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CA IPCC : Revision Test Paper (with Answers) - ACCOUNTING May 2014

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PAPER 1: ACCOUNTING PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR MAY, 2014 EXAMINATION A. Applicable for May, 2014 examination Revision in the Criteria for classifying Level II Non-Corporate Entities Due to recent changes in the enhancement of tax audit limit, the Council of the ICAI has recently decided to change the 1st criteria of Level II Non-Corporate Entities i.e. determination of SME on turnover basis from ` 40 lakhs to ` 1 Crore vide announcement Revision in the Criteria for classifying Level II Non-Corporate Entities issued by ICAI on 7th March, 2013. This revision is applicable with effect from the accounting year commencing on or after April 1, 2012. B. Not applicable for May, 2014 examination Ind ASs issued by the Ministry of Corporate Affairs The MCA has hosted on its website 35 converged Indian Accounting Standards (Ind AS) without announcing the applicability date. These are the standards which are being converged by eliminating the differences of the Indian Accounting Standards vis- -vis IFRS. These standards shall be applied for all companies falling under Phase I to Phase III as prescribed under the roadmap issued by the core group. These Ind ASs are not applicable for the students appearing in May, 2014 Examination. PART II : QUESTIONS AND ANSWERS QUESTIONS Financial Statements of Companies 1. The following balance appeared in the books of Oliva Company Ltd. as on 31-03-2014. Particulars Inventory 2013 ` Particulars 01-04- Sales -Raw Material 30,000 -Finished goods 46,500 Purchases Manufacturing Expenses ` 17,10,000 Interest 3,900 76,500 Profit and Loss A/c 45,000 12,15,000 Share Capital 2,70,000 Loans: Short term Long-term Salaries and wages 40,200 Unclaimed Dividend General Charges 16,500 Deposits: The Institute of Chartered Accountants of India 3,15,000 4,500 21,000 25,500 3,000 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Dividend for 2012-13 27,000 Plant Machinery 1,500 1,01,000 Building Short -Term Long -term 3,300 and Trade payables 4,800 3,27,000 70,400 Furniture 10,200 Motor Vehicles 40,800 Stores and Spare Parts Consumed 45,000 Investments: Current Non Current 4,500 7,500 12,000 Trade receivables 2,38,500 Cash in Bank 2,71,100 24,34,200 24,34,200 From the above balance and the following information, prepare the company s Profit and Loss Account for the year ended 31st March, 2014 and Company s Balance Sheet as on that date: 1. Inventory on 31st March,2014 Raw material ` 25,800 & finished goods ` 60,000. 2. Outstanding Expenses: Manufacturing Expenses ` 67,500 & Salaries & Wages ` 4,500. 3. Interest accrued on Securities ` 300. 4. General Charges prepaid ` 2,490. 5. Provide depreciation: Building @ 2% p.a., Machinery @ 10% p.a., Furniture @ 10% p.a. & Motor Vehicles @ 20% p.a. 6. Current maturity of long term loan is ` 1,000. 7. The Taxation provision of 40% on net profit is considered. Cash Flow Statements 2. The following are the changes in the account balances taken from the balance sheets of Leela Ltd. as at the beginning and end of the year Debit (`) 8% Debentures Debenture Discount The Institute of Chartered Accountants of India Credit (`) 1,50,000 3,000 PAPER 1: ACCOUNTING Plant and Machinery at cost 3 1,80,000 Depreciation on Plant and Machinery 43,200 Trade receivables 1,50,000 Inventory including Work-in-Progress 1,15,500 Trade payables 35,400 Net Profit for the year Dividend paid in respect of earlier year 2,29,500 90,000 Provision for Doubtful Debts Trade Investments at cost 9,900 1,41,000 Bank 2,11,500 Total 6,79,500 6,79,500 You are informed that: During the year Plant costing ` 54,000 against which Depreciation Provision of ` 40,500 was lying was sold for ` 21,000. During the middle of the year, ` 1,50,000 Debentures were issued for cash at a discount of ` 3,000. The net Profit for the year was after crediting the profit on sale plant and charging Debenture Interest. Prepare a Cash Flow Statement which will explain why Bank Borrowing has increased by ` 2,11,500 during the year end, ignore taxation. Profit or Loss Pre and Post Incorporation 3. From the following information, calculate the ratio of Sales in each case separately. (a) (i) Date of acquisition 1st April, 2013; date of incorporation 1st July, 2013 and date of closing the books of accounts 31st March, every year. (ii) The sales for the year ending on 31st March, 2014 were ` 24,00,000 of which ` 4,80,000 goods were sold during the first six months of the accounting period. (b) (i) The accounts were made up to 31st December, 2013. The company was incorporated on 1st May, 2013 to take over a business from the preceding 1st January. (ii) Total sales for the year were ` 12,00,000. It is ascertained that the sales for November and December are one and half times the average of those for the year, whilst those for February and April are only half the average. (c) (i) Hello Ltd.was incorporated on 1st July, 2013 to take the existing business of X The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 from 1stApril, 2013. Date of closing the books of account 31st March, 2014. (ii) Monthly sales in April 2013, February 2014 and March 2014 are double the average monthly sales for remaining months of the year. Accounting for Bonus Issue 4. Following is the extract of the Balance Sheet of Preet Ltd. as at 31st March, 2014 Authorised capital: 15,000 12% Preference shares of ` 10 each 1,50,000 Equity shares of ` 10 each ` 1,50,000 15,00,000 16,50,000 Issued and Subscribed capital: 12,000 12% Preference shares of ` 10 each fully paid 1,35,000 Equity shares of ` 10 each, ` 8 paid up 1,20,000 10,80,000 Reserves and surplus: General Reserve 1,80,000 Capital Reserve 1,12,500 Securities premium Profit and Loss Account 37,500 3,00,000 On 1st April, 2014, the Company has made final call @ ` 2 each on 1,35,000 equity shares. The call money was received by 20th April, 2014. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate of one share for every four shares held. Capital reserves include ` 60,000, being profit realized on sale of plant and machinery. Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30th April, 2014 after bonus issue. Internal Reconstruction of a Company 5. The ledger balance of Casio Ltd. as on 31st March, 2014 are: Profit & loss account (Dr.) balance 10,20,000, Fixed Assets ` 7,00,000, Investment ` 10,000, Inventory ` 3,90,000 Trade receivables ` 4,60,000. Equity Share Capital (60% paid) ` 6,00,000, 10% First Debentures ` 2,00,000, 12% Second Debentures ` 5,00,000, Bank overdraft ` 50,000, Trade payables (including Y for ` 8,50,000) ` 11,50,000, Outstanding interest for one year on both type of debentures. Due to heavy losses, the following scheme of re-construction is agreed: (a) To make the existing ` 100 equity shares fully paid up and then to reduce them to ` 20 each. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 5 (b) To settle the claims of first Debenture-holders by issuing 2,000, 13.5% Debentures of ` 100 each. (c) To discharge the claims of the second debenture-holders by issuing 15% 4,000 debentures of ` 100 each. (d) To pay ` 3,00,000 to Mr. Y in full settlement of his account, (e) To allot 15,000 fresh equity shares of ` 20 each to discharge the remaining trade payables, (f) Market value of investments is ` 20,000, and (g) To reduce the value of fixed assets. Assuming all formalities are duly complied with, pass journal entries to give effect to the above scheme and prepare the post-reconstruction Balance Sheet. Amalgamation of Companies 6. Alia Limited was wound up on 31.3.2014 and its draft Balance Sheet as on that date was given below: Balance Sheet of Alia Limited as on 31.3.2014 Liabilities ` Share capital: 60,000 Equity shares of ` 10 each Assets ` Fixed assets 6,00,000 Reserves and surplus: 4,82,000 Current assets: Inventory 3,87,500 Trade receivables Contingency reserve 1,56,000 Profit and loss A/c Cash at bank 91,000 1,64,500 6,43,000 1,26,000 Current liabilities: Trade payables 1,33,000 Provisions: Provision for income tax 1,10,000 ________ 11,25,000 11,25,000 Details of Trade receivables and Trade payables: Trade Receivables Sundry debtors Less: Provision for bad and doubtful debts Bills receivable The Institute of Chartered Accountants of India 80,000 4,000 76,000 15,000 91,000 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Trade payables Sundry creditors 1,13,000 Bills payable 20,000 1,33,000 Burger Limited took over the following assets at values shown as under: Fixed assets ` 6,40,000, Inventory ` 3,85,000 and Bills Receivable ` 15,000. Purchase consideration was settled by Burger Limited: ` 2,55,000 of the consideration was satisfied by the allotment of fully paid 10% Preference shares of ` 100 each. The balance was settled by issuing equity shares of ` 10 each at ` 8 per share paid up. Sundry debtors realised ` 75,000. Bills payable was settled for ` 19,000. Income tax authorities fixed the taxation liability at ` 1,11,000. Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to ` 4,000. You are required to: (i) Calculate the number of equity shares and preference shares to be allotted by Burger Limited in discharge of purchase consideration. (ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders account and Burger Limited account in the books of Alia Limited. (iii) Pass journal entries in the books of Burger Limited. Average Due Date 7. Two traders Abhinav and Krishna buy goods from one another, each allowing the other one month s credit. At the end of 3 months the accounts rendered are as follows: Goods sold by Abhinav to Krishna Goods sold by Krishna to Abhinav ` 18th 9,000 April 7,800 May 10,500 24th May 7,500 16th June 12,000 15th April ` 23rd Compute the date upon which the balance should be paid, so that no interest is due either to Abhinav or Krishna. Account Current 8. From the following prepare an account current, as sent by A to B on 30th June, 2012 by means of products method charging interest @ 6% p.a: The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 7 2012 ` Jan. 1 Balance due from B 600 Jan.11 Sold goods to B 520 Jan. 18 B returns Goods 125 Feb 11 B Paid by cheque 400 Feb 14 B accepted a bill drawn by A for one month 300 Apr. 29 Goods sold to B 615 May 15 Received cash from B 700 Self Balancing Ledgers 9. From the following particulars, prepare Total Debtors Account in the general ledger: Balance as on 1-4-2013 Dr. (`) Cr.(`) Sundry Debtors 20,000 300 Transactions during April, 2013 ` Sales (including cash ` 6,000) 25,000 Cash received from customers (in full settlement of claims of `15,000) 14,100 Bills receivable received 3,000 Bills receivable endorsed 800 Endorsed B/R dishonoured 300 B/R discounted Bills receivable dishonoured Interest charged on dishonoured B/R Transfer from Debtors Ledger to Creditors Ledger 1,400 400 30 600 Balance as on 30-4-2013 Sundry Debtors (Cr.) 450 Financial Statements of Not-For-Profit Organizations 10. The accountant of Tiger Club gave the following information about the receipts and payments of the club for the year ended 31st March, 2014: Receipts: Subscriptions Fair receipts The Institute of Chartered Accountants of India ` 1,24,260 14,400 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Variety show receipts (net) 25,620 Interest 1,380 Bar collections 44,700 Payments: Premises 60,000 Rent 4,800 Rates and taxes 7,560 Printing and stationary 2,820 Sundry expenses 10,700 Wages 5,040 Fair expenses 14,340 Honorarium to secretary 22,000 Bar purchases (payments) 34,620 Repairs 1,920 75,600 New car (less proceeds of old car ` 18,000) The following additional information could be obtained:1.4.2013 31.3.2014 ` ` 900 Nil 48,840 20,700 540 180 Subscriptions due 7,200 5,880 Premises (at cost) 1,74,000 2,34,000 Provision for depreciation on premises 1,12,800 - Car (at cost) 73,140 93,600 Accumulated depreciation on car 61,740 - Bar inventory 4,260 5,220 Creditors for bar purchases 3,540 2,580 Cash in hand Bank balance as per cash-book Cheque issued for sundry expenses not presented to the bank (entry has been duly made in the cash book) Annual honorarium of secretary is ` 24,000. Depreciation on premises is to be provided at 5% on written down value. Depreciation on new car is to be provided at 20%. You are required to prepare the Receipts and Payments Account and Income and Expenditure Account for the year ended 31.3.2014. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 9 Accounts from Incomplete Records 11. Mr. Hemant had ` 1,65,000 in the bank account on 1.1.2013 when he started his business. He closed his accounts on 31st March, 2014. His single entry books (in which he did not maintain any account for the bank) showed his position as follows: 31.3.2013 ` Cash in hand Inventory in trade Debtors Creditors 31.3.2014 ` 1,100 1,650 10,450 15,950 550 1,100 2,750 1,650 On and from 1.2.2013, he began drawings ` 385 per month for his personal expenses from the cash box of the business. His account with the bank had the following entries: Deposits ` 1.1.2013 Withdrawals ` 1,65,000 - 1.1.2013 to 31.3.2013 1.4.2013 to 31.3.2014 1,22,650 1,26,500 1,48,500 The above withdrawals included payment by cheque of ` 1,10,000 and ` 33,000 respectively during the period from 1.1.2013 to 31.3.2013 and from 1.4.2013 to 31.3.2014 respectively for the purchase of machineries for the business. The deposits after 1.1.2013 consisted wholly of sale price received from the customers by cheques. Draw up Mr. Hemant s statement of affairs as at 31.3.2013 and 31.3.2014 respectively and work out his profit or loss for the year ended 31.3.2014. Hire -Purchase 12. Computer point sells computers on Hire-purchase basis at cost plus 25%. Terms of Sale are `5,000 down payment and eight monthly instalments of `2,500 for each computer. Two Computers on which five instalments were due and two instalments not yet due were repossessed out of Sales effected during current year. Repossessed inventory is valued at 50% of cost. Calculate the value of repossessed computers. Investment Accounts 13. Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ` 100 each of Pergot Ltd. on 1st May 2013 @ ` 105 on cum interest basis. The interest on these instruments is payable on 31st & 30th of March & September respectively. On August 1st 2013 the company again purchased 2,500 of such debentures @ ` 102.50 each on cum interest The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 basis. On October 1st, 2013 the company sold 2,000 Debentures @ ` 103 each. The market value of the debentures as at the close of the year was ` 106. Prepare the Debenture Investment Account in the books of Alpha Ltd. for the year ended 31st Dec. 2013 on Average Cost Basis. Insurance Claim 14. A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2013. The building, equipment and stock were destroyed and the salvage recorded the following: Building ` 4,000; Equipment ` 2,500; Stock ` 20,000. The following other information was obtained from the records saved for the period from 1st January to 30th June 2013: ` Sales 11,50,000 Sales Returns 40,000 Purchases 9,50,000 Purchases Returns 12,500 Cartage inward 17,500 Wages Stock in hand on 7,500 31st Building (value on December, 2012 31st Equipment (value on 1,50,000 December, 2012) 31st 3,75,000 December, 2012) 75,000 Depreciation provision till 31st December, 2012 on: Building 1,25,000 Equipment 22,500 No depreciation has been provided since December 31st 2012. The latest rate of depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method. Normally business makes a profit of 25% on net sales. You are required to prepare the statement of claim for submission to the Insurance Company. Partnership: Retirement of a partner 15. On 31st March, 2014, the Balance Sheet of A, B and C sharing profits and losses in proportion to their Capital stood as below: Liabilities ` Assets Capital Account: Mr. A ` Land and Building 40,000 The Institute of Chartered Accountants of India 60,000 Plant and Machinery 40,000 PAPER 1: ACCOUNTING 11 Mr. B 60,000 Inventory of goods 24,000 Mr. C 40,000 Sundry debtors 22,000 Sundry Creditors 20,000 Cash and Bank Balances 14,000 1,60,000 1,60,000 On 1st April, 2014, A desired to retire from the firm and remaining partners decided to carry on the business. It was agreed to revalue the assets and liabilities on that date on the following basis: (i) Land and Building be appreciated by 20%. (ii) Plant and Machinery be depreciated by 30%. (iii) Inventory of goods to be valued at ` 20,000. (iv) Old credit balances of Sundry creditors, ` 4,000 to be written back. (v) Provisions for bad debts should be provided at 5%. (vi) Joint life policy of the partners surrendered and cash obtained ` 15,100. (vii) Goodwill of the entire firm is valued at ` 28,000 and A s share of the goodwill is adjusted in the A/cs of B and C, who would share the future profits equally. No goodwill account being raised. (viii) The total capital of the firm is to be the same as before retirement. Individual capital is in their profit sharing ratio. (ix) Amount due to Mr. A is to be settled on the following basis: 50% on retirement and the balance 50% within one year. Prepare (a) Revaluation account, (b) The Capital accounts of the partners, (c) Cash account and (d) Balance Sheet of the new firm M/s B & C as on 1.04.2014. Accounting in Computerized Environment 16. Prepackaged accounting software is required to be selected intelligently . Explain the statement in brief. Applicability of AS 17. (a) Comment whether the following Companies can be classified as a Small and Medium Sized Company (SMC) as per the Companies (Accounting Standards), Rules, 2006: (i) A Pvt. Ltd., a subsidiary of a multinational company listed on London Stock Exchange. It has a turnover of ` 12 crores and borrowings of ` 5 crores. (ii) B Pvt. Ltd., has a turnover of ` 45 crores, other income of ` 7 crores and bank borrowings of ` 9 crores. The Institute of Chartered Accountants of India 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 AS 1 Disclosure of Accounting Policies (b) Omega Ltd. projected a surplus of ` 40 crores during the accounting year to end on 31st March, 2013. The draft results for the year, prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a deficit of ` 10 crores. The board in consultation with the managing director, decided on the following : (i) Provide depreciation for the year on straight line basis on account of substantial additions in gross block during the year, instead of on the reducing balance method, which was hitherto adopted. As a consequence, the charge for depreciation at ` 27 crores is lower than the amount of ` 45 crores which would have been provided had the old method been followed, by ` 18 cores.) (ii) Provide for permanent fall in the value of investments - which fall had taken place over the past five years - the provision being ` 10 crores. As chief accountant of the company, you are asked by the managing director to draft the notes on accounts for inclusion in the annual report for 2012-2013. AS 2 Valuation of Inventories (c) Alpha Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Alpha Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company takes possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for these empty bottles which are sold by the company by calling for tenders. Keeping this in view: (i) Decide whether the inventory of empty bottles is an asset of the company; (ii) If so, whether the inventory of empty bottles existing as on the date of Balance Sheet is to be considered as inventories of the company and valued as per AS 2 or to be treated as scrap and shown at realizable value with corresponding credit to Other Income ? AS 6 Depreciation Accounting 18. (a) An item of machinery was purchased on 1-4-2012 for ` 2,00,000. The WDV depreciation rate applicable to the machinery was 15%. The written down value of the machinery as on 31-3-2014 was ` 1,44,500. On 1-4-2014, the enterprise decided to change the method from written down value (WDV) to straight line method (SLM). The enterprise decided to write off the book value of ` 1,44,500, over the remaining useful life of machinery i.e. 5 years. Out of the total useful life of 7 years, 2 years have already elapsed. Comment, whether the accounting treatment is correct. If not, give the correct accounting treatment with reasons. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 13 AS 7 Construction Contracts (b) PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the records of the company, the following data is available pertaining to year ended 31st March, 2014: (` crore) Total Contract Price 2,400 Work Certified 1,250 Work pending certification 250 Estimated further cost to completion 1,750 Stage wise payments received 1,100 Progress payments in pipe line 300 Using this data and applying the relevant Accounting Standard you are required to: (i) Compute the amount of profit/loss for the year ended 31st March, 2014. (ii) Arrive at the contract work in progress as at the end of financial year 2013-14. (iii) Determine the amount of revenue to be recognized out of the total contract value AS-9 Revenue Recognition 19. (a) A Ltd. has sold its building for ` 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book value of the building is ` 30 lakhs. As on 31st March, 2014, the documentation and legal formalities are pending. The company has not recorded the sale and has shown the amount received as advance. Do you agree with this treatment? AS 10 Accounting for Fixed assets (b) During the year 2013-14, P Limited incurred ` 2,50,000 as routine repairs and ` 75,000 on partial replacement of a part. ` 5,00,000 on replacement of part of machinery which will improve the efficiency of the machine. Which amount should be capitalized as per AS 10? AS 13 Accounting for Investment 20 (a) X Ltd. on 1-1-2014 had made an investment of ` 600 lakhs in the equity shares of Y Ltd. of which 50% is made in the long term category and the rest as temporary investment. The realizable value of all such investment on 31-3-2014 became ` 200 lakhs as X Ltd. lost a case of copyright. How will you recognize the reduction in financial statements for the year ended on 31-3-2014 assuming that this decline in value is not temporary in nature? The Institute of Chartered Accountants of India 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 AS 14 Accounting for Amalgamation (b) X Co. Ltd. having share capital of ` 50 lakhs divided into equity shares of ` 10 each was taken over by Y Co. Ltd. Y Co. Ltd. issued 11 equity shares of ` 10 each for every 10 shares of X Co. Ltd. Explain how the difference will be adjusted in the books of Y Co. Ltd. for the shares issued under the Pooling of interests method of amalgamation as per AS 14. SUGGESTED ANSWERS / HINTS 1. Oliva Company Ltd. Statement of Profit and loss for the year ended 31.03.2014 (`) Particulars I Revenue from operations II Other income (3,900 +300) III Total Revenue (I +II) IV Note Amount Expenses: Cost of materials consumed 17,10,000 4,200 17,14,200 10 Purchases of inventory-in-trade 12,64,200 -- Changes in inventories of finished goods work-in-progress and inventory-in-Trade 11 (13,500) Employee benefit expenses 12 44,700 Finance costs -- Depreciation and amortization expenses Other expenses Total Expenses 18,240 13 3,51,510 16,65,150 V Profit before exceptional and extraordinary items and tax VI Exceptional items VII Profit before extraordinary items and tax VIII Extraordinary items IX Profit before tax 49,050 X Tax expense (40% of 49,050) 19,620 XI Profit/Loss for the period from continuing operation 29,430 XII Profit/(Loss) from discontinuing operations The Institute of Chartered Accountants of India 49,050 -49,050 -- -- PAPER 1: ACCOUNTING 15 XIII Tax expenses of discontinuing operations -- XIV Profit/(Loss) fro discontinuing operations (after tax) -- XV Profit (Loss) for the period 29,430 Oliva Company Ltd. Balance Sheet for the year ended 31.03.2014 Particulars 1 Note Amount Equity and Liabilities (i)Shareholders funds (a) Share Capital (b) Reserves and surplus 2) 3,15,000 1 47,430 2 23,300 3 6,000 Non-current liabilities (a) Long-term borrowings (3) Current Liabilities (a) Short -term borrowings (b) Trade payables 3,27,000 (c) Other current liability 4 76,000 (d) Short term provision 5 19,620 8,14,350 II ASSETS (1) Non current assets (a) Fixed assets (i) Tangible assets 6 (b) Non-current investments 2,04,160 7,500 (2) Current assets (a) Current investments (b) Inventories 4,500 7 85,800 (c) Trade receivables 2,38,500 (d) Cash and cash equivalents 2,71,100 (e) Short-term loans and advances 8 2,490 (f) Other current assets 9 300 8,14,350 The Institute of Chartered Accountants of India 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Notes to accounts No 1. Particulars Amount Reserve & Surplus: Profit & Loss Account : Balance b/f 45,000 Net Profit for the year 29,430 Less : Dividend 2012-13 2. (27,000) 20,000 Fixed Deposits:- Unsecured 3,300 4,500 Fixed Deposits -Unsecured 1,500 3,000 Expenses Payable (67,500 + 4,500) 72,000 Current maturities of long term borrowings 1,000 19,620 Fixed Assets: Tangible Assets Building 1,01,000 Less: Depreciation 2,020 Plant & Machinery 70,400 Less: Depreciation 7,040 Furniture Less: Depreciation Motor vehicles Less: Depreciation 7 76,000 Short term provisions: Provision for Income tax 6. 6,000 Other current liabilities Unclaimed Dividend 5. 23,300 Short term borrowings: Secured loans 4. 47,430 Long term borrowings: Secured loans (21,000 less current maturities 1,000) 3. Amount 98,980 63,360 10,200 1,020 9,180 40,800 8,160 32,640 2,04,160 Inventory: Raw Material 25,800 Finished goods 60,000 The Institute of Chartered Accountants of India 85,800 PAPER 1: ACCOUNTING 8. 17 Short term Loans & Advances: General Charges prepaid 9. 2,490 Other Current Assets: Interest accrued 10. 300 Cost of material consumed: Opening inventory of Material & Stores Add : Purchased Stores & spare parts consumed Less : Closing inventory 11. 300 30,000 12,15,000 45,000 12,90,000 (25,800) 12,64,200 Changes in inventory of Finished Goods & WIP Closing Inventory: Finished Goods 60,000 Less: Opening Inventory: Finished Goods 12. 46,500 (13,500) Employee Benefit expenses: Salary & Wages (40,200 + 4,500) 13. Other Expenses: Manufacturing Expenses (2,70,000 + 67 500) General Charges (16,500 2,490) 2. 44,700 3 ,37,500 14,010 3,51,510 Cash Flow Statement of Leela Ltd. Cash flow from Operating Activities ` Net profit before Taxation (given) ` 2,29,500 Adjustments for Depreciation (W.N.2) 83,700 Debenture Interest (1,50,000 x 8% x 6/12) 6,000 Provision for Doubtful Debts 9,900 Profit/Gain on Sale of Plant(WN. 1) (7,500) Operating Profit before Working Capital Changes 3,21,600 Adjustments for Increase in Inventory (1,15,500) Increase in Trade receivables (1,50,000) The Institute of Chartered Accountants of India 92,100 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Increase in Trade payables 35,400 (2,30,100) Net Cash Flow from/(Used in) Operating Activities [A] 91,500 Cash flow from Investing Activities Purchase of Plant & Machinery (WN 3) (2,34,000) Purchase of Trade Investments (1,41,000) Sale of Machinery 21,000 Net Cash Flow from/(used In) Investing Activities [B] (3,54,000) Cash flow from Financing Activities Proceeds from issue of 8% Debentures (1,50,000-3,000) 1,47,000 Interest paid on 8% Debentures (6,000) Dividends paid in respect of earlier year (90,000) Net Cash Flow from/(used in) Financing Activities[C] Net Increase/(Decrease) in Cash and Cash Equivalents (A+B+C) 51,000 (2,11,500) Working Notes: 1. Profit on Sale of Plant = Net Book Value (i.e, Gross Block less Accumulated Depreciation) Less Sale Value = (54,000-40,500) less 21,000 = ` 7,500 Gain/Profit 2. Depreciation for current year = Increase in Depreciation as given above + Accumulates Depreciation on Plant Sold = 43,200 + 40,500 = ` 83,700 3. Cash Outflow towards assets purchase = Increase in Plant and Machinery at Cost + Gross Block of Plant sold = 1,80,000 +54,000 = ` 2,34,000. 3 (a) Sales of first 6 months = ` 4,80,000. Average sale of first 6 months = `4,80,000/6 = `80,000 per month. Pre-incorporation period consist of 3 months (i.e., April, May and June). The sales of those 3 months = ` 80,000 x 3 = ` 2,40,000. Sales of remaining 9 months = ` 24,00,000 ` 2,40,000 = ` 21,60,000. Therefore, the ratio of sales = ` 2,40,000 : ` 21,60,000 or 1: 9. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 19 (b) Let the average of monthly sales = X. The sales of different months can be shown as follows: Month Jan Feb Mar. April May June July Aug Sept Oct Nov Dec Sales 1x 0.5x 1x 0.5x 1x 1x 1x 1x 1x 1x 1.5x 1.5x Date of incorporation is May, 2013 Pre incorporation period is from January to April i.e. 3 x Post - incorporation period is from May to December i.e 9x The ratio of Sales = 3x : 9x or 1:3. (c) Let the average monthly sales be x. The sales of different months can be shown as follows: Month April May June July Aug. Sept Oct Nov Dec Jan Feb March Sales 2x 1x 1x 1x 1x 1x 1x 1x 1x 1x 2x 2x Date of incorporation is 1 July, 2013 Pre incorporation period is from April to June i.e. 4 x Post - incorporation period is from July to March i.e 11x The ratio of Sales = 4x : 11x or 4:11 4. Journal Entries in the books of Preet Ltd. ` 1-4-2014 20-4-2014 Equity share final call A/c Dr. To Equity share capital A/c (For final calls of ` 2 per share on 1,35,000 equity shares due as per Board s Resolution dated .) Bank A/c Dr. To Equity share final call A/c (For final call money on 1,35,000 equity shares received) Securities Premium A/c Dr. Capital Reserve A/c Dr. General Reserve A/c Dr. Profit and Loss A/c Dr. To Bonus to shareholders A/c (For making provision for bonus issue of one share for every four shares held) The Institute of Chartered Accountants of India ` 2,70,000 2,70,000 2,70,000 2,70,000 37,500 60,000 1,80,000 60,000 3,37,500 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Bonus to shareholders A/c To Equity share capital A/c (For issue of bonus shares) Dr. 3,37,500 3,37,500 Extract of Balance Sheet as at 30th April, 2014 (after bonus issue) ` Authorised Capital 15,000 12% Preference shares of `10 each 1,50,000 1,83,750 Equity shares of `10 each (W.N.2) 18,37,500 Issued and subscribed capital 1,20,000 12,000 12% Preference shares of `10 each, fully paid 16,87,500 1,68,750 Equity shares of `10 each, fully paid (Out of above, 33,750 equity shares @ `10 each were issued by way of bonus) Reserves and surplus Capital Reserve 52,500 Profit and Loss Account 2,40,000 Working Notes: 1. As per SEBI Guidelines, securities premium collected in cash and capital reserve realized in cash only is to be utilized for issue of bonus shares. 2. The authorized capital should be increased as per details given below: Existing authorized Equity share capital Add: Issue of bonus shares to equity shareholders (25% of ` 13,50,000) 5. ` 15,00,000 3,37,500 18,37,500 Journal entries in the books of Casio Ltd. Particulars Equity Share Final Call A/c To Equity Share Capital A/c (Final Call made for the balance on equity share) Bank A/c To Equity Share Final Call A/c (Receipt of Final Call money) The Institute of Chartered Accountants of India L.F . Dr. Dr. (`) Cr. (`) 4,00,000 4,00,000 Dr. 4,00,000 4,00,000 PAPER 1: ACCOUNTING Equity Share Capital (`100) A/c To Equity Shares (` 20) A/c To Reconstruction A/c (Reduction of `100 share capital to ` 20 each) 10% First Debentures A/c To Debentureholders A/c (Redemption due for First Debentures) Debentureholders A/c To 13.5% Debentures A/c (Redemption of First Debentures) 12% Second Debentures A/c To Debentureholders A/c (Transfer of second debentures account to debenturesholders account) Debentureholders A/c To 15% Debentures A/c To Reconstruction A/c (Settlement of second debentureholders claims) Trade payables A/c To Bank A/c To Equity Share Capital A/c To Reconstruction A/c (Settlement of trade payables account) Debenture Interest (Outstanding) A/c To Reconstruction A/c (Writing off the interest on debentures on settlement of account of debentureholders) Reconstruction A/c To Profit and Loss A/c To Fixed Assets A/c (balance in Reconstruction A/c) (Utilisation of reconstruction account for writing of past losses and value of fixed assets) 21 Dr. 10,00,000 2,00,000 8,00,000 Dr. 2,00,000 2,00,000 Dr. 2,00,000 2,00,000 Dr. 5,00,000 5,00,000 Dr. 5,00,000 4,00,000 1,00,000 Dr. 11,50,000 3,00,000 3,00,000 5,50,000 Dr. 80,000 80,000 Dr. 15,30,000 10,20,000 5,10,000 Balance Sheet of Casio Ltd. as at 31 March, 2014 (And Reduced) Note No. I Equity and liabilities (1) Shareholders funds: (a) Share Capital The Institute of Chartered Accountants of India 1 ` 5,00,000 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (1) Non-current liabilities: (a) Long term borrowings 13.5% Debentures 15% Debentures II 2,00,000 4,00,000 11,00,000 Assets (1) Non-current Assets (a) Fixed assets: (b) Non-current investments (2) Current assets (a) Inventories (b) Trade receivables (c) Cash & cash equivalent [(50,000) + 4,00,000 3,00,000] 2 1,90,000 10,000 3,90,000 4,60,000 50,000 11,00,000 Notes to Accounts 1 Share capital: 5,00,000 25,000Equity Share Capital (shares of ` 20 each) (out of which 15,000 equity shares of ` 20 each issued to trade payables) 2 Fixed assets: Fixed Assets 7,00,000 Less: Amount written off under Reconstruction Scheme 6. (i) (5,10,000) 1,90,000 Calculation of number of equity and preference shares ` Fixed assets 6,40,000 Inventory 3,85,000 Bills receivable 15,000 Purchase consideration 10,40,000 Amount discharged by issue of preference shares = ` 2,55,000 ` 2,55,000 = 2,550 shares 100 No. of preference shares to be allotted = Amount discharged by allotment of equity shares = ` 10,40,000 ` 2,55,000 = ` 7,85,000 The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 23 Paid up value of equity share =`8 Hence, number of equity shares to be issued = (ii) ` 7,85,000 = 98,125 shares 8 In the books of Alia Ltd. Realisation Account ` ` To Fixed assets 4,82,000 By To To To Inventory Trade receivables Bank account: Liquidation expenses Bills payable Tax liability Sundry creditors Equity shareholders (profit transferred) 3,87,500 95,000 By By By To 4,000 19,000 1,11,000 1,05,500 Provision for bad and doubtful debts Trade payable Provision for taxation Burger Ltd. account (Purchase consideration) Bank account: Sundry debtors By 1,58,000 13,62,000 4,000 1,33,000 1,10,000 10,40,000 75,000 ________ 13,62,000 Cash/Bank Account Dr. Cr. ` To Balance b/d To ` 1,64,500 Realisation account: Sundry debtors By Realisation account: Liquidation expenses 75,000 Bills payable 4,000 19,000 Tax liability Sundry creditors (Balancing figure) _______ 1,11,000 1,05,500 2,39,500 2,39,500 Equity Shareholders Account Dr. Cr. ` To To 10% Preference shares in Burger Ltd. 2,55,000 Equity 7,85,000 ` shares in By The Institute of Chartered Accountants of India Equity share account capital By Contingency reserve 6,00,000 1,56,000 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Burger Ltd. By Profit and loss account 1,26,000 By Realisation account(Profit) 1,58,000 10,40,000 10,40,000 Burger Limited Account Dr. Cr. ` 10,40,000 By 10% Preference shares in Burger Ltd. 2,55,000 ________ To Realisation account ` By Equity shares in Burger Ltd. 7,85,000 10,40,000 (iii) 10,40,000 Journal Entries in the books of Burger Ltd. Particulars Business purchase account Amount(`) Dr. Amount(`) 10,40,000 To Liquidator of Alia Ltd. account 10,40,000 (Being the amount of purchase consideration payable to liquidator of Alia Ltd. for assets taken over) Fixed assets account Dr. 6,40,000 Inventory account Dr. 3,85,000 Bills receivable account Dr. 15,000 To Business purchase account 10,40,000 (Being assets taken over) Liquidator of the Alia Ltd. account Dr. 10,40,000 To 10% Preference share capital account 2,55,000 To Equity share capital account 7,85,000 (Being the allotment of 10% fully paid up preference shares and equity shares of ` 10 each, ` 8 each paid up as per agreement for discharge of purchase consideration) The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 7. 25 Taking May 18th as the zero or base date: For Krishna s payments: Date of Due Date Amount No. of days from Transactions Products the base date (1) (2) (3) (4) (5) April 18 May 18 9,000 0 May 15 June 15 10,500 28 2,94,000 June 16 July 16 12,000 59 7,08,000 31,500 Total of products 10,02,000 Amount Due Abhinav to 0 For Abhinav s payments: The base date will be May 18th in this case also. Date of Transactions Due Date Amount No. of days from the base date Products (1) (2) (3) (4) (5) April 23 May 23 7,800 5 39,000 May 24 June 24 7,500 37 2,77,500 Amount Due to Krishna 15,300 Excess of Krishna s products over Abhinav s Total products 3,16,500 10,02,000 3,16,500 = Excess amount due to Abhinav s ` 31,500 15,300 = 6,85,500 = ` 16,200. Number of days from the base date to the date of settlement is 6,85,500 = 42 days 16,200 Hence the date of settlement of the balance is 42 days after May 18 i.e., on June 29. On June 29, Krishna s has to pay Abhinav, ` 16,200 to clear the account. The Institute of Chartered Accountants of India 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 8. B in Account Current with A for the period ending on 30th June, 2012 Date Particulars Amount Days Products Date 2012 Jan.1 Amount Days Products 2012 `. To Balance b/d Particulars ` 600 125 164 20,500 171 88,920 Feb. 11 By Bank A/c 400 140 56,000 615 15.75 Apr 29 To Sales A/c June 30 To Interest A/c By Sales Returns 520 Jan. 11 To Sales A/c 182 1,09,200 Jan.18 62 38,130 Feb. 14 By B/R A/c (due date: March 17) 300 105 31,500 By Cash A/c 700 46 32,200 May 15 June 30 By Balance of products 96,050 By Balance c/d 1,750.75 2,36,250 225.75 1,750.75 2,36,250 Calculation of interest: Interest = 96,050 6 = ` 15.75 366 100 9. Total Debtors Account 2013 Particulars ` 2013 Particulars April 1 To Balance b/d 20,000 April 1 By Balance b/d April 30 19,000 April 30 By Cash ` To Sales (Credit) To Total creditors (endorsed B/R dishonoured) 300 400 14,100 By Discount By Bills receivable By Total creditors To B/R (Dishonoured) 300 (Transfer) To Interest 30 To Balance c/d By Balance c/d 900 3,000 600 21,280 450 40,180 40,180 Notes: 1. B/R discounted and Cash sales will not be shown in the Total Debtors 2. Endorsed B/R dishonoured and transfers will be shown in the Total Debtors. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 10. 27 Tiger Club Receipts and Payments Account for the year ended 31st March, 2014 Receipts ` To Opening balance: Payments ` By Premises Cash on hand 900 Bank balance 48,840 To Subscriptions 1,24,260 60,000 By Rent 4,800 By Rates and taxes 7,560 By Printing and stationary 2,820 To Fair receipts 14,400 By Sundry expenses To Variety show receipts (net) 25,620 By Wages To Interest 1,380 10,700 5,040 By Fair expenses 14,340 To Bar collections 44,700 By Honorarium to secretary 22,000 To Sale proceeds of old car 18,000 By Bar purchases (payments) 34,620 By Repairs 1,920 By New Car 93,600 By Closing balance Cash in hand Nil Bank balance 20,700 2,78,100 2,78,100 Income and Expenditure Account for the year ended 31st March, 2014 Expenditure ` Income ` To Rent 4,800 By Subscriptions To Rates and taxes 7,560 Add: Due as on 31.3.14 To Printing and stationary 2,820 To Wages ` ` 1,24,260 _5,880 1,30,140 5,040 Less: Due as on 31.3.13 To Honorarium to secretary To Sundry expenses 10,700 Fair receipts (7,200) 1,22,940 24,000 By Surplus from fair: To Repairs To Depreciation on Premises @ 5% 1,920 Less: Fair expenses 6,060 [(1,74,000-1,12,800) x 0.05 + 60,000*0.05] The Institute of Chartered Accountants of India By Surplus from variety show 14,400 14,340 60 25,620 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Car @20% of 93,600 18,720 To Excess of income over expenditure 24,780 By Interest By Profit from bar (W.N.2) 1,380 12,000 86,980 By Profit from sale of car ______ (W.N. 3) 6,600 ______ 1,68,600 1,68,600 Working Notes: 1. Calculation of bar purchases Bar Creditors Account Dr. Cr. ` To Bank A/c To Balance c/d 2. ` 34,620 By Balance b/d 2,580 By Bar purchases 37,200 3,540 33,660 37,200 Profit from bar ` Bar collections Less: Bar inventory consumedOpening inventory Add: Purchases 44,700 4,260 33,660 37,920 5,220 Less: Closing inventory 3. ` 32,700 12,000 Profit on sale of car ` Sale proceeds of old car Less: W.D.V. of old car (` 73,140-` 61,740) 11. (a) 18,000 11,400 6,600 Statement of Affairs as on 31st March, 2013 Liabilities Capital (bal.fig.) Sundry creditors The Institute of Chartered Accountants of India ` Assets 1,61,700 Machinery 2,750 Inventory Debtors Cash at bank (W.N.1) Cash in hand 1,64,450 ` 1,10,000 10,450 550 42,350 1,100 1,64,450 PAPER 1: ACCOUNTING (b) 29 Calculation of loss for 3 months (1.1.2013 to 31.3.2013) ` 1,61,700 770 1,62,470 (1,65,000) 2,530 Capital as on 31.3.2013 Add: Drawings for 3 months Less: Capital as on 1.1.2013 Loss for 3 months (c) Statement of Affairs as on 31st March, 2014 Liabilities Capital Sundry Creditors (d) ` Assets 1,80,400 Machinery 1,650 Add: Additions Inventory Debtors Cash at bank (W.N.2) Cash in hand 1,82,050 ` 1,10,000 33,000 1,43,000 15,950 1,100 20,350 1,650 1,82,050 Statement of Profit and Loss for the year ended 31.3.2014 Particulars Capital as on 31.3.2014 Add: Drawings (` 385 12) Less: capital as on 31.3.2013 Net profit for the year ended 31.3.14 ` 1,80,400 4,620 1,85,020 (1,61,700) 23,320 Working Notes: ` 1. 2. Bank balance as on 31.3.2013 Balance as on 1.1.2013 Less: Withdrawals during 1.1.2013 to 31.3.2013 Balance as on 31.3.2013 Bank Balance as on 31.3.2014: Balance as on 1.4.2013 Add: Deposits during the year Less: Withdrawals during the year Bank Balance as on 31.3.2014 The Institute of Chartered Accountants of India 1,65,000 (1,22,650) 42,350 42,350 1,26,500 1,68,850 (1,48,500) 20,350 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 12. Value of repossessed computers: H.P. Price of two repossessed computers = [` 5,000 + (8 x ` 2,500)] x 2 computers = ` 50,000 ` 50,000 100 = ` 40,000 125 Cost price of the repossessed computers = Value of repossessed computers = `40,000 x 50% = `20,000 13. Books of Alpha Ltd. Investment in 13.5% Debentures in Pergot Ltd. Account (Interest payable on 31st March & 30th September) Date Particulars Nominal Interest ` Amount Date ` ` 2013 Particulars Nominal Interest ` ` Amount ` 2013 May 1 To Bank 5,00,000 5,625 Aug.1 To Bank 2,50,000 11,250 5,19,375 Sept.30 By Bank 50,625 2,45,000 Oct.1 By Bank 2,00,000 2,06,000 By Balance c/d 5,50,000 18,563 5,60,542 7,50,000 69,188 7,66,542 (6 months Int) Oct.1 To P&L A/c Dec.31 To P&L A/c 2,167 52,313 Dec.31 7,50,000 Note : 69,188 7,66,542 Cost being lower than Market Value the debentures are carried forward at Cost. Working Notes: 1. Interest paid on ` 5,00,000 purchased on May 1st, 2013 for the month of April 2013, as part of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625 2. Interest received on 30th Sept. 2013 On ` 5,00,000 = 5,00,000 x 13.5% x = 33,750 On ` 2,50,000 = 2,50,000 x 13.5% x = 16,875 Total 3. ` 50,625 Interest paid on ` 2,50,000 purchased on Aug. 1st 2013 for April 2013 to July 2013 as part of purchase price: 2,50,000 x 13.5% x 4/12 = ` 11,250 The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 4. 31 Loss on Sale of Debentures Cost of acquisition (` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = Less: Sale Price (2000 x 103) = 2,06,000 Profit on sale 5. 2,03,833 = ` 2,167 Cost of Balance Debentures (` 5,19,375 + ` 2,45,000) x ` 5,50,000/` 7,50,000 = ` 5,60,542 6. Interest on Closing Debentures for period Oct.-Dec. 2013 carried forward (accrued interest) ` 5,50,000 x 13.5% x 3/12 = ` 18,563 14. Memorandum Trading Account for the Period from 1.1.2013 to 30.6.2013 ` To Opening Stock (1.1.2013) 1,50,000 By Sales To Purchases 9,50,000 Less: Sales Returns Less: Returns (12,500) 9,37,500 To Cartage Inwards 17,500 By Closing Stock To Wages 7,500 (Bal. Fig.) To Gross Profit 2,77,500 (25% of ` 11,10,000) 13,90,000 ` 11,50,000 (40,000) 11,10,000 2,80,000 13,90,000 Stock Destroyed Account To Trading Account ` 2,80,000 By Stock Salvaged Account By Balance c/d (For Claim) 2,80,000 Items A Stock Buildings Equipment Statement of Claim Cost Depreciation (`) (`) B C 2,80,000 3,75,000 1,25,000 + 9,375 75,000 22,500 + 5,625 The Institute of Chartered Accountants of India Salvage (`) D 20,000 4,000 2,500 ` 20,000 2,60,000 2,80,000 Claim (`) (E=B-C-D) 2,60,000 2,36,625 44,375 5,41,000 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 15. (a) Revaluation Account Date Particulars ` 2014 April Date Particulars ` 2014 To Plant & Machinery 12,000 To Inventory of goods To Provision for bad and doubtful debts To April By Land and building 12,000 4,000 By Sundry creditors 4,000 1,100 By Cash & Bank Joint life Policy surrendered Capital accounts (profit on revaluation transferred) 15,100 Mr. A (2/7) 4,000 Mr. B (3/7) 6,000 Mr. C (2/7) 4,000 14,000 31,100 (b) Particulars Partners Capital Accounts A B (`) To A s Capital A/c goodwill (`) - To A s Loan A/c - (50% transfer) 26,000 B C (`) (`) (`) 40,000 60,000 40,000 By Revaluation A/c 2,000 A By Balance b/d To Cash & bank A/c (50% dues paid) 26,000 To Balance c/d 31,100 C Particulars 4,000 6,000 4,000 By B & C s Capital A/cs goodwill 8,000 - - By Cash & bank A/c-amount brought in (Balancing figures) - 6,000 32,000 52,000 72,000 76,000 (`) 6,000 - - - - - 70,000 70,000 52,000 72,000 76,000 The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING (c) 33 Cash and Bank Account To Balance b/d To Revaluation A/c surrender value of joint life policy By A s Capital A/c - 50% dues paid 26,000 By 14,000 Balance b/d 41,100 15,100 To B s Capital A/c 6,000 To C s Capital A/c 32,000 67,100 (d) 67,100 Balance Sheet of M/s B & C as on 01.04.2014 Liabilities Partners accounts ` Assets Capital ` 70,000 70,000 Mr. A s Loan Account Sundry Creditors 26,000 16,000 Add: Appreciation 20% 12,000 Plant & Machinery 1,40,000 60,000 40,000 Less: Depreciation 30% 12,000 Inventory of goods Mr. B Mr. C Land and Building 24,000 Less: devalued 4,000 Sundry Debtors 28,000 22,000 Less: Provision for bad debts 5% Cash & balances 1,82,000 72,000 1,100 20,000 20,900 Bank 41,100 1,82,000 Working Notes: Adjustment for Goodwill: Goodwill of the firm Mr. A s Share (2/7) Gaining ratio of B & C; B = 1/2 - 3/7 = 1/14 C= 1/2 - 2/7 = 3/14 B:C = 1:3 The Institute of Chartered Accountants of India ` 28,000 8,000 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Therefore, B will bear = 1/4 8,000 or ` 2,000 C will bear = 3/4 8,000 or ` 6,000 16. There are many accounting softwares available in the market. To choose the accounting software appropriate to the need of the organization is a difficult task, some of the criteria for selection could be the following: 1. Fulfillment of business requirements: Some packages have few functionalities more than the others. The purchaser may try to match his requirement with the available solutions. 2. Completeness of reports: Some packages might provide extra reports or the reports match the requirements more than the others. 3. Ease of Use: Some packages could be very detailed and cumbersome compare to the others. 4. Cost: The budgetary constraints could be an important deciding factor. A package having more features cannot be opted because of the prohibitive costs. 5. Reputation of vendor: Vendor support is essential for any software. A stable vendor with good reputation and track records will always be preferred. 6. Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be preferred to a vendor unwilling to give updates. 17 (a) As per the companies (Accounting Standards) Rules, 2006, Small and Medium Sized Company (SMC) means, a company: (i) Whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India (ii) Which is not a bank, financial institution or an insurance company; (iii) Whose turnover (excluding other income) does not exceed rupee; fifty crore in the immediately proceding accounting year, (iv) Which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately proceding accounting year; and (v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company. Explanation: a company shall qualify as a Small and Medium Sized Company, if the condition mentioned, therein are satisfied as at the end of the relevant accounting period. (i) As per the definition of SMC, point (v), a company will be a SMC, if it is not holding or subsidiary company of another company which is not a SMC. Since A Pvt. Ltd., is a subsidiary of another Company which is listed, on London The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 35 Stock Exchange (and is therefore not a SMC), A Pvt. Ltd., cannot be a SMC. The turnover and borrowings are not relevant in this case. (ii) As per the definition of SMC, point (iii), a company will be a SMC if its turnover does not exceed ` 50 crores or borrowings do not exceed ` 10 crore. For calculating this turnover, other income is not to be included. Since B Pvt. Ltd., has a turnover of ` 45 crores and borrowing of ` 9 crores, it will satisfy the definition and can be classified as SMC. (b) As per AS 1 Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect. Notes on Accounts: (i) In view of the heavy capital intensive method of production introduced during the year, the company has decided to change the method of providing depreciation from reducing balance method to straight line method. As a result of this change, depreciation has been provided at ` 27 crores which is lower than the charge which would have been made had the old method and the old rates been applied, by ` 18 crores. To that extent, the profit for the year is increased. (ii) The company has decided to provide ` 10 crores for the permanent fall in the value of investments which has taken place over the period of past five years. The provision so made has reduced the profit disclosed in the accounts by ` 10 crores. (c) (i) Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called assets. Alpha Ltd. sells these empty bottles by calling tenders. It means further benefits are accrued on its sale. Therefore, empty bottles are assets for the company. (ii) As per AS 2 Valuation of Inventories , inventories are assets held for sale in the ordinary course of business. Inventory of empty bottles existing on the Balance Sheet date is the inventory and Alpha Ltd. has detailed controlled recording and accounting procedure which duly signify its materiality. Hence inventory of empty bottles cannot be considered as scrap and should be valued as inventory in accordance with AS 2. 18. (a) As per para 15 of AS 6, Depreciation Accounting , when the method of depreciation is changed, depreciation is recalculated in accordance with the new method from The Institute of Chartered Accountants of India 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 the date of the assets coming into use. The deficiency or surplus arising from retrospective re-computation of depreciation in accordance with the new method is adjusted in the statement of profit and loss in the year in which the method of depreciation is changed. Calculation of Surplus/Deficiency due to change in method of depreciation ` 2,00,000 Purchase price of plant as on 01-04-2012 Less: Depreciation as per SLM, for the year 2012-13 (` 2,00,000 7 years) Balance as on 31-3-2013 Less: Depreciation for the year 2013-14(` 2,00,000 7 years) Balance as on 31-3-2014 Book value as per WDV method Book value as per SLM Deficiency (28,571) 1,71,429 (28,571) 1,42,858 1,44,500 1,42,858 1,642 Deficiency of ` 1,642 should be charged to Profit and Loss account. Therefore, the accounting treatment done by the enterprises is wrong i.e. book value of ` 1,44,500 will not be written off over the remaining useful life of machinery i.e. 5 years. Note: It is assumed that when the company changed the method of depreciation from WDV to SLM, it re-calculated the depreciation amount on the basis of useful life and has not continued with WDV rate of depreciation. (b) (i) Calculation of profit/ loss for the year ended 31st March, 2014 Total estimated cost of construction (1,250 + 250 + 1,750) Less: Total contract price Total foreseeable loss to be recognized as expense (` in crores) 3,250 (2,400) 850 According to para 35 of AS 7 (Revised 2002) Construction Contracts , when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately. (ii) Contract work-in-progress i.e. cost incurred to date (` in crores) Work certified Work not certified 1,250 250 1,500 The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 37 (iii) Proportion of total contract value recognised as revenue Percentage of completion of contract to total estimated cost of construction = (1,500 / 3,250) 100 = 46.15% Revenue to be recognized till date = 46.15% of ` 2,400 crores = ` 1,107.60 crores. 19. (a) The economic reality and substance of the transaction is that the rights and beneficial interest in the property has been transferred although legal title has not been transferred. A Ltd. should record the sale and recognize the profit of ` 20 lakhs in its profit and loss account. The building should be eliminated from the balance sheet. (b) As per Para 12 of AS 10 Accounting for Fixed Assets expenditure that increases the future benefits from the existing assets, is included in the gross book value. Hence, in the given case, repairs of ` 2,50,000 as routine repairs and ` 75,000 on partial replacement of the part of the machinery should be charged to Profit and Loss Account. ` 5,00,000 incurred on a part of the machinery, which will increase the efficiency, should be capitalized. 20. (a) X limited invested ` 600 lakhs in the equity shares of Y Ltd. Out of the same, the company intends to hold 50% shares for long term period i.e. ` 300 lakhs and remaining as temporary (current) investment i.e. ` 300 lakhs. Irrespective of the fact that investment has been held by X Limited only for 3 months (from 1.1.2014 to 31.3.2014), AS 13 lays emphasis on intention of the investor to classify the investment as current or long term even though the long term investment may be readily marketable. In the given situation, the realizable value of all such investments on 31.3.2014 became ` 200 lakhs i.e. ` 100 lakhs in respect of current investment and ` 100 lakhs in respect of long term investment. As per AS 13, Accounting for Investment , the carrying amount for current investments is the lower of cost and fair value. In respect of current investments for which an active market exists, market value generally provides the best evidence of fair value. Accordingly, the carrying value of investment held as temporary investment should be shown at realizable value i.e. at ` 100 lakhs. The reduction of ` 200 lakhs in the carrying value of current investment will be included in the profit and loss account. Standard further states that long-term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of long term investment, the carrying amount is reduced to recognise the decline. Here, Y Limited lost a case of copyright which drastically reduced the realisable value of its shares to one third which is quiet a substantial figure. Losing the case of The Institute of Chartered Accountants of India 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 copyright may affect the business and the performance of the company in long run. Accordingly, it will be appropriate to reduce the carrying amount of long term investment by ` 200 lakhs and shown the investments at ` 100 lakhs, considering the downfall in the value of shares as decline other than temporary. The reduction of ` 200 lakhs in the carrying value of long term investment will be included in the profit and loss account. (b) ` Purchase consideration = 5,00,000 11/10 = 55,000 shares of ` 10 each Less: Share capital of X Co. Ltd. Difference Adjusted through General Reserve The Institute of Chartered Accountants of India 55,00,000 50,00,000 5,00,000

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