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CA IPCC : Revision Test Paper (with Answers) - ACCOUNTING Nov 2011

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CA IPCC
Tilak Vidyalaya Higher Secondary School (TVHSS), Kallidaikurichi

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PAPER 1 : ACCOUNTING QUESTIONS Preparation of Financial Statements of Companies 1. (a) A company can declare and pay dividend out of profit available for distribution. Interpret the distributable profit. A company has earned profit before depreciation ` 80 lakhs, depreciation as per books is ` 26 lakhs and depreciation as per section 205 of the Companies Act works out to ` 62 lakhs. Compute the maximum amount that can be paid as dividend for the relevant accounting year. (b) A joint stock company, earning adequate profits, has four part-time directors and a whole time director. What is the maximum managerial remuneration it can pay to its (i) Part-time directors taken together and (ii) to wholetime director? What will be your answer if the company had only part-time directors and no whole-time director? Cash flow Statement 2. From the following summarized cash book of Z Ltd., prepare Cash Flow Statement for the year ended 31st March, 2011 in accordance with AS 3 (Revised), using the direct method: ` in lakhs Cash and bank balances on 1st April, 2010 Receipts from customers 10 560 Issue of equity shares Sale of land and building 60 20 650 Payments to suppliers 400 Purchase of machinery Wages and salaries paid 55 20 Payments for overhead expenses Taxation 40 35 Dividend Repayment of Bank Loan 10 60 31st Cash and bank balances on March, 2011 The company does not have any cash equivalents. The Institute of Chartered Accountants of India (620) 30 2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Profit or Loss Prior to Incorporation 3. A firm which was carrying on business from 1st January, 2011, gets itself incorporated as a company on 1st May, 2011. The first accounts are drawn upto 30 th September, 2011. The gross profit for the period is ` 56,000. The general expenses are ` 14,220; directors fees ` 12,000 per annum; formation expenses ` 1,500. Rent upto 30th June was ` 1,200 per annum, after which it was increased to ` 3,000 per annum. Salary of the Manager, who upon incorporation of the company was made a Director, was ` 6,000 per annum. His remuneration thereafter was included in the above figure of fees to directors. Give profit and loss account showing pre and post-incorporation profits. The net sales were ` 8,20,000, the monthly average of which for the first four months of 2011 being one-half of that of the remaining period. The company earned a uniform profit. Interest and tax may be ignored. Accounting for Bonus Issue 4. Lavish Limited is a company listed on the Bombay Stock Exchange (BSE). The company is intending to make a bonus issue to all its shareholders to the best extent possible. The Capital Structure & Reserves position of the company as on 31-03-2011 is as under: ` Authorised Capital 10,00,000 Equity shares of ` 10 each (Class A shares) 5,00,000 Equity shares of ` 5 each (Class B shares) 1,00,00,000 25,00,000 Issued, Subscribed & Paid-up Capital 10,00,000 Equity Shares of ` 10 each fully paid (Class A shares) 5,00,000 Equity Shares of ` 5 each ` 2.50 paid up (Class B shares) 1,00,00,000 12,50,000 Reserves & Surplus Securities Premium Account 1,25,00,000 Capital Redemption Reserve Account 25,25,000 Capital Reserve Account 50,00,000 General Reserve Profit & Loss Account 1,40,50,000 21,75,000 Secured Loans 10,00,000, 8% FCD (Fully Convertible Debentures) of ` 10 each The Institute of Chartered Accountants of India 1,00,00,000 PAPER 1 : ACCOUNTING 3 The following information is also furnished: (a) The Class A equity shares were issued in 2005 to shareholders of Poor Ltd. at a premium of ` 10 per share in lieu of their shareholdings in Poor Ltd. as per scheme of Amalgamation approved by the court. (b) The Class B equity shares of ` 5 each on which ` 2.50 is paid up were issued at a premium of ` 5 each. (c) Capital Redemption Reserve account represents profits transferred consequent to redemption of the preference shares of the company. (d) The FCDs are due for conversion to fully paid class A equity shares of ` 10 each 3 months from the date of Balance Sheet (31-03-2011) in the ratio of 1 : 1. (e) Capital Reserve represents surplus on revaluation of the company s land at Mumbai. You are required to compute the maximum amount that can be capitalized in the form of Bonus shares of each class of shareholders and also give your advice to Lavish Ltd. on the other formalities it has to go through to complete the Bonus issue. Amalgamation of Companies 5. The Balance Sheets of Rahul Ltd. and Rohit Ltd. as at 31 st March, 2011 were as under: Liabilities Rahul Ltd. Rohit Assets Ltd. ` ` Rahul Ltd. Rohit Ltd. ` ` Share Capital in Equity Shares of ` 10 each 3,75,000 3,00,000 Fixed Assets 4,75,000 2,75,000 Reserves 7% Debentures 2,25,000 - 25,000 Current Assets: 1,00,000 Stock 1,25,000 75,000 Creditors Provision Taxation 1,40,000 60,000 1,25,000 25,000 1,50,000 50,000 1,00,000 1,25,000 8,00,000 5,75,000 8,00,000 5,75,000 for Debtors Bank It was agreed that Rahul Ltd. should absorb Rohit Ltd. as at 31-3-2011 on the basis of the following information and adjustments: (i) The adjusted profits for the last three years are: The Institute of Chartered Accountants of India 4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Rahul Ltd. Rohit Ltd. ` ` Year ending 31-3-2011 2,25,000 1,50,000 Year ending 31-3-2010 2,40,000 1,35,000 Year ending 31-3-2009 2,35,000 90,000 (ii) The shares of the companies were to be valued on net assets basis, subject to goodwill of Rohit Ltd. being taken at one year s purchase of average profits of three years and no goodwill to be taken for Rahul Ltd. (iii) 7% Debentureholders are to be repaid on 31-3-2011 at par by Rohit Ltd. (iv) The fixed assets of Rahul Ltd. are to be valued at ` 6,25,000. (v) Cost of absorption of ` 5,000 is met by Rahul Ltd. You are required to calculate the ratio of exchange of shares and draw up resulting Balance Sheet of Rahul Ltd. after absorpition. Internal Reconstruction 6. The Balance Sheet of Weak Ltd. as on 31st March, 2011 was as under: Liabilities ` Assets Share Capital: Goodwill 20,000 Equity Shares of ` 100 Plant & Machinery ` 2,00,000 18,00,000 each fully paid 10,000, 7% Preference 20,00,000 Inventories Debtors 3,00,000 7,50,000 Shares of ` 100 each Creditors 10,00,000 Cash & Bank Balance 1,50,000 Profit & Loss A/c 7,00,000 7,00,000 Rich Bank overdraft 3,00,000 40,00,000 The following information is furnished to you: Preliminary Expenses 1,00,000 40,00,000 (1) Preference dividend remains in arrear for 2 years. (2) Due to adverse performance, the company decided an Internal Restructuring by writing off all losses, intangibles & implementing the following scheme: (i) Creditors agree to forego 50% of their claims. (ii) Preference shareholders waive their right to arrears of dividend and agree to reduce their capital by 20% by reducing the nominal value of their shares in consideration for an yield of 9% on their shares post restructuring, provided the sacrifice of equity shareholders is at least 51%. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 5 (iii) Rich Bank agrees to convert the overdraft into a term loan to the extent of ` 2,25,000 and balance to be continued as overdraft. (iv) Plant & Machinery to be devalued by ` 3,00,000. (v) Debtors to the extent of ` 3,50,000 are not recoverable. (vi) Equity shareholders agree to accept shares at lesser nominal value as may be required. You are required to calculate/prepare: 1. Total sacrifice by the shareholders of Weak Ltd. 2. Share of loss by each class of shareholders. 3. New share capital post the restructuring scheme. 4. Working capital of the restructured entity. 5. A Balance Sheet post restructuring. Average Due Date 7. Steady, a partner in a firm called Ready, Steady and Go withdraws the following amounts for the year ending on 31st December, 2011. He is to be charged interest on drawings @ 10% p.a. The details of his drawings are: 2011 ` 2011 ` 31 January 1,500 31 July 2,500 28 February 31 March 1,000 1,600 31 August 30 September 1,500 1,200 30 April 31 May 2,000 1,400 31 October 30 November 1,000 1,800 30 June 700 31 December 3,160 Calculate the amount of interest on drawings chargeable to Steady. The average due date may be calculated in months. Account Current 8. The following are the transactions that took place between G and H during the period from 1st October, 2010 to 31st March, 2011: 2010 ` Oct.1 Balance due to G by H 3,000 Oct. 18 Goods sold by G to H 2,500 Nov. 16 Goods sold by H to G (invoice dated November, 26) 4,000 The Institute of Chartered Accountants of India 6 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Dec.7. Goods sold by H to G (invoice dated December, 17) 3,500 Jan. 3 Promissory note given by G to H, at three months 5,000 Feb. 4 Cash paid by G to H 1,000 Mar. 21 Goods sold by G to H 4,300 Mar.28 Goods sold by H to G (invoice dated April, 8) 2,700 st Draw up an Account Current upto March 31 , 2011 to be rendered by G to H, charging interest @10% per annum. Interest is to be calculated to the nearest rupee. Self Balancing Ledgers 9. M/s Independent keeps its books on sectional balancing system. Prepare the Total Debtors and Total Creditors accounts in the General Ledger for the year ended 31st December, 2011. ` Debtors Balance 1st January 2011 (Dr.) Debtors Balance 1st January 2011 (Cr.) 20,500 150 Creditors Balance 1st January 2011 (Cr.) Creditors Balance 1st January 2011 (Dr.) 15,000 100 Cash paid to creditors Discount received thereon Cash received from debtors in full settlement of claim of ` 12,410 Purchases 7,600 200 12,000 8,000 Sales returns Returns to suppliers 80 170 Bad debts Interest charged to debtors 600 20 Sales Cash refunded to debtors Bills Payable accepted (including renewals) Bills Payable withdrawn (upon renewal) Interest on bills payable renewed Bills Receivable received 9,000 500 600 300 15 3,000 Bills Receivable endorsed Bills Receivable dishonoured (out of endorsed) 700 100 Bills Receivable discounted 200 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 7 Bills Receivable dishonoured (as discounted) 50 Transfer from purchase ledger to sales ledger 400 31st 500 Debtors Balance on Creditors Balance on December 2011 (Cr.) 31st December 2011(Dr.) 200 Financial Statements of Not-for-Profit Organisation 10. (a) Elite Club has 200 members with an annual subscription of ` 3,600 payable by every member. An analysis of subscriptions received by the club during the accounting year ended on 31st March, 2011 revealed the following: ` For the year 2009-10 25,200 For the year 2010-11 For the year 2011-12 6,98,400 7,200 7,30,800 On 31st March, 2011 it was noted that a sum of ` 3,600 was still in arrears for the year ended 31st March, 2010. Calculate the amount of subscriptions that will appear on the credit side of the Club s Income and Expenditure Account for the year ended 31st March, 2011. Also show how items relating to subscriptions will appear in the Balance Sheet dated 31st March, 2011. (b) The following is the Income and Expenditure Account of Patiala House for the year ended 31st March, 2011: Income and Expenditure Account for the year ended 31st March, 2011 ` To Salaries To Rent To Printing To Insurance To Audit Fees To Games & Sports 19,500 By Subscription 4,500 By Donation 750 500 750 3,500 To Subscriptions written off 350 To Miscellaneous Expenses 14,500 To Loss on sale of furniture 2,500 To Depreciation: Sports Equipment The Institute of Chartered Accountants of India 6,000 ` 68,000 5,000 8 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Furniture To Excess of income over expenditure 3,100 17,050 73,000 73,000 Additional information: 31-3-2010 ` 2,600 1,000 31-3-2011 ` 3,700 1,500 Subscriptions in arrears Advance Subscriptions Outstanding expenses: Rent 500 800 Salaries 1,200 350 Audit Fee 500 750 Sports Equipment less depreciation 25,000 24,000 Furniture less depreciation 30,000 27,900 Prepaid Insurance 150 Book value of furniture sold is ` 7,000. Entrance fees capitalized ` 4,000. On 1st April, 2010 there was no cash in hand but Bank Overdraft was for ` 15,000. On 31st March, 2011. Cash in hand amounted to Rs. 850 and the rest was Bank balance. Prepare the Receipts and Payments Account of the Club for the year ended 31st March, 2011. Accounts from Incomplete Records 11. Fazal keeps his books of account by single entry system. However, he is able to give you the following lists of his assets and liabilities in the beginning as well as at the end of the year ended 31st March, 2011: On 1st April, 2010 On 31st March, 2011 ` ` Cash in hand Cash at bank 1,750 20,000 1,400 - Bank Overdraft Bills Receivable 15,000 1,800 25,000 Stock Debtors 93,500 60,000 98,700 70,000 Furniture and Fittings 65,000 65,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING Creditors 45,000 9 31,000 Bills Payable 5,000 Nil st Fazal introduced ` 10,000 as fresh capital on 1 October, 2010. He also withdrew ` 5,000 every month for his household expenses. During the year, there was no sale or fresh purchase of furniture and fittings. Ascertain the profit earned by Fazal during the year ended 31st March, 2011 after depreciating furniture and fittings @ 10% per annum and creating a provision for bad debts @ 5% on debtors. Accounting for Hire Purchase Instalment System 12. The under mentioned data pertain to M/s Jograj & Sons for the year ended 31st Dec., 2010 who deal in consumer durables. ` Opening Stock: At shop 30,000 With customers at cost Purchases 20,000 60,000 Hire purchase sales collection Opening overdue Installments 70,000 10,000 Closing overdue Installments 6,000 Hire purchase expenses 3,000 Details about unmatured installments Cost Price Sold out price Amount of closing Unmatured Installments 20,000 30,000 18,000 General sales at 10% profit on cost price 22,000 Closing stock at shop 25,000 You are required to prepare the H.P. Trading Account and General Trading Account. Investment Accounting 13. Alert Holdings P. Ltd. follows the calendar year for accounting purposes. The company purchased 5,000 nos. of 13.5% Convertible Debentures of Face Value of ` 100 each of Pergot Ltd. on 1st May 2010 @ ` 105 on cum interest basis. The interest on these instruments is payable on 31st & 30th of March & September respectively. On August 1st 2010 the company again purchased 2,500 of such debentures @ ` 102.50 each on cum interest basis. On October 1st, 2010 the company sold 2,000 Debentures @ ` 103 each. On 31st December, 2010 the company received 10,000 equity shares of ` 10 each in The Institute of Chartered Accountants of India 10 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Pergot Ltd. on conversion of 20% of its holdings. The market value of the debentures and equity shares as at the close of the year were ` 106 and ` 9 respectively. Prepare the Debenture Investment Account & Equity Shares Investment Account in the books of Alert Holdings P. Ltd. for the year 2010 on Average Cost Basis. Insurance Claims 14. A fire engulfed the premises of a business of M/s Danger on the morning of 1 st July 2011. The building, equipment and stock were destroyed and the salvage recorded the following: Building ` 8,000; Equipment ` 5,000; Stock ` 40,000. The cost of salvage amounted to ` 17,000. The following other information was obtained from the records saved for the period from 1st January to 30th June 2011: ` Sales 23,00,000 Sales Returns Purchases 80,000 19,00,000 Purchases Returns Cartage inward 25,000 36,000 Wages Stock in hand on 31st December, 2010 15,000 3,00,000 Building (valued on 31st December, 2010) Equipment (valued on 31st December, 2010) 7,50,000 1,50,000 Depreciation provision till 31st December, 2010 on: Building 2,50,000 Equipment 45,000 No depreciation has been provided since December 31 st 2010. 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. On a claim being made on the insurance company, the claim was settled for ` 10,50,000. Give necessary journal entries in this regard. Partnership - Admission of a Partner 15. (a) Red and Green are partners sharing profits and losses in the ratio of 3:2 after allowing ` 500 p.m. salary for each partner. However, the accounts have not been prepared for the last three years. From the following details, you are required to calculate the distribution of profits between the partners in total for the three years. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3rd Assets as at the end of year Liabilities as at the end of 3rd year Drawings for three years in addition to Salaries: Red Green Capital on commencement: Red Green Introduction of fresh capital during three years Red 11 ` 80,000 20,000 15,000 11,000 25,000 20,000 5,000 (b) Teak and Walnut are equal partners in Timber Business. The Balance Sheet of their firm as on 31st of March, 2011 was as under: Liabilities Capital Accounts Teak Walnut Amount Assets Amount Fixed Assets 1,25,000 80,000 Stocks 80,000 Cash & Bank 32,600 27,400 Creditors & Sundry payables 25,000 1,85,000 1,85,000 st On 1 April, 2011, Plywood is admitted as an equal partner. Prior to his admission, the partners agreed to bring into the books of the firm, stocks worth ` 40,000 that was received free of cost from a Business Associate. Consequent to Plywood s entry into the firm the capital base of the firm was expanded to ` 3 lakhs with all the partners agreeing to adopt the proportionate capital principle. Plywood brought in the agreed sum of ` 1,40,000. (` 1,00,000 towards capital and ` 40,000 towards his share of goodwill). The partners decided not to raise goodwill in the books of accounts. You are requested to show Capital Accounts of the three partners and the Balance Sheet of the Firm as on 1st April, 2011. Partnership Retirement of a partner 16. Alpha, Beta and Cheeta were equal working partners in the business of salt and sugar trade. Cheeta decided to retire due to health considerations. Alpha & Beta decided to continue the business with profit sharing ratio of 3 : 2. To compensate Cheeta for his loss of income both continuing partners decided to contribute from their capitals, in the new profit sharing ratio, a sum of ` 5,00,000 in the form of Fixed Deposit (F.D.) in the name of Cheeta. Reserves of the firm were ` 12,00,000 which the partners wished, The Institute of Chartered Accountants of India 12 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 should be continued in the books of the firm as such. Show the Journal Entries with appropriate narrations for giving Cheeta his share of Reserves and for the placement of the F.D. Capital balances were ` 30 lakhs, ` 20 lakhs and ` 15 lakhs respectively for Alpha, Beta & Cheeta. The Cash & Bank Balance of the firm stood at ` 1.76 crore. Accounting in Computerised Environment 17. (a) A large business entity wants to go in for an ERP (Enterprise Resource Planning) package. Which factors should it consider for the choice of an ERP package? (b) Briefly describe the advantages and disadvantages of using an Enterprise Resource Planning (ERP) software in computerized accounting. Accounting Standards AS 2 18. (a) As per Accounting Standard 2 (Revised) Valuation of Inventories , what is meant by the term inventories ? Also state the general principle of valuation of inventories laid down by this accounting standard. AS 3 (b) Describe, very briefly, the benefits of preparing Cash Flow Statement. AS 6 19. (a) A company has the policy of charging depreciation @ 18% on machinery on Written Down Value method. As on 31st March, 2010, W.D.V. of machinery was ` 10 lakhs and its useful life was assessed 4 years. How much depreciation is to be charged in the accounting year ending 31st March, 2011? If the above machinery has scrap value of ` 2 lakhs at the end of fourth year, what would be the amount of depreciation for the accounting year ending 31st March, 2011. AS 7 (b) Galaxy Ltd., has signed on 31st Dec, 2010, the Balance Sheet date, a contract where the total revenue is estimated at ` 15 crores and total cost is estimated at ` 20 crores. No work began on the contract. Is contractor required to give any accounting effect for the year ended December, 31st 2010 in his accounts? AS 9 (c) Y Co. Ltd., used certain resources of X Co. Ltd. In return, X Co. Ltd. received ` 10 lakhs and ` 15 lakhs as interest and royalties respective from Y Co. Ltd. during the year 2010-11. You are required to state whether and on what basis these revenues can be recognised by X Co. Ltd. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 13 AS 10 20. (a) Pellets India Ltd. intends to set up a steel pellet plant. The company has acquired a dilapidated factory having area of 5000 acres at a cost of ` 50,000 per acre. The company has incurred ` 1,02,00,000 on demolishing the old factory building thereon. A sum of ` 57,75,525 (including 5% sales tax) was realized from sale of material salvaged from the site. The company also incurred stamp duty and registration charges of 5% of land value, paid legal and consultancy charges ` 5,00,000 for land acquisition and incurred ` 1,50,000 on title guarantee insurance. You are required to compute the value of land acquired. AS 13 (b) An unquoted long term investment is carried in the books at its cost of ` 5 lakhs. The Published Accounts of the unlisted company received in May, 2010 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than ` 80,000. State with reasons, how you would deal with them in the Financial Statements. SUGGESTED ANSWERS/HINTS 1. (a) Distributable profits mean profit arrived at after providing for depreciation on assets, not only for the year in which the profits are earned but also for any arrears of depreciation of the past years, calculated in the manner prescribed by Section 205 of the Companies Act, 1956. Computation of maximum amount that can be paid as Dividend: (` in lakhs) Profit before depreciation 80.00 Less: Depreciation as per Section 205 Distributable profit 62.00 18.00 Therefore, maximum amount which can be paid as dividend would be ` 18.00 lakhs. (b) A joint stock company, earning adequate profits and having part-time directors as well as whole-time directors can pay the maximum managerial remuneration to them as follows: (i) The total remuneration to part-time directors taken together should not exceed 1% of the net profits of the company, if there is a managing or whole-time director. (ii) The total remuneration to a whole-time director should not exceed 5% of the net profits of the company. The Institute of Chartered Accountants of India 14 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 If there are only part-time directors and no managing or whole-time director in the company, the maximum managerial remuneration paid to them should not exceed 3% of the net profits of the company. Note: With the approval of the Central Government, the above limits can be exceeded. 2. Z Ltd. Cash Flow Statement for the year ended 31st March, 2011 ` in lakhs ` in lakhs Cash flow from operating activities Cash receipts from customers Cash paid to suppliers 560 (400) Cash paid to employees (20) Cash paid for overhead expenses (40) Cash generated from operations 100 Less: Income tax paid (35) 65 Net cash generated from operating activities Cash flow from investing activities Purchase of machinery Proceeds from sale of land and building (55) 20 (35) Net cash used in investing activities Cash flow from financing activities Proceeds from issuance of equity share 60 Repayment of bank loan (60) Dividend paid (10) Net cash used in financing activities (10) Net increase in cash and cash equivalents 20 Add: Cash and bank balances as on 1st April, 2010 10 Cash and bank balances as on 31st March, 2011 30 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3. 15 Profit & Loss Account (From 1.1.2011 to 30.9.2011) Particulars To General Expenses To Directors Fees To Formation Expenses Total PostIncorp. ` ` ` 6,320 7,900 14,220 - 5,000 5,000 - 1,500 1,500 400 950 1,350 2,000 - 2,000 To Net Profit - 24,650 To Capital Reserve 7,280 - 16,000 40,000 To Rent To Manager s Salary Particulars PreIncorp. By Gross Profit PreIncorp PostIncorp. Total ` ` ` 16,000 40,000 56,000 16,000 40,000 56,000 24,650 7,280 56,000 Working Notes: (i) Gross Profit has been apportioned in the sales ratio i.e. 2 : 5 calculated as follows: The average monthly sales for the first four months are 100. Therefore, the average monthly sales for the next five months will therefore be (2 x 100) 200. Hence, the total sales for the first four months are 400 (4 x 100) and those for the next five months (5 x 200) 1,000. Thus, the sales for the two period are in the ratio of 400 : 1,000 or 2 : 5. (ii) General expense have been apportioned according to time basis i.e. 4 : 5. (iii) Rent ` Rent for pre-incorporation period - 1st January, 2011 to 30th April, 2011 Rent for post-incorporation period - 1st May, 2011 to 30th June, 2011 - 1st July, 2011 to 30th September, 2011 4 months x ` 100 400 2 months x ` 100 3 months x ` 250 200 750 950 (iv) Manager s salary for four months @ ` 500 per month is ` 2,000. The Institute of Chartered Accountants of India 16 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 (v) Directors fees for five months @ ` 1,000 per month. (vi) The formation expenses have been charged exclusively to post-incorporation period. 4. Maximum amount of reserves available for capitalization as bonus shares ` Securities Premium realized in cash 25,00,000 Capital Redemption Reserve built out of profits 25,25,000 General Reserve Profit & Loss Account Total 1,40,50,000 21,75,000 2,12,50,000 Amount required for a 1:1 issue Existing Class A Equity shareholders Existing Class B shareholders to be made fully paid 1,00,00,000 12,50,000 Bonus Reservation for FCD holders on conversion Total 1,00,00,000 2,12,50,000 Available Reserves is ` 2,12,50,000 of which ` 12,50,000 is required to make the partly paid Class B shareholders fully paid which is a statutory requirement. The balance reserves available are ` 2,00,00,000. Hence 1:1 bonus issue for Class A equity shareholders can be made. This will use up reserves to the extent of ` 1,00,00,000 and the remaining reserves of ` 1,00,00,000 will be used for issuing Bonus shares to the FCD holders in the ratio of 1:1 upon conversion of the FCD s into Class A Equity Shares. The reservation to the FCD holders is compulsory as per SEBI rules. Other formalities are as under: 1. To convert partly paid up shares into fully paid up shares. 2. To increase the Authorized Capital of the company. 3. To ensure compliance with SEBI s (Issue of Capital and Disclosure Requirements) Regulations, 2009. 4. To ensure that the company has necessary authority in its Articles of Association (AOA) to proceed with the Bonus issue or else the AOA is to be amended. 5. To obtain the consent of the BOD to the issue. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 5. 17 Calculation of the ratio of exchange of shares Rahul Ltd. ` 6,25,000 1,25,000 1,50,000 50,000 9,50,000 (1,40,000) (60,000) 7,50,000 37,500 shares ` 20 Fixed assets as revalued Goodwill (W.N.2) Stock Debtors Bank Less:Creditors Provision for taxation Net assets Number of shares Value per share Rohit Ltd. ` 2,75,000 1,25,000 75,000 1,00,000 25,000 * 6,00,000 (1,25,000) (25,000) 4,50,000 30,000 shares ` 15 Ratio of Exchange of Shares: Since the intrinsic value of shares of Rahul Ltd. is ` 20 and Rohit Ltd. is ` 15 per share. Therefore, the ratio of exchange will be 3 shares of Rahul Ltd. for 4 shares of Rohit Ltd. Balance Sheet of Rahul Ltd. As at 31.3.2011 (after absorption) Liabilities Share Capital 60,000, Equity shares of ` 10 each fully paid (out of the above 22,500 shares have been issued as fully paid for consideration other than cash) Securities Premium Capital Reserve (on revaluation of assets) (1) Reserves Creditors Provision for Taxation * After discharge of debenture holders. The Institute of Chartered Accountants of India ` Assets Fixed assets Current Assets: 6,00,000 Stock 2,00,000 Debtors 2,50,000 2,25,000 Bank 70,000 20,000 2,25,000 2,65,000 85,000 14,20,000 ` 9,00,000 5,20,000 14,20,000 18 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Working Note: 1. Capital Reserve ` Fixed assets of Rahul Ltd. revalued at 6,25,000 Less: Book value of fixed assets of Rahul Ltd. (4,75,000) Capital reserve on revaluation of fixed assets 1,50,000 Less: Goodwill on take over of Rohit Ltd. written off Cost of absorption adjusted 1,25,000 5,000 Balance in Capital Reserve Account 2. (1,30,000) 20,000 Calculation of Goodwill Average Profits Years ended 31-3-2009 90,000 31-3-2010 1,35,000 31-3-2011 1,50,000 3,75,000 3. Average Profits 1,25,000 Goodwill at one year s purchase i.e., 1,25,000 Bank position of Rahul Ltd. after absorption: ` Balance as given 50,000 Add: Bank balance of Rohit Ltd. after payment to debeture holders 25,000 75,000 4. Less: Costs of absorption (5,000) Balance Shares issued by Rahul Ltd. 70,000 Total shares of Rohit Ltd. = 30,000 shares No. of shares to be issued by Rahul Ltd. 30,000 x Since shares of Rahul Ltd. will be issued at ` 20, ` 10 should be treated as securities premium. The Institute of Chartered Accountants of India 3 = 22,500 shares. 4 PAPER 1 : ACCOUNTING 6. 19 (1) Loss to be borne by Equity and Preference Shareholders ` Profit and loss account (debit balance) 7,00,000 Preliminary expenses 1,00,000 Goodwill 2,00,000 Plant & Machinery Debtors 3,00,000 3,50,000 Amount to be written off 16,50,000 Less: 50% of Creditors (3,50,000) Recorded loss borne by the share holders 13,00,000 Add: Arrears of preference dividend of 2 years forgone by the preference shareholders 1,40,000 Total sacrifice by the shareholders of Weak Ltd. 14,40,000 (2) Share of loss to be borne by the equity and preference shareholders ` ` Total recorded loss of `13,00,000 Preference shareholders share of loss = 20% of ` 10,00,000 2,00,000 Add: Arrears of preference dividend 1,40,000 Equity shareholders share of loss (`13,00,000 ` 2,00,000) being more than 51% of equity share capital 3,40,000 11,00,000 14,40,000 (3) New share capital after restructuring ` Equity shares: 20,000 Equity shares of ` 45 each, fully paid up 9,00,000 (` 20,00,000 ` 11,00,000) Preference shares: 10,000, 9% Preference shares of ` 80 each, fully paid up 8,00,000 (` 10,00,000 ` 2,00,000) 17,00,000 The Institute of Chartered Accountants of India 20 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 (4) Working capital of the restructured company ` ` Current Assets: Inventories 3,00,000 Debtors 4,00,000 Cash & Bank 1,50,000 8,50,000 Less: Current liabilities: Creditors 3,50,000 Bank overdraft (3,00,000-2,25,000) 75,000 (4,25,000) 4,25,000 (5) Balance Sheet of Weak Ltd. (As reduced) as on 31st March, 2011 Liabilities ` Assets Share Capital Plant & Machinery 20,000 Equity shares of ` 45 each fully paid up Inventories 9,00,000 Debtors 10,000, 9% Preference shares of ` 80 each 8,00,000 Rich Bank Term Loan 2,25,000 Cash & Bank ` 15,00,000 3,00,000 4,00,000 1,50,000 (3,00,000 75,000) Rich Bank Overdraft 75,000 Creditors 3,50,000 23,50,000 7. 23,50,000 Taking 1st January as zero date, we get: Date of drawings Amount 2011 ` Months after 1st January, 2011 Products ` 31st January 1,500 1 1,500 28th February 1,000 2 2,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 21 31st March 1,600 3 4,800 30th April 2,000 4 8,000 31st May 1,400 5 7,000 30th June 700 6 4,200 31st July 2,500 7 17,500 31st August 1,500 8 12,000 30th September 1,200 9 10,800 31st October 1,000 10 10,000 30th November 1,800 11 19,800 31st December 3,160 12 37,920 19,360 Average Due Date = Base date + 1,35,520 Total of Pr oducts Total of Amount = 1st January, 2011 + 1,35,520 19,360 = 7 months from 1st January 2011 i.e., 31st July 2011 The amount of interest on drawings chargeable to Steady from 1st August, 2011 to 31st December, 2011 = 10% p.a. on ` 19,360 for 5 months = 19,360x10x5 = ` 807 (approx.) 100x12 The Institute of Chartered Accountants of India 22 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 8. In the books of G H in Account Current with G (Interest to 31st March, 2011 @ 10% p.a.) Date Due date Particulars 2010 2010 Oct. 1, Oct. 1, To Balance b/d Oct. Oct. To Sales 18, 18 2011 2011 Jan. 2 Apr. 6 To Bills payable Feb. 4 Feb. 4 To Cash Mar. 21 Mar. 31 Mar. 21 Mar. 31 To Sales No., of Amount days till 31.3.11 ` 182 3,000 164 2,500 (6) 5,000 55 1,000 10 4,300 Product Date 2010 5,46,000 Nov. 16 4,10,000 Dec 7 2011 (30,000) Mar. 28 55,000 Mar. 31 43,000 To Interest 1,81,600x10x1 100 x 365 The Institute of Chartered Accountants of India 50 - 15,850 10,24,000 Due date 2010 Nov. 20 Dec. 17 2011 Apr. 8 Particulars No. of days till 31.3.11 Amount Product 5,00,000 By Purchases 125 ` 4,000 By Purchases 104 3,500 3,64,000 By Purchases (8) 2,700 (21,600) Mar. 31 By Balance of product By Balance c/d 1,81,600 5,650 15,850 10,24,000 PAPER 1 : ACCOUNTING 9. 23 In the General Ledger Total Debtors Account 2011 ` 2011 Jan. 1 Jan. 1 To Balance b/d 20,500 By Balance b/d Till Dec. 31 To To Interest Sales To Cash Refund To Total Creditors Account To To ` 150 Till Dec. 31 20 By Cash 9,000 By Discount allowed 500 By Returns By Bad Debts (B/R dishonoured as endorsed) Bank (B/R dishonoured as discounted) 100 By Bills Receivable Balance c/d 500 12,000 410 80 600 3,000 50 By Transfer from Purchase Ledger to Sales Ledger By Balance c/d 400 14,030 (Bal. Fig.) 30,670 2012 Jan. 1 To 30,670 2012 Jan. 1 Balance b/d 14,030 By Balance b/d 500 Total Creditors Account 2011 Jan. 1 To Balance b/d Till Dec. 31 To Cash To Discount received To Returns Outwards To Bills Payable (including renewals) To Bills Receivable (Endorsed) To Transfer from Purchase The Institute of Chartered Accountants of India ` 2011 ` Jan. 1 100 By Balance b/d Till Dec. 31 7,600 By Purchases 200 By Bills Payable (Withdrawn) 170 15,000 8,000 300 By Interest on Bills 600 Payable (Renewal) 700 By Total Debtors Account (Bills Receivable) 15 100 24 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Ledger to Sales Ledger 400 (Dishonoured as endorsed) To Balance c/d 13,845 By Balance c/d 200 (Bal.Fig.) 23,615 Jan. 1, 2012 23,615 Jan. 1, 2012 To Balance b/d 200 By Balance b/d 13,845 Notes: 1. Bills Receivable discounted is not shown in the total accounts. 2. Bills Receivable dishonoured (as endorsed) has to be entered both in total debtors and total creditors accounts. It is credited in the total creditors account and debited in the total debtors account. 10. (a) Income and Expenditure Account for the year ended 31st March, 2011 (An Extract) Income ` Subscriptions (` 3,600 x 200 members) 7,20,000 Balance Sheet as on 31st March, 2011 (An Extract) Liabilities Subscription received in advance Working Note: ` Assets ` 7,200 Subscription in arrear: For 2009-10 3,600 For 2010-11 21,600 25,200 Subscription due for 2010-11 (` 3,600 x 200) ` 7,20,000 Subscription received for 2010-11 ` 6,98,400 Subscription in arrear for 2010-11 21,600 (b) Receipts and Payments Account For the year ended 31-3-2011 To Subscription A/c (W.N.1) To Donation A/c To Entrance Fees A/c To Furniture A/c (Sale of 67,050 5,000 4,000 By Balance b/d (Bank overdraft) By Salary Add: Outstanding of last year The Institute of Chartered Accountants of India 19,500 1,200 15,000 PAPER 1 : ACCOUNTING furniture) (7,000 2,500) 4,500 Less: Outstanding of this year By Rent Add: Outstanding of last year Less: Outstanding of this year By Printing By Insurance Add: Prepaid in this year By Audit Fees Add: Outstanding of last year Less: Outstanding of this year By Games & Sports By Miscellaneous Expenses By Sports Equipment (Purchased) (W.N. 2) By Furniture (Purchased) (W.N. 3) By Balance c/d Cash Bank (bal. fig.) 25 (350) 4,500 500 (800) 500 150 750 500 (750) 20,350 4,200 750 650 500 3,500 14,500 5,000 8,000 850 7,250 80,550 80,550 Working Notes: 1. Calculation of subscription received during the year 2010-2011 ` Subscription as per Income & Expenditure A/c Less: Arrears of 2010-2011 Advance in 2009-2010 3,700 1,000 Add: Arrears of 2009-2010 Advance for 2011-2012 2,600 1,500 Less: Written off during 2010-2011 2. ` 68,000 (4,700) 63,300 4,100 67,400 (350) 67,050 Calculation of Sports Equipment purchased during 2010-2011 Sports Equipment A/c ` To Balance b/d To Receipts & Payments A/c The Institute of Chartered Accountants of India 25,000 5,000 ` By Income & Expenditure A/c (Depreciation) 6,000 26 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 (Purchased) (bal. fig.) By Balance c/d 24,000 30,000 3. 30,000 Calculation of Furniture purchased during 2010-2011 Furniture A/c ` To Balance b/d To Receipts & Payments A/c ` 30,000 By Receipts & Payments A/c 4,500 8,000 By Income & Expenditure A/c 2,500 (Purchased)(Bal.fig.) (Loss on sale) By Income & Expenditure A/c (Depreciation) 3,100 By Balance c/d 27,900 38,000 11. 38,000 Statement of Affairs as on 1st April, 2010 ` Creditors Bills Payable Capital (bal.fig.) ` 45,000 Cash in Hand 5,000 Cash at Bank 2,05,250 Bills Receivable Stock Debtors Furniture and Fittings 2,55,250 1,750 20,000 15,000 93,500 60,000 65,000 2,55,250 Statement of Affairs as on 31st March, 2011 Liabilities Creditors Bank Overdraft Capital (bal.fig.) ` Assets ` 31,000 Cash in Hand 1,800 Bills Receivable 2,17,300 Stock Debtors 2,50,100 The Institute of Chartered Accountants of India ` 1,400 25,000 98,700 70,000 Less: Provision for doubtful debts (3,500) Furniture and fittings 65,000 Less: Depreciation (6,500) 66,500 58,500 2,50,100 PAPER 1 : ACCOUNTING 27 Statement of Profit ` 2,17,300 60,000 2,77,300 (10,000) 2,67,300 (2,05,250) 62,050 31st Capital as on March, 2011 Add: Drawings (` 5,000 x 12) Less: Additional capital Less: Capital as on 1st April, 2010 Profits during the year 12. Hire Purchase Trading Account Particulars ` Particulars To Opening Stock: ` ` By H.P. Sales: With customers 20,000 Collection To General Trading Account 45,000 Less: Opening overdue To Hire Purchases expenses 3,000 Installments To Profit & Loss A/c: 70,000 (10,000) 60,000 H.P. Profit (Bal.fig) 10,000 Add: Closing overdue Installments 6,000 66,000 By Closing Stock: with customers (18,000x20,000/30,000) 78,000 12,000 78,000 General Trading Account Particulars ` Particulars To Opening Stock 30,000 By Goods sold on hire purchase To Purchases 60,000 To Gross Profit transferred to Profit and Loss A/c 45,000 (Bal.fig.) By Sales 22,000 2,000 By Closing stock 25,000 92,000 The Institute of Chartered Accountants of India ` 92,000 28 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 13. Books of Alert Holdings P. Ltd. Investment in 13.50% Convertible Debentures in Pergot Ltd. Account (Interest payable 31st March & 30th September) Date Particulars Nominal Interest ` ` Amount Date Nominal Interest Amount ` ` ` ` 2010 May 1 Particulars 2010 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625 (6 months Int) Aug.1 To Bank Oct.1 To P&L A/c Dec.31 To P&L A/c 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000 Dec.31 By Equity share 1,10,000 1,12,108 Dec.31 By Bank 2,167 52,313 (See note1) Dec.31 7,50,000 69,188 By Balance c/d 7,66,542 3,713 4,40,000 14,850 4,48,434 7,50,000 69,188 7,66,542 Note 1: ` 3,713 received on 31.12.2010 represents interest on the debentures converted till date of conversion. Note 2: Cost being lower than Market Value the debentures are carried forward at Cost. Investment in Equity shares in Pergot Ltd. Account Date Particulars Nominal Dividend Amount ` Date ` 2010 Dec31 To 13.5% Deb. Particulars Nominal Dividend Amount ` ` 2010 1,00,000 1,00,000 1,12,108 Dec.31 By P&L A/c 1,12,108 22,108 Dec.31 By Bal. c/d 1,00,000 90,000 1,00,000 1,12,108 Note 1: Cost being higher than Market Value the shares are carried forward at Market Value. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 29 Working Notes: 1. Interest paid on ` 5,00,000 purchased on May 1st, 2010 for the month of April 2010, as part of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625 2. Interest received on 30th Sept. 2010 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 2010 for April 2010 to July 2010 as part of purchase price: 2,50,000 x 13.5% x 4/12 = ` 11,250 4. Loss on Sale of Debentures Cost of acquisition 5. (` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833 Less: Sale Price (2000 x 103) = 2,06,000 Profit on sale = ` 2,167 Interest on 1,100 Debentures (being those converted) for 3 months i.e. Oct-Dec. 2010 1,10,000 x 13.5% x 3/12 = ` 3,713 6. Cost of Debentures converted to Equity Shares (` 5,19,375 + ` 2,45,000) x 1,10,000/7,50,000= ` 1,12,108 7. Cost of Balance Debentures (` 5,19,375 + ` 2,45,000) x ` 4,40,000/` 7,50,000 = ` 4,48,434 8. Interest on Closing Debentures for period Oct.-Dec. 2010 carried forward (accrued interest) ` 4,40,000 x 13.5% x 3/12 = ` 14,850 14. Memorandum Trading Account for the Period from 1.1.2011 to 30.6.2011 To Opening Stock (1.1.2011) To Purchases Less: Returns To Cartage Inwards To Wages ` 3,00,000 By Sales Less: Sales 19,00,000 Returns (25,000) 18,75,000 35,000 By Closing Stock 15,000 (Bal. Fig.) The Institute of Chartered Accountants of India ` 23,00,000 (80,000) 22,20,000 5,60,000 30 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 To Gross Profit (25% of ` 22,20,000) 5,55,000 27,80,000 27,80,000 Stock Destroyed Account ` To Trading Account ` 5,60,000 By Stock Salvaged Account 40,000 By Balance c/d (For Claim) 5,20,000 5,60,000 Items A Stock Buildings Equipment Cost of salvage 5,60,000 Statement of Claim Cost Depreciation (`) (`) B C 5,60,000 7,50,000 2,50,000 + 18,750 1,50,000 45,000 + 11,250 17,000 - Salvage ( `) D 40,000 8,000 5,000 - Journal Entries ` Insurance Company Account To Stock Destroyed Account Dr. Claim (`) (E=B-C-D) 5,20,000 4,73,250 88,750 17,000 10,99,000 ` 10,99,000 5,20,000 To Buildings Account To Equipment Account 4,73,250 88,750 To Cost of Salvage Account 17,000 (Amount of claim submitted) Bank Account Dr. 10,50,000 Profit and Loss Account Dr. 49,000 To Insurance Company Account (Amount of claim admitted to the extent of ` 10,50,000; the balance transferred to profit and loss account) The Institute of Chartered Accountants of India 10,99,000 PAPER 1 : ACCOUNTING 31 15. (a) Statement showing distribution of profits between the partners ` Assets at the end of the 3rd year ` 80,000 Less: Liabilities at the end of the 3rd year (20,000) 60,000 Add: Drawings including partnership salary: Red [15,000 + (500 x 12 x 3)] 33,000 Green [11,000 + (500 x 12 x 3)] 29,000 62,000 1,22,000 Less: Opening Capital: Red Green 25,000 20,000 (45,000) 77,000 Less: Introduction of capital: Red (5,000) Net Profit 72,000 Profit and Loss Appropriation Account for 3 years Particulars ` Particulars To Partner s Salary Red (500 x 12 x 3) Green (500 x 12 x 3) ` By Net Profit for three years 72,000 18,000 18,000 To Share of Profit Red 21,600 Green 14,400 36,000 72,000 (b) 72,000 Partners Capital Accounts Particulars To Teak & Walnut To Bank Teak Walnut ` ` ` - - 40,000 20,000 20,000 - The Institute of Chartered Accountants of India Plywood Particulars By Balance b/d By Bank Teak Walnut Plywood ` ` ` 80,000 - 80,000 - 1,40,000 32 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 To Balance c/d 1,00,000 1,00,000 1,00,000 By Plywood 20,000 20,000 - By Stock A/c 20,000 20,000 - 1,20,000 1,20,000 1,40,000 1,20,000 1,20,000 1,40,000 Balance Sheet of M/s Teak, Walnut & Plywood as on 1st April, 2011 Liabilities ` Assets Capital Accounts Teak ` Fixed Assets 1,00,000 Stocks 1,25,000 72,600 Walnut 1,00,000 Cash & Bank 1,27,400 Plywood 1,00,000 Creditors & Sundry Payables 25,000 3,25,000 Working Note: 3,25,000 Old profit sharing ratio: 1:1 New ratio:1:1:1 Plywood s share of capital = ` 3,00,000/3 = ` 1,00,000 Goodwill = ` 1,40,000 ` 1,00,000 = ` 40,000 for the 1/3rd share 16. Journal Entries (1) Fixed Deposit (FD) Account for Cheeta To Bank A/c (Being the placement of FD for Cheeta from Firm s resources) (2) Alpha s Capital Account Beeta s Capital Account To FD Account for Cheeta (Being the FD taken out of firm s resources borne by the continuing partners in the new profit sharing ratio) (3) Alpha s Capital A/c Beta s Capital A/c To Cheeta s Capital Account (Being entry for Cheeta s share of reserve borne by continuing partners in ratio of gain) The Institute of Chartered Accountants of India ` Dr. 5,00,000 ` 5,00,000 Dr. 3,00,000 Dr. 2,00,000 5,00,000 Dr. 3,20,000 Dr. 80,000 4,00,000 PAPER 1 : ACCOUNTING 33 Working Note: Alpha s Gain = 3/5 1/3 = 4/15 Beta s Gain = 2/5 1/3 = 1/15 Gaining ratio of Alpha & Beta will thus be 4 : 1 17. (a) The business entity should consider the following factors while choosing an ERP package: (i) Functional requirement of the organization: The ERP that matches most of the requirements of the organization should be preferred to others. (ii) Reports available in the ERP: The organization should visualize the reporting requirements and choose a vendor which fulfils them. (iii) Background of the vendors: The service and deliverable record of a vendor is extremely important in choosing the vendor. (iv) Budget of the organization: The budget constraint and fund position of the enterprise should also be taken into consideration. (b) The followings are the advantages of using an Enterprise Resource Planning (ERP) software in computerized accounting: (i) It covers most of the common functions. (ii) It generates most of the desired reports which are standardize across industries and acceptable to users. (iii) It being an integrated package, duplication is avoided. (iv) Much more information is made available by this package than what is available otherwise. The followings are the disadvantages of ERP: (i) The user may have to modify his business procedures to use ERP effectively. (ii) It is often too expensive for small and medium sized organizations. (iii) There may be implementation hurdles. (iv) It is a complex software. Large number of modules, parameter settings and configuration makes it a complex. 18. (a) As per Accounting Standard 2 (Revised) Valuation of Inventories , inventories mean assets: (i) held for sale in the ordinary course of business; (ii) in the process of production for such sale; and (iii) in the form of materials, spares, or supplies to be consumed in the production process or in rendering of services The Institute of Chartered Accountants of India 34 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 The general principle of valuation of inventories is that inventories should be valued at the lower of cost and net realisable value. (b) The followings are the benefits of preparing Cash Flow Statement: (i) It gives much more reliable information regarding results of the enterprise than the profit and loss account. (ii) It gives an idea of the ability of the enterprise to meet its short term cash commitments and to pay dividend. (iii) It is useful in checking the accuracy of past assessments of future cash flows. (iv) It is very useful in planning and preparing cash budget for a future period. (v) It is useful in getting information about changes in cash and cash equivalents over a period. 19. (a) (a) (` in lakhs) W.D.V. as on 31st March, 2010 10.00 1.8 Depreciation for 2010-11 (` 10 lakh x 18%) (b) Where machinery has scrap value of ` 2,00,000 Rate of depreciation as per WDV = 1 Rate of depreciation = [1 4 n Scrap value x100 Cost 2,00,000 ]x100 or = [1 10,00,000 4 20 ]x100 100 After applying the log and antilog table, the rate of depreciation would be = [1-(1/4 log 20 - 1/4 log 100)] x 100 = [1-(/4 x 1.3010 - 1/4 x 2.0000)] x 100 = [1-(.32525-.5)] x 100 = [1-(-.17475)] x 100 = [1-(Antilog -.17475+1-1)] x 100 = [1-(Antilog bar1.8253)] x 100 = [1-0.6688] x 100 = .3312 x 100 = 33.12% (` in lakhs) W.D.V. as on 31st March, 2010 Depreciation to be charged in 2010-11 @ 33.12% The Institute of Chartered Accountants of India 10 3.312 PAPER 1 : ACCOUNTING 35 (b) As per para 35 of AS 7 Construction Contracts, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. The amount of such loss is determined irrespective of whether or not work has commenced on the contract. Thus, Galaxy Ltd. should recognize loss amounting `5 crores for the year ended 31st December, 2010. The contract should be reviewed at the end of the each accounting period for additional losses to be incurred, if any. (c) As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise resources yielding interest and royalties should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases: (i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable. (ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement 20. (a) Para 20 of AS 10 Accounting for Fixed Assets stipulates that the cost of a fixed asset should comprise of its purchase price and any attributable cost of bringing the asset to its working condition for its intended use. Further, in para 9, the standard gives examples of attributable costs such as site preparation & professional fees. Subsequently, through para 10.1 the standard also permits elimination of internal profits in arriving at costs. Accordingly the cost of the land will be as under: (` in lakhs) 2,500.000 125.000 5.000 1.500 Purchase price @ ` 50,000 per acre: Stamp Duty & Registration charges @ 5% Legal Fees Title Guarantee Insurance Demolition Expenses 102.00 Sale of Salvaged materials (net of Tax) (55.005) 46.995 Cost of Land (2,678.495) (b) Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Para 17 of AS 13 Accounting for Investments states that indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. On this basis, the facts of the given case clearly suggest that the provision for diminution should be made to reduce the carrying amount of long term investment to ` 80,000 in the financial statements for the year ended 31st March, 2010. The Institute of Chartered Accountants of India 36 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2011 Appendix Announcements and Notifications applicable for November, 2011 examination 1. Limited Revisions due to Issuance of AS 30 and 31 As per the announcement issued by the Accounting Standard Board of the ICAI regarding applicability of AS 30 (dated 11th February, 2011) in respect of the financial statements, it has been clarified that to the extent of accounting treatments covered by any of the existing notified accounting standards (for eg. AS 11, AS 13 etc,) the existing notified accounting standards would continue to prevail over AS 30. 2. Schedule XIII of the Companies Act 1956 being amended- Unlisted Companies shall not require Government Approval for Managerial Remuneration where they have no Profits The Ministry of Corporate Affairs issued a notification on Managerial Remuneration in unlisted companies having no profits/inadequate profits. In the case of unlisted companies so long as the conditions specified in Schedule XIII, including special resolution of shareholders and absence of default on payment to creditors, are fulfilled approval will not be needed hereafter. Accordingly, Schedule XIII of the Companies Act 1956 is being amended to provide that unlisted companies (which are not subsidiaries of listed companies) shall not require Government approval for managerial remuneration in cases where they have no profits/ inadequate profits, provided they meet the other conditions stipulated in the Schedule. Note: Accounting Standards 1, 2, 3, 6, 7, 9, 10, 13, 14, are covered in the syllabus. Non- applicability of Announcements and Notifications for November, 2011 examination 1. The MCA has issued 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 November, 2011 Examination. 2. Non-applicability of Revised Schedule VI for November 2011 Examination This is to bring to the attention of students that a decision has been taken to defer the applicability of the Revised Schedule VI for CA examination, consequent to which the same will not be applicable for PCC examinations to be held in November, 2011. The Institute of Chartered Accountants of India

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