₹20,000) | ₹20,000 |
| Error 4 | Purchase Return Book was overcast (totalled in excess) by ₹8,000 | ₹8,000 |
Question 3.1 • 2 Marks
Classify Error 1 (posting ₹12,000 instead of ₹30,000 to Ramesh’s personal account) and Error 2 (debiting capital overhaul of ₹40,000 to Repairs A/c) according to accounting principles.
A Error 1: Error of Commission (One-sided, affects Trial Balance); Error 2: Error of Principle (Two-sided, does NOT affect Trial Balance)
B Error 1: Error of Principle; Error 2: Error of Commission
C Both are Compensating Errors
D Error 1: Error of Omission; Error 2: Error of Commission
Correct Answer: Option A — Error 1: Error of Commission (One-sided, affects Trial Balance); Error 2: Error of Principle (Two-sided, does NOT affect Trial Balance)
Error of Commission = Wrong amount/casting/posting; Error of Principle = Treating Capital item as Revenue or vice-versa- Step 1: Posting a wrong amount (₹12,000 instead of ₹30,000) to a ledger account is an Error of Commission affecting Trial Balance agreement.
- Step 2: Debiting a capital expenditure (pre-commissioning overhaul of second-hand machinery) to a revenue expense account (Repairs) is an Error of Principle.
IIBF Examiner Tip: Errors of Principle never affect the agreement of the Trial Balance, but they ALWAYS distort Net Profit!
Question 3.2 • 2 Marks
What is the rectifying journal entry for Error 1 (Ramesh’s A/c debited with ₹12,000 instead of ₹30,000), and does it affect the Profit & Loss Account?
A Ramesh A/c Dr. ₹18,000 To Suspense A/c ₹18,000 (Zero impact on Net Profit)
B Suspense A/c Dr. ₹18,000 To Sales A/c ₹18,000 (+₹18,000 impact on Profit)
C Ramesh A/c Dr. ₹18,000 To Sales A/c ₹18,000 (+₹18,000 impact on Profit)
D Suspense A/c Dr. ₹18,000 To Ramesh A/c ₹18,000
Correct Answer: Option A — Ramesh A/c Dr. ₹18,000 To Suspense A/c ₹18,000 (Zero impact on Net Profit)
Since Sales Book (Nominal A/c) was correctly credited, only Ramesh (Personal A/c) was short-debited by ₹18,000- Step 1: Sales A/c was credited correctly via the Sales Book total.
- Step 2: Ramesh’s Personal A/c was short-debited by ₹30,000 - ₹12,000 = ₹18,000.
- Step 3: Rectifying entry: Debit Ramesh A/c ₹18,000, Credit Suspense A/c ₹18,000. Since neither account is a Nominal (P&L) account, Net Profit is unaffected.
IIBF Examiner Tip: Check whether an error involves a Nominal Account (P&L) or only Personal/Real accounts before adjusting Net Profit!
Question 3.3 • 2 Marks
How does rectifying Error 2 (₹40,000 capital overhaul debited to Repairs A/c) affect the company’s Draft Net Profit of ₹3,40,000?
A Increases Net Profit by ₹40,000
B Decreases Net Profit by ₹40,000
C No impact on Net Profit
D Increases Net Profit by ₹20,000
Correct Answer: Option A — Increases Net Profit by ₹40,000
Machinery A/c Dr. ₹40,000 To Repairs A/c (P&L Adjustment) ₹40,000- Step 1: Repairs A/c (an expense) was overstated by ₹40,000, which had understated Net Profit by ₹40,000.
- Step 2: Crediting Repairs A/c (or P&L Adjustment A/c) and debiting Machinery A/c increases Net Profit by +₹40,000.
IIBF Examiner Tip: Reversing an wrongly debited revenue expense always increases Net Profit.
Question 3.4 • 2 Marks
Suppose in Error 3, Drawings of goods (Cost ₹15,000, Selling Price ₹20,000) were recorded as Drawings A/c Dr. ₹20,000 To Sales A/c ₹20,000. What is the net impact of rectifying Error 3 and Error 4 (Purchase Return Book overcast by ₹8,000) on Net Profit?
A Error 3 reduces profit by ₹5,000; Error 4 reduces profit by ₹8,000 (Total -₹13,000)
B Error 3 reduces profit by ₹20,000; Error 4 increases profit by ₹8,000
C Error 3 has zero effect; Error 4 reduces profit by ₹8,000
D Error 3 increases profit by ₹5,000; Error 4 reduces profit by ₹8,000
Correct Answer: Option A — Error 3 reduces profit by ₹5,000; Error 4 reduces profit by ₹8,000 (Total -₹13,000)
Goods withdrawn by proprietor must be credited to Purchases A/c at COST (₹15,000), not to Sales at ₹20,000- Step 1: In Error 3, Sales was wrongly credited by ₹20,000 whereas Purchases should have been credited at cost (₹15,000). The unrealized profit of ₹5,000 (₹20,000 - ₹15,000) must be removed -> reduces Net Profit by ₹5,000.
- Step 2: In Error 4, Purchase Return Book (a credit to trading account that reduces cost of purchases) was overstated by ₹8,000, which had inflated profit by ₹8,000. Reversing it reduces Net Profit by ₹8,000.
- Step 3: Combined impact of Error 3 and Error 4 = -₹5,000 - ₹8,000 = -₹13,000.
IIBF Examiner Tip: Proprietor drawings of stock are ALWAYS valued at Cost Price (credited to Purchases A/c), never at Selling Price!
Question 3.5 • 2 Marks
What is the Corrected Net Profit of M/s Sterling Traders after rectifying all four errors (Draft Net Profit = ₹3,40,000)?
A ₹3,67,000
B ₹3,80,000
C ₹3,27,000
D ₹3,85,000
Correct Answer: Option A — ₹3,67,000
Corrected Net Profit = Draft Profit + Error 2 (+₹40,000) - Error 3 (-₹5,000) - Error 4 (-₹8,000)- Step 1: Draft Net Profit = ₹3,40,000.
- Step 2: Error 1 impact = ₹0 (Personal A/c only).
- Step 3: Error 2 impact = +₹40,000 (Repairs reversed to Machinery).
- Step 4: Error 3 & 4 impact = -₹5,000 - ₹8,000 = -₹13,000.
- Step 5: Corrected Net Profit = ₹3,40,000 + ₹40,000 - ₹13,000 = ₹3,67,000.
IIBF Examiner Tip: Always build a quick +/- column for Nominal Accounts in rectification case studies!
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Total Capitalized Cost:₹60 Lakhs
Annual SLM Depreciation:₹9 Lakhs / yr
Closing WDV at End of Year 2:₹38.4 Lakhs
Closing WDV at End of Year 3:₹30.72 Lakhs
Frequently Asked JAIIB Exam Questions (AFM Paper 3)
Why is Salvage Value ignored when applying the WDV percentage rate?
Because the WDV percentage rate r = 1 - (Salvage / Cost)^(1/n) is already mathematically derived to reduce the asset’s Cost down to its Salvage Value at the end of year n. Therefore, during each annual calculation, the WDV % is applied directly to Opening Book Value without subtracting Salvage Value.
Which depreciation methods are permitted under the Indian Companies Act, 2013 (Schedule II) vs Income Tax Act, 1961?
Schedule II of the Companies Act, 2013 permits Straight Line Method (SLM), Written Down Value (WDV), and Units of Production method based on useful life. The Income Tax Act, 1961 (Section 32) mandates only the WDV method on a "Block of Assets" basis (except for power generation undertakings which may opt for SLM).
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