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CA IPCC : Revision Test Paper (with Answers) - ACCOUNTING May 2012

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PAPER 1 : ACCOUNTING PART I : ANNOUNCEMENTS STATING NON-APPLICABILITY FOR MAY, 2012 EXAMINATION (i) Schedule VI revised by the Ministry of Corporate Affairs The Ministry of Corporate Affairs (MCA) has revised Schedule VI to the Companies Act, 1956 on the 28th February, 2011 pertaining to the preparation of Balance Sheet and Profit and Loss Account under the Companies Act, 1956. This revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006. The Revised Schedule VI shall come into force for the Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after 1.4.2011. However, the revised Schedule VI is not made applicable for May, 2012 examination. (ii) Ind ASs issued by the Ministry of Corporate Affairs The Ministry of Corporate Affair (MCA) has issued 35 Converged Indian Accounting Standards (known as Ind-AS ), without announcing the applicability date. The issuance of Ind-AS is a significant step towards the implementation of converged standards in India. However, Ind ASs are not made applicable for May, 2012 examination. PART II : QUESTIONS AND ANSWERS QUESTIONS WITH HINTS Preparation of Financial Statements of Companies P&L A/c 1. (a) From the following Profit and Loss Account (draft) of Swati Ltd. for the year ended 31st March, 2011, calculate whether the commission payable to the managing director and other part time directors of the company, whose commission was fixed @ 5% and 2% respectively on the profit of the company before charging their commission is permissible as per the Companies Act or not: Dr. (`) To Salaries and wages To Rent, rates and taxes Cr. (`) 20,00,000 By Gross Profit 51,00,000 4,50,000 By Bounties and subsidies received from the Government 1,00,000 60,000 By Profit on sale of fixed assets 80,000 To Miscellaneous expenses 1,40,000 By Premium on issue of shares 20,000 To Workmen compensation By Profit on sale of To Repairs and renewals The Institute of Chartered Accountants of India 2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 including ` 10,000 legal compensation 25,000 To Interest on bank overdraft 40,000 To Interest on debentures 50,000 To Director s fee To Donation to charitable fund 18,000 25,000 To Depreciation on fixed assets To Loss on investments sale of 10,000 1,00,000 25,000 To Reserve for redemption of redeemable preference shares 1,50,000 To Development reserve 1,00,000 rebate forfeited shares To Provision for taxation 10,00,000 To Balance c/d 11,27,000 53,10,000 53,10,000 Notes : ` (1) (2) Original cost of the fixed assets sold 1,90,000 Written down value of the fixed assets sold Sale proceeds of the fixed assets 1,40,000 2,20,000 Depreciation allowable as per Schedule XIV to the Companies Act, 1956 80,000 Profit or Loss Prior to Incorporation (b) (i) Agra Company, incorporated on 1st April, 2011, took over running business from 1st January, 2011. The company prepares its first final accounts on 31st December, 2011. From the following information, you are required to calculate the sales ratio of pre-incorporation and post-incorporation periods: 1. Sales for January, 2011 to December, 2011 is ` 7,20,000, 2. The sales for the month of January is twice of the average sales; for the month of February it is equal to average sales, sales for four months from May to August is 1/4 of the average of each month; and sales for October The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3 and November is three times the average sales. (ii) Fatafat Ltd. took over a running business with effect from 1 st April, 2010. The company was incorporated on 1st August, 2010. The following Profit and Loss Account has been prepared for the year ended 31.3.2011: To To To To To To To To To To To To To To To To Salaries Stationery Travelling expenses Advertisement Miscellaneous trade expenses Rent (office buildings) Electricity charges Director s fee Bad debts Commission to selling agents Audit fee Debenture interest Interest paid to vendors Selling expenses Depreciation on fixed assets Net Profit ` ` 48,000 By Gross Profit 3,20,000 4,800 16,800 16,000 37,800 26,400 4,200 11,200 3,200 16,000 6,000 3,000 4,200 25,200 9,600 87,600 3,20,000 3,20,000 Additional information: (a) Total sales for the year, which amounted to ` 19,20,000 arose evenly upto the date of 30.9.2010. Thereafter they spurted to record an increase of two-third during the rest of the year. (b) Rent of office building was paid @ ` 2,000 per month upto September, 2010 and thereafter it was increased by ` 400 per month. (c) Travelling expenses include ` 4,800 towards sales promotion. (d) Depreciation includes ` 600 for assets acquired in the post incorporation period. (e) Purchase consideration was discharged by the company 30th September, 2010 by issuing equity shares of ` 10 each. on Prepare the Profit and Loss A/c in columnar form showing distinctly the allocation of expenses between pre and post incorporation periods. The Institute of Chartered Accountants of India 4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Accounting for Issue of Bonus Shares 2. (a) Sidharatha Trading Co. Ltd. has an Authorised Capital of ` 16,00,000 divided into: 20,000 6% Preference Shares of ` 10 each; 40,000 7% Preference Shares of ` 10 each; and 30,000 Equity Shares of ` 10 each. On 1st January, 2011, the whole of the two classes of preference shares and 30,000 equity shares stood in the books as fully paid. The securities premium account as on that date showed a balance of ` 40,000. The balance of profit was ` 64,000. On 1st July, 2011 it was decided to redeem the whole of 6% preference shares at a premium of ` 1 per share and for this specific purpose, the company issued for cash 16,000 equity shares of ` 10 each at a premium of ` 2 per share, payable full on allotment. All the above shares were taken up. The cost of issue of shares amounted to ` 6,000. On 1st October, 2011, the company issued to all equity shareholders one bonus share of ` 10 fully paid for each five held. It is the intention of the directors that minimum reduction should be made in revenue reserve account which stood at ` 2,50,000. Give necessary journal entries. Cash Flow Statement (b) From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended 31st March, 2011 in accordance with AS 3 (Revised) using the direct method. The company does not have any cash equivalents. Summary Cash Account for the year ended 31.3.2011 ` 000 To Balance on 1.4.2010 To Issue of Equity Shares To Receipts Customers from To Sale of Fixed Assets ` 000 50 By Payment to Suppliers 300 By Purchase of Fixed Assets 2,800 By Overhead expense 100 By Wages and Salaries 200 200 100 By Taxation By Dividend 250 50 By Repayment of Bank Loan 300 _____ By Balance on 31.3.2011 3,250 The Institute of Chartered Accountants of India 2,000 150 3,250 PAPER 1 : ACCOUNTING 5 Amalgamation of Companies 3. Given below are the balance sheets of two companies as on 31st December, 2011: A Limited Liabilities ` Assets Issued and fully paid share capital: 50,000 8% cumulative preference shares of ` 10 each Patent rights Land and buildings 5,00,000 Plant and machinery 1,50,000 equity shares of ` 10 each 15,00,000 Stock General reserves 8,00,000 Sundry debtors Profit and loss A/c 90,000 Cash and bank balance Sundry creditors 50,000 29,40,000 ` 2,00,000 6,00,000 15,50,000 3,50,000 80,000 1,60,000 29,40,000 B Limited Liabilities ` Assets Issued and fully paid share capital: 40,000 shares of ` 10 each Profit and loss account Sundry creditors Goodwill 4,00,000 Motor Vehicles 32,000 Furniture 21,000 Stock Sundry debtors Cash and Bank balance 4,53,000 ` 70,000 40,000 25,000 2,39,000 62,000 17,000 4,53,000 On 1st January, 2012, it has been agreed that both these companies should be wound up and a new company Shakti Ltd. should be formed to acquire the assets of both the companies on the following terms: (i) Shakti Ltd. is to have an authorised capital of ` 30,00,000 divided into 50,000 5% cumulative preference shares of ` 10 each and 2,50,000 equity shares of ` 10 each. (ii) Shakti Ltd. is to purchase whole of the assets of A Ltd. (except cash and bank balances) for ` 27,95,000 to be settled by paying ` 5,45,000 in cash and balance by issue of 1,80,000 equity shares at a premium of ` 2.50 each. (iii) Shakti Ltd. is to purchase whole of the assets of B Ltd. (except cash and bank balances) for ` 3,81,000 to be settled by paying ` 6,000 in cash and balance by issue of 30,000, equity shares ` 12.50 each. The Institute of Chartered Accountants of India 6 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 (iv) Shakti Ltd. is to make a public issue of 50,000, 5% cumulative preference shares at par and 30,000 equity shares, at the issue price of ` 12.50 per share, all payable in full on application (v) A Ltd. and B Ltd. both are to be wound up, the two liquidators distributing the shares in Shakti Ltd. in kind among the equity shareholders of the respective companies. (vi) The liquidator of A Ltd. is to pay the preference shareholders ` 10 in cash for every share held in full satisfaction of their claims. It is estimated that the costs of liquidation (including the liquidators, remuneration) will be ` 5,000 in case of A Ltd. and ` 2,000 in the case of B Ltd. and that the preliminary expenses of Shakti Ltd. will amount to ` 18,000 exclusive of the underwriting commission of ` 23,750 payable on the public issue. The scheme has been sanctioned and carried through in its entirety. You are required to: (a) Pass the necessary journal entries in the books of A Ltd. for winding up. (b) Draw up the initial Balance Sheet of Shakti Ltd. on the basis that all assets other than goodwill are taken over at the books values. Internal Reconstruction of a Company 4. Yoga Ltd. found itself in financial difficulty. The balance sheet of the company as at 31st March, 2011 was as follows: Equity shares of ` 10 each 10% Preference shares of ` 10 each 12% Debentures Interest payable on debentures Loan from directors Provision for depreciation: Buildings Machinery Bank overdraft Sundry creditors ` 10,00,000 Goodwill Land 4,00,000 3,00,000 Building at cost Machinery at cost 36,000 1,00,000 Investments Stock 75,000 Debtors 80,000 Cash 1,50,000 Profit and loss account 2,59,000 24,00,000 ` 3,00,000 4,00,000 3,75,000 2,20,000 2,25,000 3,60,000 2,00,000 5,000 3,15,000 24,00,000 The authorised share capital of the company is 2,50,000 equity shares of ` 10 each and 50,000 10% preference shares of ` 10 each. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 7 It was decided during a meeting of the shareholders and directors of the company to carry out a scheme of internal reconstruction as follows: 1. Each equity share is to be redesigned as a share of ` 2.50. The equity shareholders are to accept a reduction in the nominal value of their share from ` 10 to ` 2.50 and subscribe for a new issue on the basis of 1 for 2 at a price of ` 4 per share. 2. The existing preference shares are to be exchanged for a new issue of 30,000 15% preference shares of ` 10 each and 40,000 equity shares of ` 2.50 each. 3. The debenture holders are to accept 10,000 equity shares of ` 2.50 each in lieu of interest payable. The interest rate is to be increased to 14%. A further ` 1,00,000 of 14% debentures of ` 100 each is to be issued and taken up by the existing holders at ` 90. 4. ` 40,000 of director's loan is to be cancelled. The balance amount is to be settled by issue of ` 10,000 equity shares of ` 2.50 each @ ` 6 each. 5. The investments are to be sold at current market price of ` 3,00,000. 6. The bank overdraft is to be repaid. 7. A sum of ` 1,59,000 is to be paid to the creditors immediately and the balance is to be paid at quarterly intervals. 8. All intangible assets are to be eliminated. 9. The following assets are to be adjusted to fair values: ` Debtors 1,80,000 Stock Machinery 3,20,000 1,00,000 Buildings Land 2,50,000 3,20,000 You are required to : (a) show the journal entries to effect the reconstruction scheme; and (b) prepare the balance sheet of the company immediately after reconstruction. Average Due Date 5. Mehnaaz accepted the following bills drawn by Shehnaaz: On 8th March, 2011, ` 4,000 for 4 months. On 16th March, 2011, ` 5,000 for 3 months. On 7th April, 2011, ` 6,000 for 5 months. The Institute of Chartered Accountants of India 8 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 On 17th May, 2011, ` 5,000 for 3 months. He wants to pay all the bills on a single day. Find out this date. Interest is charged @ 18% p.a. and Mehnaaz wants to earn ` 150 by way of interest. Find out the date on which he has to effect the payment to earn interest of ` 150. Account Current 6. The following are the transactions that took place between Rohan & Sunil during the half year ended 30th June, 2011: ` I Balance due to Rohan by Sunil on 1 January, 2011 3,010 ii Goods sold by Rohan to Sunil on 7 January, 2011 4,430 iii Goods purchased by Rohan from Sunil on 16 February, 2011 6,480 iv Goods returned by Rohan to Sunil on 18 February, 2011 (out of the purchases of 16 February, 2011) v vi Goods sold by Sunil to Rohan on 24th March, 2011 Bill accepted by Rohan at 3 months on 22nd April, 2011 3,560 1,500 vii Cash paid by Rohan to Sunil on 29th April, 2011 Goods sold by Rohan to Sunil on 17th May, 2011 2,500 2,710 viii Goods sold by Sunil to Rohan on 22nd June, 2011 2,280 560 Draw up an account current to be rendered by Sunil to Rohan (by interest method) charging interest @ 10% per annum. Self Balancing Ledgers 7. From the following particulars, prepare Total Debtors Account and Total Creditors Account in the general ledger: Balance as on 1-4-2011 Sundry Debtors Sundry Creditors Dr. (`) 40,000 Cr.(`) 600 400 30,000 Transactions during April, 2011 Purchases (including cash ` 8,000) ` 24,000 Sales (including cash ` 12,000) 50,000 Cash paid to suppliers in full settlement of claims of ` 18,000) 17,000 Cash received from customers (in full settlement of claims of `30,000) 28,200 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 9 Bills payable accepted (including renewals) 4,000 Bills payable withdrawn on renewals 1,000 Interest on B/P renewal 40 Bills receivable received Bills receivable endorsed 6,000 1,600 Endorsed B/R dishonoured 600 B/R discounted 2,800 Bills receivable dishonoured Interest charged on dishonoured B/R 800 60 Transfer from Debtors Ledger to Creditors Ledger 1,200 Returns (Cr.) 1,400 Balance as on 30-4-2011 Sundry Debtors (Cr.) 900 Sundry Creditors (Cr.) 21,740 Accounting for Not-For-Profit Organisations 8. From the following information relating to Mukta Social Club, you are required to prepare: (a) An Income and Expenditure Account (including profit or loss on bar) for the year ended 31st March 2011; and (b) A Balance Sheet at that date. (i) A summary of cash book for the year 2010-2011 is as follows: Bank balance Annual subscriptions Bar takings Hire of rooms Income from investments Sale of investments ` 8,360 36,680 1,53,920 1,460 3,150 3,280 2,06,850 (ii) Bar supplies Bar wages Salaries and wages Office expenses Lighting and heating Rates and insurance Miscellaneous expenses Investments Furniture (purchased on 01.10.2010) Bank balance ` 1,34,610 10,990 13,650 4,240 3,720 2,870 3,030 14,000 9,000 10,740 2,06,850 The balance at bank on 1st April, 2010 represented ` 3,360 on current account and The Institute of Chartered Accountants of India 10 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 ` 5,000 on deposit account. All the receipts shown in the above summary were paid into the Current Account except for ` 510 deposit account interest (included in income from investment) and all payments were made from the Current Account. During 2010-2011, ` 3,000 were transferred from the Current Account to the Deposit Account. (iii) The following items were outstanding on 31st March: 31.03.2010 31.03.2011 ` ` Subscriptions in arrears 790 980 Salaries and wages accrued 330 410 12,170 13,250 560 140 650 260 290 370 Electricity charges unpaid 310 440 Debtors for bar sales Outstanding repairs account miscellaneous expenses) 120 90 490 530 Bar wages accrued 210 230 Stock of coal Rates and insurance prepaid 400 620 570 730 14,220 19,890 Creditors for bar supplies Stock of stationery (included in office expenses) Subscription in advance Telephone expenses) bill outstanding Stock of bar supplies (included in (included office in (iv) At March 31, 2010, the club owned the following assets which are shown at cost. On March 31, 2010, they had been in the ownership of the club for the number of years indicated: ` ` Freehold premises 60,000 12 years Furniture 10,000 12 years Furniture 8,000 5 years 30,000 4 years Investments (v) The club is providing for the depreciation on freehold premise at 2.5% per annum and on furniture at 10% per annum both rates being calculated on original cost. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 11 Accounts from Incomplete Records 9. Mr. Hemant had ` 1,65,000 in the bank account on 1.1.2010 when he started his business. He closed his accounts on 31st March, 2011. His single entry books (in which he did not maintain any account for the bank) showed his position as follows: 31.3.2010 Cash in hand Stock in trade Debtors Creditors 31.3.2011 ` ` 1,100 10,450 1,650 15,950 550 1,100 2,750 1,650 On and from 1.2.2010, 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 1.1.2010 1.1.2010 to 31.3.2010 1.4.2010 to 31.3.2011 Withdrawals ` ` 1,65,000 - 1,26,500 1,22,650 1,48,500 The above withdrawals included payment by cheque of ` 1,10,000 and ` 33,000 respectively during the period from 1.1.2010 to 31.3.2010 and from 1.4.2010 to 31.3.2011 respectively for the purchase of machineries for the business. The deposits after 1.1.2010 consisted wholly of sale price received from the customers by cheques. Draw up Mr. Hemant s statement of affairs as at 31.3.2010 and 31.3.2011 respectively and work out his profit or loss for the year ended 31.3.2011. Hire Purchase Instalment Payment System 10. The following are the particulars from the books of a trader who sells goods of small value on hire-purchase system at 50% profit on cost: 2011 January December 31 ` Stock with the customers 40,500 Stock in the shop 81,000 Installments due 22,500 Stock in the shop 92,250 Installments due 40,500 Goods repossessed (Installments due ` 12,000) valued at ` 2,250 which had been included in the The Institute of Chartered Accountants of India 12 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 stock at the end at ` 2,250 Cash received from customers Goods purchased during the year 2,70,000 2,70,000 Prepare hire-purchase trading account for the year ending December 31, 2011. Investments Accounts 11. Ajanta Investment Corporation has done the following transactions in 6% State Government Stock between 1st September 2009 and 31st July 2011 and all these transactions are cum-interest except those marked as ex-interest. Interest is payable half-yearly on 1st February and 1st August. The accounting period ends on 30th June every year: 1st September 2009- Purchased `10,000 stock @ ` 101.50 1st October 2009-Purchased `25,000 stock @ ` 101 1st November 2009-Sold `15,000 stock @ ` 103.25 1st November 2009-Purchased `5,000 stock @ ` 103 15th January 2010-Sold `10,000 stock @ ` 105 ex-interest 1st March 2010-Sold `4,000 stock @ ` 102.50 15th July 2010-Purchased `5,000 stock @ ` 101.25 ex-interest 1st November 2010-Purchased ` 5,000 stock @ ` 102 15th January 2011-Sold `15,000 stock @ ` 103 1st July 2011-Purchased ` 2,000 stock @ ` 102 Write up the Investment Account in the books of the Corporation, showing the profits and losses on the transactions using the average cost method and also showing the amount of interest for each accounting period duly realized. Insurance Claim for Loss of Stock 12. The premises of Agni Ltd. caught fire on 22nd January 2011, and the stock was damaged. The firm makes account up to 31st March each year. On 31st March, 2010 the stock at cost was ` 13,27,200 as against ` 9,62,200 on 31st March, 2009. Purchases from 1st April, 2010 to the date of fire were ` 34,82,700 as against ` 45,25,000 for the full year 2009 -10 and the corresponding sales figures were ` 49,17,000 and ` 52,00,000 respectively. You are given the following further information: (i) In July, 2010, goods costing ` 1,00,000 were given away for advertising purposes, no entries being made in the books. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 13 (ii) During 2010-11, a clerk had misappropriated unrecorded cash sales. It is estimated that the defalcation averaged ` 2,000 per week from 1st April, 2010 until the clerk was dismissed on 18th August, 2010. (iii) The rate of gross profit is constant. From the above information calculate the stock in hand on the date of fire. Partnership: Admission of a Partner 13. The Balance Sheet of P and T who share profits & losses in the ratio of 3 : 1 as at 31st March, 2011 was as follows: Liabilities ` Sundry creditors Employee s fund provident Assets 60,000 Cash at bank 4,500 Debtors Contingency reserve 1,500 Less: Provision General reserve 1,500 Stock B s capital ` 5,250 6,150 Bills receivable Profit and loss account A s capital ` 33,000 25,500 1,500 1,10,700 Furniture and fixtures 96,900 Land & building 2,81,250 24,000 90,000 16,500 1,12,500 2,81,250 On 31st March, 2011, O was admitted into partnership on the following terms: (a) The new profit sharing ratio of P, T and O will be 3 : 1 : 1. (b) Goodwill of the firm was to be valued at two and half years' purchase of the average profits of the last three completed years. The profits were 2006-07 - ` 30,000, 2007-08 - ` 45,000, 2008-09 - ` 60,000, 2009-10 - ` 75,000, 2010-11 - ` 90,000. (c) The stock was found overvalued by ` 9,000. Fixtures are to be brought down to ` 14,850. Provision for doubtful debts is to be made up to 5% on the debtors and bills receivable. Land & building was found undervalued by ` 22,500. (d) The unaccrued income is ` 1,275. (e) A claim on account of workmen's compensation for ` 225 to be provided for. (f) Mr. X, and old customer whose account for ` 1,500 was written off as bad has promised in writing to pay 65% in settlement of his full debt. Prepare Revaluation Account, Partners Capital Accounts and the Balance Sheet of a new firm when O pays ` 60,000 as his capital but is unable to bring in any cash for his share of goodwill. No account for goodwill should remain in the books of new firm. The The Institute of Chartered Accountants of India 14 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 capitals of all partners will be in the same ratio as profit sharing ratio taking original capital of O as basis. The necessary adjustment should be made through current accounts. Partnership: Retirement of a partner 14. On 31st December 2011, the Balance Sheet of X, Y, and Z who were sharing profits and losses in proportion to their capital stood as follows: Liabilities ` Creditors Assets ` 20,000 Cash at bank Employees provident fund 1,600 Debtors X s capital A/c 72,000 Less : Provision Y s capital A/c 48,000 Stock Z s capital A/c Contingency reserve 24,000 Machinery 30,000 Land & building Workmen reserve ` compensation 16,000 20,000 400 19,600 18,000 48,000 1,00,000 6,000 2,01,600 2,01,600 Y retires and the following adjustments of the assets and liabilities have been agreed upon before the ascertainment of the amount payable to Y: (a) Out of the amount of insurance which was debited entirely to Profit and Loss Account, ` 2,000 to be carried forward as an unexpired insurance. (b) Land and building to be appreciated by 10%. (c) Provision for doubtful debts to be brought up to 5% on debtors. (d) Machinery to be depreciated by 5%. (e) Provision of ` 3,000 to be made in respect of an outstanding bill of repairs. (f) Goodwill of the entire firm be fixed at `36,000 and Y's share of the same be adjusted into the accounts of X and Z who are going to share future profits in the proportion of 3/4 and 1/4 respectively. (No Goodwill account being raised). (g) The entire capital of the firm as newly constituted be fixed at `1,20,000 between X and Z in the proportion of 3/4 and 1/4 after passing entries in their accounts for adjustments i.e. actual cash to be paid off or to be brought in by the continuing partners as the case may be. (h) Y to be paid ` 6,000 in cash and the balance to be transferred to his loan account. Prepare Revaluation Account, Capital Accounts of the partners and the Balance Sheet of the firm of X and Z after retirement. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 15 Partnership: Death of a partner 15. The Balance Sheet of X, Y and Z as at 31.12.2010 stood as follows: Liabilities ` Creditors Assets ` 25,800 Cash & bank General reserve Investment fluctuation reserve 8,900 Debtors Less : Provision 2,400 ` 10,000 20,000 1,600 18,400 X s capital A/c 59,700 Stock 20,000 Y s capital A/c 39,700 Land & building 74,000 Z s capital A/c 39,700 Investments Goodwill 10,000 37,800 Life policy (at surrender value): X 2,500 Y 2,500 Z 1,000 1,76,200 1,76,200 Z died on 31st March, 2011. For the purpose the following adjustments were agreed upon: (a) Land and building is appreciated by 50%. (b) Investments is valued at 6% less than the cost. (c) All debtors (except 20% which are considered as doubtful) are good. (d) Stock is reduced to 94%. (e) Goodwill is valued at one year's purchase of the average profit of the past five years. (f) Z's share of profit to the date of death is calculated on the basis of average profits of the three completed years immediately preceding the year of death. The book profits of last five years as follows: 2006 - ` 23,000, 2007- ` 28,000, 2008 - ` 18,000, 2009 - ` 16,000 and 2010 - ` 20,000. The life policies have been shown at their surrender values representing 10% of the sum assured in each case. The annual premium of ` 1,000 is payable every year on 1st August. Give the necessary journal entries and the balance sheet of the reconstituted firm. The Institute of Chartered Accountants of India 16 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Accounting in Computerized Environment 16. Recently a growing trend has developed for outsourcing the accounting functions to a third party . Analyse. Accounting Standards AS-1 17. (a) X Ltd. sold its building to Mini Ltd. for ` 60 lakhs on 30.09.2010 and gave possession of the property to Mini Ltd. However, documentation and legal formalities are pending. Due to this, the company has not recorded the sale and has shown the amount received as an advance. The book value of the building is ` 25 lakhs as on 31st March, 2011. Do you agree with this treatment? If you do not agree, explain the reasons with reference to the accounting standard. (Hint: Para 16 & 17 of AS 1) AS-2 (b) Anil Pharma Ltd. ordered 16,000 kg of certain material at `160 per unit. The purchase price includes excise duty `10 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to ` 1,40,160. Normal transit loss is 2%. The company actually received 15,500 kg and consumed 13,600 kg of material. Compute cost of inventory under AS 2 and amount of abnormal loss. (Hint: Para 7 of AS 2) AS-6 18. (a) An item of machinery was purchased on 1-4-2008 for ` 2,00,000. The WDV depreciation rate applicable to the machinery was 15%. The written down value of the machinery as on 31-3-2010 was ` 1,44,500. On 1-4-2010, 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. (Hint: Para 15 of AS 6) AS-7 (b) Jain Construction Co. Ltd. undertook a contract on 1st January, 2011 to construct a building for ` 80 lakhs. The company found on 31st March, 2011 that it had already spent ` 58,50,000 on the construction. Prudent estimate of additional cost for completion was ` 31,50,000. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 17 What amount should be charged to revenue and what amount of contract value to be recognized as turnover in the final accounts for the year ended 31st March, 2011 as per provisions of AS 7 (revised)? (Hint: Para 21 & 35 of AS 7) AS-11 19. (a) Aman Ltd. borrowed US $ 5,00,000 on 31-12-2010 which will be repaid (settled) as on 30-6-2011. Aman Ltd. prepares its financial statements ending on 31-3-2011. Rate of exchange between reporting currency (Rupee) and foreign currency (US $) on different dates are as under: (i) 31-12-2010 1 US $ = ` 44.00 31-3-2011 1 US $ = ` 44.50 30-6-2011 1 US $ = ` 44.75 Calculate borrowings in reporting currency to be recognised in the books on above mentioned dates & also show journal entries for the same. (ii) If borrowings was repaid (settled) on 28-2-2011 on which date exchange rate was 1 US$= ` 44.20 than what entry should be passed? (Hint: Para 9, 11 & 13 of AS 11) AS-9 (b) A company is engaged in the business of ship building and ship repair. On completion of the repair work, a work completion certificate is prepared and countersigned by ship owner (customer). Subsequently, invoice is prepared based on the work completion certificate describing the nature of work done together with the rate and the amount. Customer scrutinizes the invoice and any variation is informed to the company. Negotiations take place between the company and the customer. Negotiations may result in a deduction being allowed from the invoiced amount either as a lumpsum or as a percentage of the invoiced amount. The accounting treatment followed by the company is as follows: (i) When the invoice is raised, the customer s account is debited and ship repair income account is credited with the invoiced amount. (ii) Deduction, if any, arrived after negotiation is treated as trade discount by debiting the ship repair income account. (iii) At the close of the year, negotiation in respect of certain invoices had not been completed. In such cases, based on past experience, a provision for anticipated loss is created by debiting the Profit and Loss account. The provision is disclosed in Balance Sheet. The Institute of Chartered Accountants of India 18 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Following two aspects are settled in the negotiations: (i) Errors in billing arising on account of variation between the quantities as per work completion certificate and invoice and other clerical errors in preparing the invoice. (ii) Disagreement between the company and customer about the rate/cost on which prior agreement has not been reached between them. Comment: (i) Whether the accounting treatment of deduction as trade discount is correct? If not, state the correct accounting treatment. (ii) Whether the disclosure of the provision for anticipated loss in Balance Sheet is correct. If not, state correct accounting treatment. (Hint: Para 6 of AS 9 and Para 8 of AS 4) AS-13 20. (a) Albert Finance Ltd. has made the following investments: (i) Purchased the following equity shares from stock exchange on 1st June, 2010: Scrip X Scrip Y Scrip Z Cost ` 1,80,000 50,000 1,70,000 4,00,000 (ii) Purchased gold of ` 3,00,000 on 1st April, 2007. (iii) Invested in mutual funds at a cost of ` 6,00,000 on 31st March, 2010. (iv) Purchased government securities at a cost of ` 5,00,000 on 1st April, 2010. How will you treat these investments as per applicable AS in the books of the company for the year ended on 31st March, 2011, if the values of these investments are as follows: Shares Scrip X Scrip Y Scrip Z Gold Mutual funds Government securities The Institute of Chartered Accountants of India ` 1,90,000 40,000 70,000 ` 3,00,000 5,00,000 4,50,000 7,00,000 PAPER 1 : ACCOUNTING 19 Also explain is it possible to off-set depreciation in investment in mutual funds against appreciation of the value of investment in government securities? (Hint: Para 14, 15 & 17 of AS 13) AS-10 (b) Rajkumar Ltd. purchased a machine on 1st January 2006 for ` 300 lakhs. The machine was depreciated on straight line basis using a depreciation rate of 10% per annum. On 1-1-2010 the machine was revalued at ` 270 lakhs and the same was adopted. What will be the carrying cost of the machinery asset as on 31-12-2011? There is no change in the economic life of the asset. SUGGESTED ANSWERS / HINTS 1. (a) Calculation of Profit for the purpose of Managerial Remuneration ` Gross Profit as per profit and loss account Add : Bounties and subsidies received from Government Profit on sale of fixed assets (Original cost ` 1,90,000 - ` 1,40,000 written down value of assets. Capital profit ` 30,000 i.e. ` 2,20,000 - ` 1,90,000 not considered) Expenses allowable: Salaries and wages Rent, rates and taxes Repairs and renewals Miscellaneous expenses Workmen compensation (Only legal compensation allowed, voluntary compensation not allowed) Interest on bank overdraft Interest on debentures Director s fee Donation to charitable funds Depreciation as per Schedule XIV to the Companies Act,1956 Profit according to section 349 Less : The Institute of Chartered Accountants of India ` 51,00,000 1,00,000 50,000 52,50,000 20,00,000 4,50,000 60,000 1,40,000 10,000 40,000 50,000 18,000 25,000 80,000 28,73,000 23,77,000 20 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 When there is more than one managerial person, managerial remuneration should be maximum 10% of net profit. Therefore, commission payable to the Managing Director @ 5% on ` 23,77,000 = ` 1,18,850 is permissible; and As per section 309 of the Companies Act, other part time directors are entitled to a commission of only 1% if the Company has a managing director. A commission of 2% on the profits of the company can be paid with the approval of the Central Government. Therefore, commission payable to other part time directors @ 2% on ` 23,77,000 = ` 47,540 needs approval from the Central Government. Note: It is assumed that investment is a long- term (fixed) asset, so loss on sale of such investment has been excluded. (b) (i) Average sales per month = 7,20,000 = 12 months ` 60,000 Sales for the month of ` January, 2011 (2 x ` 60,000) 1,20,000 February, 2011 (1 x ` 60,000) 60,000 ( 1 x ` 60,000) 4 15,000 ( 1 x ` 60,000) 4 15,000 ( 1 x ` 60,000) 4 15,000 ( 1 x ` 60,000) 4 15,000 May, 2011 June, 2011 July, 2011 August, 2011 October, 2011 (3 x ` 60,000) 1,80,000 November, 2011 (3 x ` 60,000) 1,80,000 Total sales for 8 months Sales for the remaining 4 months 6,00,000 = ` 7,20,000 ` 6,00,000 = ` 1,20,000 Average sales for the remaining 4 months = The Institute of Chartered Accountants of India 1,20,000 = ` 30,000. 4 PAPER 1 : ACCOUNTING 21 Sales for pre-incorporation period: January, 2011 ` 1,20,000 February, 2011 ` 60,000 March, 2011 ` 30,000 ` 2,10,000 Sales for post-incorporation period = ` 7,20,000 ` 2,10,000 = ` 5,10,000 Sales ratio of pre-incorporation to post-incorporation period = 7: 17 (ii) Profit and Loss Account of Fatafat Ltd. for the year ended 31.3.2011 Particulars PrePost- Particulars incorpo- incorpor ration ation period period ` To Salaries (1:2) To Stationery (1:2) 16,000 1,600 ` 32,000 By Gross 3,200 Profit (1:3) To Advertisement (1:3) 4,000 12,000 To Travelling expenses (W.N.3) 4,000 8,000 To Sales promotion expenses (W.N.3) 1,200 3,600 To Misc. trade expenses (1:2) 12,600 25,200 To Rent (office building) (W.N.2) 8,000 18,400 To Electricity charges (1:2) 1,400 2,800 To Director s fee - 11,200 800 2,400 To Selling agents commission (1:3) 4,000 12,000 To Audit fee (1:2) 2,000 4,000 - 3,000 To Interest paid to vendor (2:1) (W.N.4) 2,800 1,400 To Selling expenses (1:3) 6,300 18,900 To Depreciation on fixed 3,000 6,600 To Bad debts (1:3) To Debenture interest The Institute of Chartered Accountants of India Preincorporation period Postincorporation period ` ` 80,000 2,40,000 22 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 assets (W.N.5) To Capital reserve 12,300 - - 75,300 To Net profit 80,000 2,40,000 80,000 2,40,000 Working Notes: Pre incorporation period = 1st April, 2010 to 31st July, 2010 i.e. 4 months 1. Sales ratio Let the monthly sales for first 6 months (i.e. from 1.4.2010 to 30.09.2010) be = x Then, sales for 6 months = 6x Monthly sales for next 6 months (i.e. from 1.10.10 to 31.3.2011) = x + Then, sales for next 6 months = 2 5 x= x 3 3 5 x X 6 = 10x 3 Total sales for the year = 6x + 10x = 16x Monthly sales in the pre incorporation period = `19,20,000/16 = ` 1,20,000 Sales for pre-incorporation period = ` 1,20,000 x 4 = ` 4,80,000 Sales for post incorporation period = ` 19,20,000 ` 4,80,000 = ` 14,40,000 Sales Ratio = 4,80,000 : 14,40,000 2. =1:3 Rent ` Rent for pre-incorporation period (` 2,000 x 4) 8,000 (pre) Rent for post incorporation period August, 2010 & September, 2010 (` 2,000 x 2) October, 2010 to March, 2011 (` 2,400 x 6) 3. 4,000 14,400 18,400 (post) Travelling expenses Traveling expenses ` 12,000 (i.e. ` 16,800 ` 4,800) distributed in 1:2 ratio The Institute of Chartered Accountants of India Pre ` Post ` 4,000 8,000 PAPER 1 : ACCOUNTING 23 Sales promotion expenses ` 4,800 distributed in 1:3 ratio 1,200 3,600 5,200 11,600 4. Interest paid to vendor till 30th September, 2010 4,200 4 ) 6 Interest for post incorporation period i.e. for Interest for pre-incorporation period ( August, 2010 & September, 2010 = ( 5. Post ` ` 2,800 1,400 4,200 2 ) 6 Depreciation Total depreciation Less: Depreciation exclusively for post incorporation period Pre Post ` ` 9,600 600 600 9,000 4 ] 12 8 Depreciation for post incorporation period [9,000 x ] 12 Depreciation for pre-incorporation period [9,000 x 2. Pre 3,000 6,000 3,000 6,600 Sidharatha Trading Co. Ltd. Journal Entries 2011 July, 1 July, 1 Dr. `s Dr. 2,00,000 Dr. 20,000 Cr. ` 6% Redeemable preference share capital A/c Premium on redemption of preference shares A/c To Preference shareholders A/c 2,20,000 (Being amount due on redemption of 20,000 6% preference shares of ` 10 each at a premium of 10%) Bank A/c Dr. 1,92,000 To Equity share capital A/c 1,60,000 The Institute of Chartered Accountants of India 24 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 July, 1 July, 1 July, 1 Oct, 1 Oct, 1 To Securities premium A/c (Being issue of 16,000, equity shares of ` 10 each at a premium of ` 2 per share for redeeming 6% preference shares) Cost of issue A/c To Bank A/c (Being expenses incurred on issue of equity shares) Securities premium A/c To Premium on redemption of preference shares A/c To Cost of issue A/c (Being amount of premium utilized for providing premium on redemption and writing off cost of issue) Profit and loss A/c To Capital redemption reserve A/c (Being amount provided out of profit and loss account for redeeming preference shares which could not be redeemed out of fresh issue of shares) Preference shareholders A/c To Bank A/c (Being payment of amount due on redemption of preference shares) Capital redemption reserve A/c Securities premium A/c Profit and loss A/c To Bonus to equity shareholders A/c (Being amount required for issue of 9,200 bonus shares of ` 10 each @ 1 share for every 5 equity shares held on October 1 provided out of various reserves utilizing the minimum of revenue reserves) Bonus to equity shareholders A/c To Equity share capital A/c (Being issue of 9,200 equity shares of ` 10 each as fully paid bonus shares) The Institute of Chartered Accountants of India 32,000 Dr. 6,000 Dr. 26,000 6,000 20,000 6,000 Dr. 40,000 Dr. 2,20,000 Dr. Dr. Dr. 40,000 46,000 6,000 Dr. 92,000 40,000 2,20,000 92,000 92,000 PAPER 1 : ACCOUNTING (b) 25 X Ltd. Cash Flow Statement for the year ended 31st March, 2011 (Using the direct method) ` 000s ` 000s Cash flows from operating activities Cash receipts from customers Cash payment to suppliers & employees (refer W.N.) Cash generated from operations Income tax paid 2,800 (2,300) 500 (250) Net cash from operating activities 250 Cash flows from investing activities Payment for purchase of fixed assets Proceeds from sale of fixed assets (200) 100 Net cash used in investing activities (100) Cash flows from financing activities Proceeds from issuance of equity shares Bank loan repaid Dividend paid 300 (300) (50) Net cash used in financing activities (50) Net increase in cash 100 Cash at the beginning of the period 50 Cash at the end of the period 150 Working Note: Cash paid to Suppliers & Employees ` 000s a. Payment to suppliers 2,000 b. Wages & salaries 100 c. Overhead expenses 200 The Institute of Chartered Accountants of India 2,300 26 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 3. In the books of A Ltd. Journal Entries Particulars 1. Realisation A/c ` Dr. 27,80,000 To Patent rights A/c 2,00,000 To Land and buildings A/c To Plant and machinery A/c 6,00,000 15,50,000 To Stock 3,50,000 To Sundry debtors (Being assets taken over by Shakti Ltd.) 2. 3. 4. 80,000 Sundry creditors A/c To Realisation A/c (Being creditors transferred to Realisation A/c) Dr. 50,000 Shakti Ltd. To Realisation A/c (Being purchase consideration due) Dr. 27,95,000 Realisation A/c Dr. 50,000 27,95,000 5,000 To Cash & bank A/c (Being cost of liquidation charged to Realisation A/c ) 5. Realisation A/c 5,000 Dr. 50,000 To Cash & bank A/c (Being creditors dues paid) 6. 7. 8. 50,000 Shares in Shakti Ltd. (1,80,000 x `12.50) Dr. 22,50,000 Cash & bank A/c To Shakti Ltd. (Being shares received in payment of purchase consideration and balance in cash) Dr. Preference share capital A/c To Preference shareholders A/c (Being transfer of preference share capital to preference shareholders account) Dr. Equity share capital A/c Dr. 15,00,000 General reserves A/c Dr. The Institute of Chartered Accountants of India ` 5,45,000 27,95,000 5,00,000 5,00,000 8,00,000 PAPER 1 : ACCOUNTING Profits and loss A/c 27 Dr. 90,000 To Equity shareholders A/c (Being equity transferred to equity shareholders A/c) 9. Preference shareholders A/c 23,90,000 Dr. 5,00,000 To Cash & bank A/c (Being preference shareholders paid) 10. Realisation A/c (W.N.1) 5,00,000 Dr. 10,000 To Equity shareholders A/c (Being transfer of profit on realization to equity shareholders account) 11. Equity shareholders A/c To Shares in Shakti Ltd. To Cash & bank ( W.N.2) (Being distribution of shares & cash among the equity shareholders) 10,000 Dr. 24,00,000 22,50,000 1,50,000 Shakti Limited Balance Sheet as on 1st Janurary, 2012 Liabilities ` Assets ` Authorised share capital: 50,000, 5% Cumulative preference shares of ` 10 each Fixed Assets: Goodwill (W.N.3) Patent rights 5,00,000 Land and buildings 30,000 2,00,000 6,00,000 2,50,000, Equity shares of ` 10 each Plant and machinery 25,00,000 Motor vehicles 15,50,000 40,000 Issued and subscribed : 30,00,000 Furniture Current assets, loans and advances: 50,000, 5% Cumulative preference shares of ` 10 each 2,40,000 Equity shares of ` 10 each fully paid (Out of above, 2,10,000 equity shares have been issued for Stock (3,50,000+2,39,000) Sundry debtors 5,00,000 (80,000+62,000) 24,00,000 Cash (W.N.4) The Institute of Chartered Accountants of India 25,000 5,89,000 1,42,000 2,82,250 28 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 consideration cash) other than Reserve and surplus: Securities premium [(2,40,000 x ` 2.50) ` 18,000- ` 23,750] * 5,58,250 34,58,250 34,58,250 Working Notes: 1. Realisation A/c of A Ltd. ` To Patent right To Land & building 2,00,000 By Sundry creditors 6,00,000 By Shakti Ltd. To Plant & machinery ` 50,000 27,95,000 15,50,000 To Stock 3,50,000 To Debtors 80,000 To Cash Creditors 50,000 Expenses 5,000 To Equity shareholders A/c 10,000 28,45,000 2. 28,45,000 Cash Account of A Ltd. Particulars ` Particulars To Balance b/d 1,60,000 By Realisation A/c (Liquidation exp.) To Shakti Ltd. 5,45,000 By Realisation A/c 7,05,000 * ` 5,000 50,000 By Preference shareholders 5,00,000 By Equity shareholders (Bal. fig.) 1,50,000 7,05,000 As per section 78 of the Companies Act, 1956, Securities premium has been utilized in writing off the preliminary expense and commission on issue of shares of the company. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3. 29 Calculation of Goodwill/Capital Reserve ` Purchase consideration 27,95,000 (27,80,000) Less: Net assets of A. Ltd. (` 29,40,000 ` 1,60,000) Goodwill 15,000 Purchase consideration 3,81,000 (3,66,000) Less: Net assets of B Ltd( ` 4,53,000- ` 70,000-` 17,000) Goodwill 15,000 Thus, total goodwill will be = ` 15,000 (A Ltd.) + ` 15,000 (B Ltd.) 30,000 4. Cash Account of Shakti Ltd. . ` To 5% Cumulative preference share application and allotment account By A Ltd. By B Ltd. 5,00,000 By Preliminary expenses To Equity share applications and allotment account 3,75,000 5,45,000 6,000 18,000 By Underwriting commission 23,750 By Balance c/d (Bal.fig.) 8,75,000 4. ` 2,82,250 8,75,000 Journal Entries ` 1. Equity share capital A/c (` 10) ` Dr. 10,00,000 2,50,000 7,50,000 To Equity share capital A/c (` 2.50) To Capital reduction A/c (` 7.50) (Being the amount transferred @ ` 7.50 per share to Capital Reduction A/c as per the scheme of reconstruction dated ..) 2. Bank A/c To Equity share capital A/c To Securities premium A/c (Being amount received from existing shareholders for subscribing 50,000 new equity shares @ ` 2.50 each at a premium of ` 1.50 per share as per scheme of reconstruction dated . ) The Institute of Chartered Accountants of India Dr. 2,00,000 1,25,000 75,000 30 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 3. 10% Preference share capital A/c Dr. 4,00,000 To 15% Preference share capital A/c 3,00,000 To Equity share capital A/c 1,00,000 (Being conversion of 10% Preference share capital to 30,000 15% Preference shares of ` 10 each and 40,000 equity shares of ` 2.50 each as per reconstruction scheme) 4. Interest payable on debentures A/c Dr. 36,000 To Equity share capital A/c 25,000 To Capital reduction A/c 11,000 (Being share capital issued in lieu of interest payable on debentures as per reconstruction scheme) 5. 12% Debentures A/c Dr. 3,00,000 To 14% Debentures A/c (Being conversion of 12% debentures to 14% debentures as per reconstruction scheme) 6. 3,00,000 Bank A/c Dr. 90,000 Discount on issue of debentures A/c To 14% Debentures A/c Dr. 10,000 1,00,000 (Being issue of new debentures of 14% as per scheme at a discount of ` 10 per debenture) 7. Loan from Directors A/c Dr. 1,00,000 To Equity share capital A/c To Securities premium A/c 25,000 35,000 To Capital reduction A/c 40,000 (Being issue of equity share capital in cancellation of loan from directors as per reconstruction scheme) 8. Bank A/c To Investment A/c To Capital reduction A/c (Being amount realized from the sale of investment as per reconstruction scheme) The Institute of Chartered Accountants of India Dr. 3,00,000 2,25,000 75,000 PAPER 1 : ACCOUNTING 9 Bank Overdraft A/c 31 Dr. 1,50,000 To Bank A/c 1,50,000 (Being the amount paid to creditors as per reconstruction scheme) 10. Creditors A/c To Bank A/c Dr. 1,59,000 1,59,000 (Being the amount paid to creditors as per reconstruction scheme) 11. Capital Reduction A/c To Goodwill A/c Dr. 8,76,000 3,00,000 To Profit & loss A/c To Discount on issue of debentures A/c 3,15,000 10,000 To Land A/c (4,00,000 3,20,000) To Building A/c (3,75,000 75,000-2,50,000) 80,000 50,000 To Machinery A/c (2,20,000 80,000-1,00,000) 40,000 To Stock A/c (3,60,000 3,20,000) To Debtors A/c (2,00,000 1,80,000) 40,000 20,000 To Capital reserve A/c (Bal. fig.) (Being capital reduction account utilised for writing off all intangible assets & for adjusting the assets to its fair values as per the reconstruction scheme) 21,000 Balance Sheet (And Reduced) Liabilities Authorised capital: ` Assets ` share ` Fixed assets: 2,50,000, Equity Land 3,20,000 shares @ ` 2.50 6,25,000 each Building Machinery 2,50,000 1,00,000 50,000, 15% Preference shares 5,00,000 of ` 10 each ` Current assets, loans & 11,25,000 advances: Issued, subscribed and paid up: The Institute of Chartered Accountants of India Stock Debtors 3,20,000 1,80,000 6,70,000 32 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 2,10,000, Equity shares of ` 2.50 each fully called & 5,25,000 paid up 30,000, 15% Preference shares of ` 10 each Reserves surplus : Capital reserve 3,00,000 Cash in hand 5,000 Cash at bank (Refer W.N) 2,81,000 7,86,000 8,25,000 & 21,000 Securities premium 1,10,000 1,31,000 Secured loans : 14% Debentures Current liabilities & provisions : Sundry creditors (2,59,000 1,59,000) 4,00,000 1,00,000 14,56,000 14,56,000 Working Note: Calculation of Cash at Bank `R Issue of equity shares 2,00,000 Sales of investments 3,00,000 Issue of debentures 90,000 5,90,000 Less: Payment to creditors (1,59,000) Less: Payment of bank overdraft (1,50,000) 2,81,000 5. Calculation of number of days from base date Transaction date Due date Amount ` 8.3.2011 11.7.2011 4,000 The Institute of Chartered Accountants of India No. of days from Base date (Base date 19.6.2011) Product 22 88,000 PAPER 1 : ACCOUNTING 33 16.3.2011 19.6.2011 5,000 0 0 7.4.2011 10.9.2011 6,000 83 4,98,000 17.5.2011 20.8.2011 5,000 62 3,10,000 20,000 Average due date 8,96,000 Total of Pr oduct Total of Amount = Base date + = 19.6.2011 + ` 8,96,000 / ` 20,000 = 19.6.2011 + 44.8 days (or 45 days approximately) = 3.8.2011 Mehnaaz wants to earn interest of ` 150. The yearly interest is ` 20,000 18% = ` 3,600. Assume that days corresponding to interest of ` 150 are Y. Then, 3,600 Y/365 = ` 150 or Y = 150 365/3,600 = 15.2 days or 15 days (Approx.) Hence, if Mehnaaz wants to save ` 150 by way of interest, she should prepone the payment of amount involved by 15 days from the Average Due Date. Hence, she should make the payment on 19.7.2011 (i.e. 03.08.2011 15 days). 6. In the books of Sunil Rohan in Account Current with Sunil as on 30th June, 2011 Date Particulars 2011 Amount Days Interest Date Particulars Amount Days Interest ` 2011 Feb. 16 To Sales 6,480.00 134 237.90 Jan. 1 By Balance b/d 3,010.00 181 149.26 Mar. 24 To Sales 3,560.00 98 95.58 Jan. 7 By Purchases 4,430.00 174 211.18 June 22 To Sales 2,280.00 8 5.00 Feb 18 By Returns inward 560.00 132 20.25 ` June 30 To Balance of interest June 30 To Balance c/d 107.08 2,497.08 ` Apr. 22 By B/R 1,500.00 (25) (maturing on 25 July, 2011) 2,500.00 62 42.47 May 17 By Purchases 2,710.00 44 32.67 445.56 107.08 14,817.08 July 1 The Institute of Chartered Accountants of India (10.27)* Apr. 29 By Cash June 30 By Interest 14,817.08 ` By Balance b/d 2,497.08 445.56 34 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 * Interest on amount of Bill receivable maturing on 25th July, 2011 is a red ink interest. Credit for the B/R is given on the date when it is received, but the amount will be received only on its maturity. Hence, the interest for the period for which the bill is to run after accounting period is shown as negative figure. 7. Total Debtors Account 2011 Particulars ` 2011 April 1 To Balance b/d 40,000 April 1 April 30 To Sales (Credit) 38,000 April 30 By Cash To Total creditors (endorsed B/R dishonoured) 600 To B/R (Dishonoured) To Interest 800 60 To Balance c/d 900 Particulars By Balance b/d By Discount By Bills receivable By Total creditors (Transfer) By Balance c/d 80,360 ` 600 28,200 1,800 6,000 1,200 42,560 80,360 Total Creditors Account 2011 Particulars April 1 April 30 To Balance b/d To Cash ` 2011 400 April 1 By Balance b/d 17,000 April 30 By Purchases (Credit) ` 30,000 16,000 To Discount received 1,000 By Bills payable (withdrawn) To Bills payable 4,000 By Interest To Bills receivables (endorsed) To Total debtors 1,600 By Total debtors (endorsed B/R dishonoured) 600 1,200 By Balance c/d 700 (Transfer) To Purchase returns To Balance c/d Notes: Particulars 1,000 40 1,400 21,740 48,340 48,340 1. B/R discounted, Cash purchases and Cash sales will not be shown in the Total Debtors & Creditors accounts. 2 Endorsed B/R dishonoured and transfers will be shown in both the Total Debtors & Creditors accounts. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 8. 35 Bar Trading Account Particulars for the year ending on 31st March, 2011 ` ` Particulars To Bar stock (opening) ` 14,220 By Bar sales To Bar purchases 1,54,290 1,35,690 By Bar stock (closing) To Wages 19,890 10,990 Less: O/s for 09-10 (210) 10,780 Add: O/s for 10-11 230 To Bar profit t/f to income and expenditure A/c 11,010 13,260 1,74,180 1,74,180 Income and Expenditure Account for the year ending on 31st March, 2011 Expenditure ` ` Income To Salaries and Wages 13,650 Less: O/s of 09-10 Add: O/s of 10-11 (330) 410 To Lighting & Heating Less: O/s of 09-10 3,720 (310) Add: Adv. of 09-10 140 Less: Adv. of 10-11 (260) 36,750 Add: O/s of 10-11 440 3,850 By Room Hire By Income from investments 1,460 3,150 400 By Bar Trading A/c [Profit from Bar Room] 13,260 Add: Opening stock (coal) Less: Closing stock (coal) To Rates & Insurance (570) 13,730 3,680 2,870 Add: Prepaid of 09-10 620 Less: Prepaid of 10-11 (730) To Miscellaneous Expenses Less: O/s of 09-10 By Subscriptions ` 3,030 (90) 2,940 The Institute of Chartered Accountants of India 2,760 36,680 Less: O/s of 09-10 (790) Add: O/s of 10-11 980 36 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Add: O/s of 10-11 530 3,470 To Depreciation: Furniture `(800+450) 1,250 Premises 1,500 To Office Expenses 4,240 Add: Opening stock (stationary) 560 Less: Closing stock (stationary) (650) 4,150 Less: O/s of 09-10 (Telephone bills) (290) Add: O/s of 10-11 (Telephone bills) 370 To Excess of income over expenditure 4,230 24,000 54,620 Liabilities Balance Sheet as at 31st March, 2011 Assets ` ` Salaries and wages due Creditors supplies for bar Bank balance: 410 Current A/c Deposit A/c 13,250 (3,000+5,000+510) ` `. 2,230 8,510 10,740 Advance subscription 260 Telephone bill outstanding 370 Electricity bill outstanding Furniture : 440 13 years old Repairs A/c outstanding 6 years old 530 Less: Depreciation 8,000 (4,800) 3,200 Bar wages due Capital fund: 230 New furniture Less: Depreciation 9,000 (450) 8,550 Opening balance Add: Surplus Investments Add: New purchases 54,620 Less: Sale 87,530 Subscriptions 24,000 1,11,530 outstanding The Institute of Chartered Accountants of India 30,000 14,000 44,000 (3,280) 40,720 Nil 980 PAPER 1 : ACCOUNTING 37 Stock of stationery 650 Stock of coal 570 Rates & prepaid insurance 730 Debtors for bar sales Stock of bar supplies Freehold premises Less: Acc. dep. 490 19,890 60,000 (19,500) 1,27,020 40,500 1,27,020 Working Notes: (i) Creditors for Bar Purchases Account Particulars ` To Cash A/c To Balance c/d (ii) Particulars ` 1,34,610 By Balance b/d 13,250 By Bar trading A/c (Purchases) (bal. fig.) 12,170 1,35,690 1,47,860 1,47,860 Debtors for bar taking Account Particulars ` Particulars To Balance b/d To Bar Trading A/c (Sales) ` 120 By Cash A/c (collections 1,54,290 from debtors) 1,53,920 By Balance c/d 490 1,54,410 (iii) 1,54,410 Balance Sheet as at 31st March, 2010 Liabilities ` Assets Salaries and wages due Creditors for bar supplies ` ` 330 Bank balance: 12,170 Current A/c 3,360 140 Deposit A/c 5,000 Subscription in advance Outstanding: Investment Telephone bill 290 Stock of bar supplies Electricity bill 310 Furniture Repairs A/c Bar wages The Institute of Chartered Accountants of India 90 12 years old 210 Less: Depreciation 30,000 14,220 10,000 (10,000) nil 38 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Capital Fund (bal. fig.) 87,530 5 years old 8,000 Less: Depreciation (4,000) Subscriptions due 790 Stock of stationery 560 Stock of coal 400 Rates & insurance prepaid 620 Debtors for bar sales 120 Freehold premises 60,000 Less: Acc. depreciation (18,000) 1,01,070 9. (a) 4,000 42,000 1,01,070 Statement of Affairs as on 31st March, 2010 Liabilities Capital (bal.fig.) Sundry creditors ` Assets ` 1,61,700 Machinery 2,750 Stock 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 (b) Calculation of loss for 3 months (1.1.2010 to 31.3.2010) ` Capital as on 31.3.2010 Add: Drawings for 3 months 1,61,700 770 Less: Capital as on 1.1.2010 1,62,470 (1,65,000) Loss for 3 months (c) 2,530 Statement of Affairs as on 31st March, 2011 Liabilities Capital Sundry Creditors ` Assets 1,80,400 Machinery 1,650 Add: Additions Stock Debtors Cash at bank (W.N.2) Cash in hand 1,82,050 The Institute of Chartered Accountants of India ` 1,10,000 33,000 1,43,000 15,950 1,100 20,350 1,650 1,82,050 PAPER 1 : ACCOUNTING (d) 39 Statement of Profit and Loss for the year ended 31.3.2011 Particulars ` Capital as on 31.3.2011 1,80,400 4,620 Add: Drawings (` 385 12) 1,85,020 Less: capital as on 31.3.2010 (1,61,700) Net profit for the year ended 31.3.11 23,320 Working Notes: ` 1. Bank balance as on 31.3.2010 Balance as on 1.1.2010 Less: Withdrawals during 1.1.2010 to 31.3.2010 2. 1,65,000 (1,22,650) Balance as on 31.3.2010 42,350 Bank Balance as on 31.3.2011: Balance as on 1.4.2010 42,350 Add: Deposits during the year 1,26,500 1,68,850 Less: Withdrawals during the year (1,48,500) Bank Balance as on 31.3.2011 10. 20,350 Hire-Purchase Trading Account for the year ending 31st December, 2011 ` ` To Stock with customers (at cost) 27,000 By Cash received from customers (W.N 1) To Installments due and unpaid 22,500 By Goods Repossessed A/c By Stock with customers To Goods sold on H.P. A/c (W.N 1) To Profit and Loss A/c 2,61,000 100 (W.N.2) 150 90,250 By Installments due and unpaid 4,00,750 The Institute of Chartered Accountants of India 1,32,000 2,70,000 2,250 88,000 40,500 4,00,750 40 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Working Notes: (1) Shop Stock A/c ` To Balance b/d ` 81,000 By Cost of Goods sold on Hire- To Purchases 2,70,000 To H.P. Trading-Goods Repossessed Purchase(Balancing Figure) 2,61,000 By Balance c/d 92,250 2,250 3,53,250 (2) 3,53,250 Installments Account ` To Stock with customers (at H.P) ` 40,500 By Cash received By Goods Repossessed 2,70,000 To Instalments due and unpaid To Goods sold on H.P. 3,91,500 By Stock with customers (Bal. Fig.) (at H.P) A/c (` 2,61,000 150%) By Instalments due and unpaid 22,500 (Instalments due on them) 4,54,500 11. ` ` ` ` Sept 1 Purchase 10,000 10,150 50 10,100 Oct 1 Purchase 25,000 25,250 250 25,000 35,000 Nov. 1 Sale 15,000 20,000 Nov. 1 Purchase 5,000 25,000 Sale 10,000 1,32,000 40,500 4,54,500 Schedule of Profit or Loss on Sales (Average cost method) Nominal Cum- Dividend Cost Realized Dividend cost 2009 12,000 ` Profit Loss ` 35,100 15,0431 15,262.50 219.50 20,057 5,150 75 5,075 25,132 2010 Jan. 15 The Institute of Chartered Accountants of India 10,0532 10,500 447.00 ` PAPER 1 : ACCOUNTING Mar.1 Sales 15,000 15,079 4,000 4,0213 11,000 11,058 July 15 Purchase 5,000 16,000 5,062.5 - 5,062 16,120 Nov.1 Purchase 5,000 5,100 75 5,025 2011 Jan.15 Sale 21,000 21,145 15,000 15,1044 6,000 6,041 41 4,080 59.00 750.50 15,037 67 Working Notes: 1. 15 x 35,100 = ` 15,043 (approx) 35 2. 10 x 25,132 = ` 10,053 (approx) 25 3. 4 x 15,079 = ` 4,021 (approx) 15 4. 15 x 21,146 = ` 15,104 (approx) 21 6% State Government Stock (Interest payable half-yearly on 1st February & 1st August) Date Particulars Nominal Interest Capital Date ` ` ` 2009 To Cash A/c: Purchase at ` 101.50 10,000 50 10,100 Nov. To Cash A/c: Purchase at ` 101 25,000 250 5,000 75 2009 Sept. 1 Oct.1 Nov. 1 To Cash Purchase `103 A/c: at 2010 Particulars 1 By Cash A/c: Sale at ` 103.25 25,000 Jan. 15 By Cash A/c: Sale at ` 105 ex-interest 5075 Feb. 1 By Interest on 15,000 at 6% p.a. for half year 220 Mar. 1 By Cash A/c: Sale at ` 102.50 Nov. 1 To P/L A/c (Profit on transaction) The Institute of Chartered Accountants of India Nominal Interest Capital ` ` ` 15,000 225 15,263 10,000 275 10,500 450 4,000 20 4,080 42 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 2010 Jan. 15 447 June 30 By Balance c/d (Stock at To P/L A/c Mar.1 To P/L A/c June To P/L A/c 30 59 40,000 1,245 11,000 275 11,058 Aug. 1 By Interest on `16,000 at 6% p.a. for half year 2011 138 5,062 Jan. 15 By Cash A/c: Sale at `103 Jan. 15 By P/L A/c (Loss and transaction) To Cash Purchase `101.25 interest A/c: at ex- 5,000 Nov. 1 To Cash Purchase `102 2011 A/c: at 5,000 June 30 11,058 40,901 40,000 1,245 40,901 2010 July 1 To Balance b/d July 15 275 average cost) Accruing interest there on for 5 months) 870 2010 11,000 75 5,025 Feb. 1 480.00 15,000 413 15,037 67.00 By Bank A/c (Int on `6,000 for 180.00 1/2 year) To P/L A/c 710 June 30 By Balance c/d (Stock at average cost accruing interest for 5 months) 21,000 1,198 21,145 July 1 To Balance b/d 6,000 125 6,041 July 1 To Cash Purchase `102 2,000 50 1,990 6,000 125.00 6,041 21,000 1,198 21,145 2011 A/c: at 12. Ascertainment of rate of gross profit for the year 2009-10 Trading A/c for the year ended 31-3-2010 To Opening stock To Purchased To Gross profit ` 9,62,200 45,25,000 10,40,000 65,27,200 The Institute of Chartered Accountants of India By Sales By Closing stock ` 52,00,000 13,27,200 65,27,200 PAPER 1 : ACCOUNTING Rate of gross profit = = 43 GP 100 Sales 10,40,000 100 = 20% 52,00,000 Memorandum Trading A/c for the period from 1-4-2010 to 22-01-2011 ` To Opening stock To Purchases Less: Goods used for advertisement ` ` 13,27,000 By Sales 34,82,700 Add: Unrecorded cash sales ` 49,17,000 40,000 49,57,000 (1,00,000) 33,82,700 By Closing stock 7,44,100 9,91,400 To Gross profit (20% of ` 49,57,000) 57,01,100 57,01,100 Estimated stock in hand on the date of fire= ` 7,44,100. Working Note: Cash sales defalcated by the Accountant: Defalcation period = 1.4.2010 to 18.8.2010 = 140 days Since, 140 days / 7 weeks = 20 weeks Therefore, amount of defalcation = 20 weeks ` 2,000 = ` 40,000. 13. Revaluation Account Particulars ` Particulars To Stock 9,000 By Provision for doubtful debts To Furniture & fixtures 1,650 By Land & buildings To Provision for doubtful B/R 1,650 By Mr. X (Debtor) To Unaccrued incomes 1,275 To Workmen compensation claim ` 225 22,500 975 225 To Profit on revaluation t/f to: P s capital A/c 7,425 T s capital A/c 2,475 23,700 The Institute of Chartered Accountants of India 23,700 44 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Capital Accounts of Partners Particulars To P s Capital A/c To T s Capital A/c To Balance c/d To T s Current A/c To Balance c/d P ` 1,46,250 T ` 1,08,750 1,46,250 1,08,750 1,80,000 48,750 60,000 1,80,000 1,08,750 O ` 22,500 7,500 30,000 P ` 1,10,700 7,425 3,375 1,125 T ` 96,900 2,475 1,125 375 O ` - 1,125 375 - - - 60,000 22,500 1,46,250 1,46,250 7,500 1,08,750 1,08,750 60,000 30,000 60,000 By P s Current 33,750 A/c 60,000 1,80,000 _ 30,000 1,08,750 60,000 60,000 Particulars By Balance b/d By Revaluation A/c By P & L A/c By General Reserve By Contingency reserve By Bank A/c By O s Capital A/c By Balance b/d Balance Sheet of M/s. P, T & O as on 31st March, 2011 Liabilities Sundry creditors Employees provident ` Assets 60,000 Cash at (5,250+60,000) ` bank ` 65,250 fund 6,150 Bills receivable 33,000 Unaccrued incomes Workmen compensation claim 1,275 Less: Provision 225 Debtors (1,650) 25,500 31,350 (1,275) 24,225 P s capital 1,80,000 Less: Provision T s capital 60,000 Mr. X O s capital 60,000 Stock ( ` 90,000 ` 9,000) 48,750 Furniture & fixtures (` 16,500 ` 1,650) T s current A/c Land & buildings (` 1,12,500+ ` 22,500) 4,16,400 The Institute of Chartered Accountants of India 975 81,000 14,850 1,35,000 P s current A/c 33,750 O s current A/c 30,000 4,16,400 PAPER 1 : ACCOUNTING 45 Working Notes: 1. Calculation of sacrificing ratio P= 3 3 15 - 12 3 = = 4 5 20 20 T= 5-4 1 1 3 = = 4 5 20 20 Therefore sacrificing ratio of P & T= 3:1 2 . Calculation of goodwill Total profits of last three completed years = ` 45,000 + ` 60,000 + ` 75,000 = ` 1,80,000 Average profits of last three completed years = ` 1,80,000/3 = ` 60,000 Goodwill of the firm = ` 60,000 2 = ` 1,50,000 Incoming partner's share of Goodwill = ` 1,50,000 1/5= ` 30,000 Shared by P & T in 3:1 = ` 22,500 : ` 7,500 3. Total capital of the firm = ` 60,000 5 = 3,00,000 P s new capital = ` 3,00,000 x 3/5 = ` 1,80,000 T s new capital = ` 3,00,000 x 1/5 = ` 60,000 14. Revaluation Account Particulars ` To Provision for doubtful debts Particulars 600 By Unexpired insurance To Machinery To Outstanding repairs 2,400 By Land and building 3,000 To Profit t/f to: X s capital A/c 3,000 Y s capital A/c Z s capital A/c 2,000 1,000 12,000 The Institute of Chartered Accountants of India ` 2,000 10,000 12,000 46 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Capital Accounts of Partners Particulars To Y s capital A/c (for goodwill) (W. N 2) To Bank A/c To Y s loan A/c To Balance c/d X Y Z Particulars P T O ` ` ` ` ` ` 9,000 - 72,000 3,000 48,000 2,000 24,000 1,000 - 6,000 90,000 68,000 - - A/c (for goodwill) 30,000 (W .N. 2) - 9,000 - By Z s capital A/c (for goodwill) (W .N 2) - 3,000 - By Contingency Reserve 15,000 10,000 5,000 By Work Compensation Reserve 3,000 2,000 1,000 By Bank (Bal. fig) 6,000 - 2,000 99,000 74,000 33,000 99,000 3,000 By Balance b/d By Revaluation A/c - By X s capital 74,000 A/c 33,000 Balance Sheet of X and Z at 31st December 2011 Liabilities Creditors Employees Provident Fund Liability for repairs Y s loan A/c X s capital A/c Z s capital A/c ` Assets ` 20,000 Cash at bank (W .N 1) 1,600 Debtors 3,000 Less: Provision 68,000 Stock 90,000 Machinery 30,000 (48,000- 2,400) Land & building (1,00,000+10,000) Unexpired insurance 2,12,600 The Institute of Chartered Accountants of India ` 18,000 20,000 (1,000) 19,000 18,000 45,600 1,10,000 2,000 2,12,600 PAPER 1 : ACCOUNTING 47 Working Notes: 1. Bank Account Particulars ` To Balance b/d Particulars ` 16,000 By Y s capital A/c 6,000 6,000 By Balance c/d 2,000 18,000 To X s capital A/c To Z s capital A/c 24,000 2. Adjustment of goodwill New ratio 24,000 Old ratio Gaining ratio X 3/4 3/6 18 - 12 6 = 24 24 Z 1/4 1/6 6-4 2 = 24 24 Therefore, gaining ratio of X & Z = 3:1 Y s share of goodwill of ` 12,000 will be shared by X & Z in 3:1 = `9,000: ` 3,000 15. In the books of X, Y & Z Journal Entries Particulars Insurance Company s A/c Dr. (`) Dr. Cr. (`) 10,000 To Life Policy A/c ( W.N 3) 10,000 (Being the Policy on the life of Z matured on his death) Life Policy A/c ( W.N 4) Dr. 9,000 To Xs Capital A/c To Y s Capital A/c 3,000 3,000 To Z s Capital A/c (Being the transfer of balance of Life Policy A/c) Profit and Loss Suspense A/c (W.N.1) 3,000 Dr. 1,500 To Z s Capital A/c (Being Z s share of profit to date of death credited to his account) 1,500 X s Capital A/c Dr. 12,600 Y s Capital A/c Dr. 12,600 The Institute of Chartered Accountants of India 48 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Z s Capital A/c Dr. 12,600 To Goodwill A/c 37,800 (Being the existing Goodwill written off) X s Capital A/c ( W.N 2) Y s Capital A/c Dr. Dr. 3,500 3,500 To Z s Capital A/c 7,000 (Being Z s share of goodwill adjusted through capital accounts) Land & Building A/c Dr. 37,000 To Revaluation A/c 37,000 (Being an increase in the value of assets) Investment fluctuation reserve A/c To Investment A/c Dr. 600 600 (Being decline in the cost of investment adjusted from investment fluctuation reserve A/c) Revaluation A/c To Stock A/c Dr. 3,600 1,200 To Provision for doubtful debts A/c (Being decline in value of assets recorded) Revaluation A/c 2,400 Dr. 33,400 To X s Capital A/c To Y s Capital A/c 11,133 11,133 To Z s Capital A/c (Being transfer of profit on revaluation) 11,134 General Reserve A/c Dr. 8,900 Investment Fluctuation Reserve A/c (2,400 -600) Dr. 1,800 To X s Capital A/c 3,567 To Y s Capital A/c 3,567 To Z s Capital A/c 3,566 (Being the transfer of accumulated profits) Z s Capital A/c To Z s Executor s A/c (Being the transfer of Z s Capital to his Executors A/c The Institute of Chartered Accountants of India Dr. 53,300 53,300 PAPER 1 : ACCOUNTING 49 Balance Sheet as at 31st March, 2011 Liabilities ` Assets ` ` Z s Executors A/c 53,300 Cash and Bank 10,000 Creditors X s Capital A/c 25,800 61,300 Debtors Less : Provision 20,000 (4,000) Y s Capital A/c 41,300 Stock 20,000 Less: Reserve (1,200) 18,800 Investments Less : Reserve 10,000 (600) 9,400 16,000 Land and Building ( 74,000+ 37,000) 1,11,000 P&L Suspense A/c 1,500 Life Policies (X and Y) 5,000 Insurance Company 1,81,700 10,000 1,81,700 Working Notes: ` 1. Calculation of Z s share of profit to the date of death Total profits for previous three years (18,000+16,000+20,000) 54,000 Average Profits (` 54,000/3 years) 18,000 Profit for 3 months period (` 18,000 /4) 2. Z s share of profit (` 4,500 1/3) Calculation of goodwill (a) (b) Total profits of last five years (c) Goodwill at one year s purchase(` 21,000 1) Share of goodwill of Z = 21,000/3 Average profit of last five years (` 1,05,000/5) Shared by X & Y in 1:1 = ` 3,500 : ` 3,500 3. Sum assured of Life Policy of Z = (`1,000 100/10) = 10,000 4. Balance of Z s Life policy account to be credited to all partners The Institute of Chartered Accountants of India 4,500 1,500 1,05,000 21,000 21,000 7,000 50 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 = Sum assured Surrender value already appearing in the books = `10,000 `1,000 = `9,000 16. Recently a growing trend has developed for outsourcing the accounting function to a third party. The consideration for doing this is to save cost and to utilise the expertise of the outsourced party. The third party maintains the accounting software and the client data, does the processing and hands over the report from time to time. One should be well acquainted with the advantages & disadvantages of outsourcing. Following are the advantages of outsourcing the accounting functions: 1. The organisation that outsources is able to save time to concentrate on the core area of business activity. 2. The organisation is able to utilise the expertise of the third party in undertaking the accounting work. 3. Storage and maintenance of the data is in the hands of professional people. 4. The organisation is not bothered about people leaving the organisation in key accounting positions. 5. The proposition often proves to be economically more sensible. Following are the disadvantages of outsourcing the accounting functions: 1. The data of the organisation is handed over to a third party: This raises two issues, one of security and second of confidentiality. There have been instances of information leaking out of the third party data centers. 2. Inadequate services provided: The third party is unable to meet the standards desirable. 3. The cost may ultimately be higher than initially envisaged. 4. Delay in obtaining services: The third party service providers are catering to number of clients thereby processing as per priority basis. 17. (a) As per para 16 & 17 of AS 1, Disclosure of Accounting Policies , the main consideration in selection of accounting policy is the presentation of a true and fair picture of the state of affairs & performance of the enterprise. To ensure true and fair consideration, principles of prudence, substance over form and materiality should be looked into. In this case, 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. Hence, X Ltd. in its financial statements for the year ended 31.3.2011, should record the sale and recognize the profit of ` 35 lakhs in its Profit The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 51 & Loss Account and building should be removed from the balance sheet of X Ltd. Therefore, the treatment given by the company is not correct. (b) Calculation of total cost of material as per AS-2 ` 25,60,000 Purchase price (16,000 kg. x ` 160) (1,60,000) Less : CENVAT credit (16,000 kg. x ` 10) 24,00,000 Add : Freight 1,40,160 Total material cost 25,40,160 Number of units after normal loss = 16,000 kg. x (100-2)% = 15,680 kg 25,40,160 Revised cost per kg. = = ` 162 per kg 15,680 kg Closing inventory = Material actually received Material consumed = 15,500 kg 13,600 kg = 1,900 kg Value of closing stock = 1,900 kg x ` 162 = ` 3,07,800 Abnormal loss in kg = Material after normal loss - Material actually received =15,680 kg 15,500 kg = 180 kg Abnormal loss in value = 180 kg ` 162 = ` 29,160 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 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 & loss in the year in which the method of depreciation is changed. Calculation of Surplus/Deficiency due to change in method of depreciation Purchase price of plant as on 01-04-2008 Less: Depreciation as per SLM, for the year 2008-09 (` 2,00,000 7 years) Balance as on 31-3-2009 Less: Depreciation for the year 2009-10 (` 2,00,000 7 years) Balance as on 31-3-2010 Book value as per WDV method Book value as per SLM Deficiency The Institute of Chartered Accountants of India ` 2,00,000 (28,571) 1,71,429 (28,571) 1,42,858 1,44,500 1,42,858 1,642 52 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Deficiency of ` 1,642 should be charged to Profit & 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) Calculation of total estimated cost ` Cost incurred to date 58,50,000 Estimate of cost to completion 31,50,000 Estimated total cost 90,00,000 Also as per para 21 of the standard, when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. Accordingly, Percentage of completion of contract = Expenditure till date 100 Total estimated exp enditure Degree of completion (58,50,000/90,00,000) x 100 = 65% Revenue recognised as a percentage to contract price 65% of ` 80,00,000 = ` 52,00,000 As per para 35 of AS 7 (Revised) 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. Accordingly, the loss of `10,00,000 (i.e.` 90,00,000-80,00,000) is required to be recognized as an expense in the year 2010-11. Total foreseeable loss Less: Loss for the current year (58,50,000-52,00,000) Expected loss to be recognized immediately as per para 35 of AS 7 The Institute of Chartered Accountants of India ` 10,00,000 (6,50,000) 3,50,000 PAPER 1 : ACCOUNTING 53 Profit and Loss A/c (An extract) To Construction cost To Estimated loss on completion of contract 19. (a) ` 58,50,000 By Contract price ` 52,00,000 3,50,000 ? ? (i) As per para 9 of AS 11 Changes in Foreign Exchange Rates , a foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Accordingly, on 31.12.2010, borrowings will be recorded at ` 2,20,00,000 (i.e $ 5,00,000 ` 44.00) X As per para 11(a) of the standard, at each balance sheet date, foreign currency monetary items should be reported using the closing rate. Accordingly, on 31.12.2011, borrowings (monetary items) will be recorded at ` 2,22,50,000 (i.e $ 5,00,000 ` 44.50). In the Books of Aman Ltd. Journal Entries Date 1. 2. Particulars ` 31-12-2010 Bank A/c To Borrowings 31.03.2011 Dr. 2,20,00,000 2,20,00,000 P/L A/c (Difference exchange) (W.N.1) in Dr. 2,50,000 To Borrowings 3. 30.06.2011 ` 2,50,000 Borrowings A/c Dr. 2,22,50,000 P/L A/c (Difference in Dr. exchange) (W.N.2) 12,500 To Bank A/c 2,23,75,000 (ii) In case borrowings is repaid before balance sheet date, then the entry would be as follows:28-2-2011 Borrowings A/c P/L A/c (Difference exchange) (W.N.3) To Bank A/c The Institute of Chartered Accountants of India Dr. in Dr. 2,20,00,000 1,00,000 2,21,00,000 54 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Working Notes: (b) (i) 1. The exchange difference of ` 2,50,000 is arising because the transaction has been reported at different rate (` 44.50 =1 US $) from the rate initially recorded (i.e. ` 44 =1 US $). 2. The exchange difference of ` 12,500 is arising because the transaction has been settled at an exchange rate (` 44.75 =1 US $) different from the rate at which reported in the last financial statement (` 44.50= 1 US $). 3. The exchange difference of ` 1,00,000 is arising because the transaction has been settled at a different rate (i.e. ` 44.20 = 1 US $) than the rate at which initially recorded (1 US $ = ` 44.00). As per para 6 of AS 9 Revenue Recognition , revenue is recognized at the time when the significant risks & rewards of ownership is transferred i.e. when the invoice is raised to the customers. However, the treatment of deduction as trade discount is not as per illustrative example given in AS 9. According to the treatment prescribed by para 8 of AS 4 Contingencies and Events Occurring after the Balance Sheet Date , the adjustment of the difference between the invoiced amount and the amount finally settled against Ship Repair Income account is correct. Events occurring up to the date of approval of the accounts by the Board of Directors should be taken into consideration in determining the amount of adjustment to be made in this regard. However, the description of the difference as trade discount is not appropriate. (ii) In respect of ship repair jobs for which negotiations between the ship owners and the company are not over, the accounting treatment is not appropriate. Instead, the amount of difference between the invoiced amount and the amount likely to be finally settled (as estimated on the basis of past experience) should be adjusted in the Ship Repair Income by a corresponding credit to the accounts of the respective ship owners. Consequently, the figure of sundry debtors included in the balance sheet would be net of adjustment for such difference. In other words, the amount of the difference would be neither shown under the head provisions nor shown as a deduction from the sundry debtors in the balance sheet. 20. (a) As per para 14 & 15 of AS 13 Accounting for Investments , current investments should be carried at lower of cost and fair price determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis. Also as per para 17 of the standard, long-term investments are carried at cost The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 55 except when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognise the decline. (i) If the investment in shares is intended to be held for not more than one year from the date on which such investment is made then scrip X should be valued at cost i.e. `1,80,000 (lower of cost and fair value), scrip Y should be valued at fair value i.e. `40,000 (lower of cost and fair value) and scrip Z should be valued at fair value i.e. `70,000 (lower of cost and fair value). The total loss of ` 1,00,000 (` 4,00,000 ` 3,00,000) on scrip s purchased on 1st June, 2010 is to be charged to profit and loss account for the year ended 31 st March, 2011. If investment is intended to be held for long term period then it will continue to be shown at cost in the balance sheet of the company. However, provision for diminution shall be made to recognize a decline, other than temporary, in the value of investments, such reduction being determined and made for each investment individually. (ii) The investment in gold (purchased in April, 2007) shall continue to be shown at cost of `3,00,000 in the balance sheet as on 31.3.2011. (iii) If mutual funds are intended to be held for short term period then, it will be valued at `4,50,000 as on 31st March, 2011 and if it is intended to be held for long term then it should be valued at its cost i.e. `6,00,000. (iv) Value of government securities (purchased on 1st April, 2010) is to be shown at cost of ` 5,00,000 in the balance sheet as on 31.3.2011. Inter-category adjustments of appreciation and depreciation in value of investments cannot be done. It is not possible to offset depreciation in investment in mutual funds against appreciation in value of investments in government securities. (b) Ascertainment of carrying cost ` in lakhs Cost of acquisition Less: Depreciation for 4 years (i.e from 1.1.2006 to 31.12.2009) @ 10% per annum (300 10% 4 years) Book value as on 1.1.2010 Add: Upward revaluation credited to revaluation reserve A/c 300 (120) 180 90 Revalued carrying cost as on 1.1.2010 270 Less: Depreciation at one sixth of the revalued amount (Refer note) (45) The Institute of Chartered Accountants of India 56 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2012 Book value as on 1.1.2011 225 Less: Depreciation at one-sixth of the revalued amount (45) Balance to be carried forward as on 31.12.2011 180 Note: As the depreciation rate is 10% on SLM, it is implied that the economic life of the asset is 10 years. Since there is no change in the economic life of the machinery, the revalued amount should be written off over the remaining six year of economic life i.e ` 270/6 = ` 45 lakhs per year. The book value of the asset on 1-1-2010 is ` 180 lakhs. Since it is revalued at ` 270 lakhs the difference of ` 90 lakhs is credited to revaluation reserve as per para 13 of AS 10 Accounting for Fixed Assets . Additional deprecation of ` 15 lakhs (` 45 lakhs ` 30 lakhs) due to upward revaluation of the assets, may be charged to Revaluation Reserve A/c . The Institute of Chartered Accountants of India

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