XYLO Ltd. reported a net loss of 11,95,000 crore for the year 2009–10 as compared to the net profit of 77,000 crore for the year 2008–09. However, the sales for the year 2009–10 was higher by 5,00,000 crore as compared to the sales for the year 2008–09. The income tax return filled by XYLO Ltd. was challenged by the assessing officer and the assessing officer reworked the net profit as 2,25,000 crore. The income statement of XYLO Ltd. for the year ending March 31, 2010 was as follows:

The following additional information was also extracted from the notes forming the part of financial statements:

(i) During the year, the company developed a new drug for which the research and development expenses were incurred; the benefit of these expenses is likely to be received in the five years’ time commencing from the next accounting year.

(ii) The company being the new entrant in the industry spent heavily on advertisements the benefit of advertising expenses is likely to be received during four financial years equally including the current financial year.

(iii) Motor van is equally used by one more subsidiary of XYLO Ltd.

(iv) A litigation is pending if the court decision goes against the company. Then the company is likely to pay a compensation of 30,000 crore to its suppliers. However, the management of the company is confident that the case will be settled in the favour of company.

Discussion Question

You are an expert in accounting and the company has roped in you to verify whether the assessment by the income tax officer is correct or not. Elaborate your findings.

Transcribed Image Text:

Particulars To Opening Stock Finished Goods Raw Material To Purchase of raw material To Direct wages To Manufacturing expenses To Administrative expenses To Depreciation To R & D Expenses To Preliminary expenses written off To Motor van expenses To Advertising expenses To Selling and distribution expenses To Loss on sale of plant To Interest on debentures To Provision for compensation Profit and Loss Account For the year ending March 31, 2010 (in crore) 1,00,000 50,000 5,00,000 2,00,000 1,00,000 30,000 20,000 10,50,000 10,000 1,40,000 3,60,000 40,000 55,000 10,000 30,000 26,95,000 Particulars By sales By closing stock Finished goods Raw material By Profit on sale of shares By Net Loss for the year (in crore) 12,00,000 1,50,000 1,00,000 50,000 11,95,000 26,95,000