a. A company had lost a legal action, which had been pending for the last three years and in consequence had to pay Rs. 75,000 as duty for import of machinery and Rs. 10,000 towards costs. No provision appeared in the previous year’s accounts.

Answer
The subject matter of the case relates to a dispute on import duty on machinery imported. The amount of Rs. 75,000/- paid in terms of the court order should be debited to the appropriate Machinery Account and the amount of Rs. 10,000/- paid as costs should be charged off to revenue, as a separate item. The auditor should ensure that depreciation in respect of the Machinery has been recomputed on the increased cost and should be provided prospectively over the residual useful life of the asset. Since the liability for payment has arisen during the year on account of court order, it cannot be called as a prior period. Item.