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CA IPCC : Revision Test Paper (with Answers) - ACCOUNTING May 2015

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PAPER 1: ACCOUNTING PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR MAY, 2015 EXAMINATION A. Applicable for May, 2015 examination Revision in the Criteria for classifying Level II Non-Corporate Entities Due to recent changes in the enhancement of tax audit limit, the Council of the ICAI has recently decided to change the 1st criteria of Level II Non-Corporate Entities i.e. determination of SME on turnover basis from ` 40 lakhs to ` 1 Crore vide announcement Revision in the Criteria for classifying Level II Non-Corporate Entities issued by ICAI on 7th March, 2013. This revision is applicable with effect from the accounting year commencing on or after April 1, 2012. Companies Act, 2013 The relevant Sections of the Companies Act, 2013 notified up to 30th September 2014 will be applicable for May, 2015 Examination. B. Not applicable for May, 2015 examination Ind ASs issued by the Ministry of Corporate Affairs The MCA has hosted on its website 35 converged Indian Accounting Standards (Ind AS) without announcing the applicability date. These are the standards which are being converged by eliminating the differences of the Indian Accounting Standards vis- -vis IFRS. These Ind ASs are not applicable for the students appearing in May, 2015 Examination. PART II: QUESTIONS AND ANSWERS QUESTIONS Financial Statements of Companies 1. (a) State under which head these accounts should be classified in Balance Sheet, as per Schedule III of the Companies Act, 2013: (i) Share application money received in excess of issued share capital. (ii) Share option outstanding account. (iii) Unpaid matured debenture and interest accrued thereon. (iv) Uncalled liability on shares and other partly paid investments. (v) Calls unpaid. (vi) Intangible Assets under development. (vii) Money received against share warrant. The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (b) The following extract of Balance Sheet of X Ltd. (a non-investment company) was obtained: Balance Sheet (Extract) as on 31st March, 2015 Liabilities ` Authorised capital: 15,000, 14% preference shares of ` 100 1,50,000 Equity shares of ` 100 each 15,00,000 1,50,00,000 1,65,00,000 Issued and subscribed capital: 15,000, 14% preference shares of ` 100 each fully paid 15,00,000 1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000 Capital reserves (` 1,50,000 is revaluation reserve) 1,95,000 Securities premium 15% Debentures Unsecured loans: Public deposits repayable after one year 50,000 65,00,000 3,70,000 Investment in shares, debentures, etc. 75,00,000 Profit and Loss account (debit balance) 15,25,000 You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013. (c) Futura Ltd. had the following items under the head Reserves and Surplus in the Balance Sheet as on 31st March, 2015: Amount ` in lakhs Securities Premium Account 80 Capital Reserve 60 General Reserve 90 The company had an accumulated loss of ` 250 lakhs on the same date, which it has disclosed under the head Statement of Profit and Loss as asset in its Balance Sheet. Comment on accuracy of this treatment in line with Schedule III to the Companies Act, 2013. Cash Flow Statement 2. PQ Ltd. gives you the following summarized balance sheets. You are required to prepare Cash Flow Statement by using indirect method as per AS 3 for the year ended 31.03.2014: The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 3 Balance Sheet as on Liabilities 31st March 31st March Assets 2013 2014 ` 31st March 31st March 2013 2014 ` ` ` Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000 Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000 9,00,000 21,20,000 32,80,000 23,90,000 28,30,000 1,50,000 1,90,000 Debentures Current Liabilities Trade Payables 8,80,000 8,20,000 Trade Receivables Bank Loan 1,50,000 3,00,000 Less: Provision Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000 Dividend payable 1,50,000 3,00,000 Cash 27,00,000 33,20,000 20,10,000 19,20,000 90,000 1,20,000 Inventories Prepaid Expenses 91,60,000 1,12,80,000 91,60,000 1,12,80,000 Additional Information: (i) Net profit for the year ended 31st March, 2014, after charging depreciation ` 1,80,000 is ` 22,40,000. (ii) Trade Receivables of ` 2,30,000 were determined to be worthless and were written off against the provisions for doubtful debts account during the year. (iii) PQ Ltd. declared dividend of ` 12,00,000 for the year 2013-2014. Profit/Loss prior to Incorporation 3. Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April, 2013. During the year 2013-14, the total sales were ` 24,00,000 of which ` 4,80,000 were for the first six months. The Gross profit of the company ` 3,90,800. The expenses debited to the Profit & Loss Account included: (i) Director's fees ` 30,000 (ii) Bad debts ` 7,200 (iii) Advertising ` 24,000 (iv) Salaries and General Expenses ` 1,28,000 (v) Preliminary Expenses written off ` 10,000 Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March, 2014. The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Accounting for Bonus Issue 4. Following items appear in the Trial Balance of Saral Ltd. (a listed Company) as on 31st March, 2015: Particulars Amount 4,500 Equity Shares of `100 each 4,50,000 Capital Reserve (including `40,000 being profit on sale of Plant) 90,000 Securities Premium 40,000 Capital Redemption Reserve 30,000 General Reserve 1,05,000 Profit and Loss Account (Cr. Balance) 65,000 The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 2 shares held. Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the books of Saral Ltd. Internal Reconstruction of a Company 5. Following is the summarized Balance Sheet of M Ltd. as at 31st March, 2015: Liabilities ` Assets 15,000, 10% Preference shares of ` 100 each 15,00,000 Land & Buildings Plant & Machinery 35,000 Equity shares of ` 100 each 35,00,000 Inventory Securities Premium account 1,00,000 Trade receivables 7% Debentures of ` 100 each 5,00,000 Cash at bank Trade payables Loan from Director 12,50,000 Profit & Loss A/c ` 15,00,000 10,00,000 6,00,000 15,00,000 1,00,000 23,00,000 1,50,000 70,00,000 70,00,000 No dividend on Preference shares has been paid for the last 5 years. The following scheme of reorganization was duly approved by the Tribunal: (i) Each Equity share to be reduced to ` 25. (ii) Each existing Preference share to be reduced to ` 75 and then exchanged for 1 new 13% Preference share of ` 50 each and 1 Equity share of ` 25 each. (iii) Preference shareholders have forgone their right for dividend for four years. One year s dividend at the old rate is however, payable to them in fully paid equity Shares of ` 25. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 5 (iv) The Debentureholders be given the option to either accept 90% of their claims in cash or to convert their claims in full into new 13% Preference shares of ` 50 each issued at par. One half (in value) of the debentureholders accepted Preference shares for their claims. The rest were paid cash. (v) Contingent liability of ` 1,50,000 is payable, which has been created by wrong action of one Director. He has agreed to compensate this loss out of the loan given by the Director to the company. (vi) 40,000 new Equity shares of ` 25 each are to be issued at par, payable in full on application. Shares were fully taken up. (vii) Decrease the value of Plant and Machinery, Inventory and Trade receivables by ` 4,00,000, ` 1,00,000 and ` 1,50,000 respectively. Increase the value of Land and Buildings to ` 18,00,000. (viii) The total expenses incurred by the company in connection with the scheme excluding underwriting commission amounted to ` 15,000. Pass necessary Journal Entries to record the above transactions. Amalgamation of Companies 6. P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorized Capital of ` 10,00,000 divided into 1,00,000 equity shares of ` 10 each. The Balance Sheet of the companies as on 31.03.2014 were as under: P Limited Balance Sheet as at 31.03.2014 Particulars Equity and Liabilities 1. Shareholder s Fund (a) Share Capital (b) Reserves & Surplus Profit & Loss A/c 2. Non Current Liabilities 8 % Secured Debentures 3. Current Liabilities Trade Payables Total II. Assets 1. Non-current Assets (a) Fixed Assets Building at cost less Depreciation Amount (`) I. The Institute of Chartered Accountants of India 1,40,000 30,000 1,10,000 54,000 3,34,000 1,00,000 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 2. Plant & Machinery at cost less Depreciation Current Assets (a) Inventories (b) Trade Receivables (c) Cash at bank Total 25,000 1,35,000 44,000 30,000 3,34,000 Q Limited Balance Sheet as at 31.03.2014 Particulars I. Amount (`) Equity and Liabilities 1. Shareholder s Fund (a) Share Capital (b) 2,50,000 Reserves & Surplus General Reserve Profit & Loss A/c 2. 1,20,000 35,000 Current Liabilities Trade Payables Total 1,40,000 5,45,000 II. Assets 1. Non-current assets (a) Fixed Assets Building at cost less depreciation 1,90,000 Plant & Machinery at cost less depreciation Furniture & Fixture at cost less depreciation 2. 80,000 25,000 Current Assets (a) Inventories (b) Trade Receivables (c) Cash at bank Total 50,000 1,42,000 58,000 5,45,000 The assets and liabilities of the existing companies are to be transferred at book value with the exception of some items detailed below: (i) Goodwill of P Ltd. was worth ` 50,000 and of Q Ltd. was worth ` 1,50,000. (ii) Furniture & Fixture of Q Ltd. was valued at ` 35,000. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 7 (iii) The Trade receivables of P Ltd. are realized fully and bank balance of P Ltd. are to be retained by the liquidator and the trade payables are to be paid out of the proceeds thereof. (iv) The debentures of P Ltd. are to be discharged by issue of 8% 11,000 debentures of PQ Ltd. at a premium of 10%. You are required to: (i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of the existing companies. (ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation. Average Due Date 7. Mehnaaz accepted the following bills drawn by Shehnaaz: On 8th March, 2014, ` 4,000 for 4 months. On 16th March, 2014, ` 5,000 for 3 months. On 7th April, 2014, ` 6,000 for 5 months. On 17th May, 2014, ` 5,000 for 3 months. He wants to pay all the bills on a single day. Find out the average due date. Account Current 8. The following are the transactions that took place between Rohan & Sunil during the half year ended 30th June, 2014: ` I Balance due to Rohan by Sunil on 1 January, 2014 3,010 ii Goods sold by Rohan to Sunil on 7 January, 2014 4,430 iii Goods purchased by Rohan from Sunil on 16 February, 2014 6,480 iv Goods returned by Rohan to Sunil on 18 February, 2014 (out of the purchases of 16 February, 2014) v Goods sold by Sunil to Rohan on 24th March, 2014 3,560 vi Bill accepted by Rohan at 3 months on 22nd April, 2014 1,500 Cash paid by Rohan to Sunil on 29th April, 2014 2,500 vii viii 560 Goods sold by Rohan to Sunil on 17th May, 2014 2,710 Goods sold by Sunil to Rohan on 22nd June, 2014 2,280 Draw up an account current to be rendered by Sunil to Rohan charging interest @ 10% per annum. The Institute of Chartered Accountants of India 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Hire Purchase Transactions 9. Globus Ltd. acquired a delivery van on hire purchase on 01.04.2014 from Ganesh Enterprises. The terms were as follows: Particulars Amount (`) Hire Purchase Price 1,80,000 Down Payment 30,000 1st installment payable after 1 year 50,000 2nd installment after 2 years 50,000 3rd installment after 3 years 30,000 4th installment after 4 years 20,000 Cash price of van ` 1,50,000 and depreciation is charged at 10% WDV. You are required to calculate Total Interest and Interest included in each installment Self Balancing Ledgers 10. Prepare the General Ledger Adjustment Account as will appear in the Debtors Ledger from the information given below: Dr. Cr. ` ` 94,400 480 Balances on 1.4.2013 Debtors Ledger Transactions for the year ended 31.3.2014: Credit sales 2,24,000 Received from debtors (in full settlement of ` 1,18,000) 1,16,400 Returns from debtors 5,200 Bills accepted by customers 40,200 Bills receivables dishonoured 3,000 Bills receivable discounted 10,000 Bills receivable endorsed to creditors 8,000 Endorsed bills dishonoured 2,000 Bad debts written off 5,000 Balance on 31.3.2014 Debtors ledger The Institute of Chartered Accountants of India 760 PAPER 1: ACCOUNTING 9 Financial Statements of Not for Profit Orgnisations 11. (a) Elite Club (not registered under the Companies Act, 2013) 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, 2015 revealed the following: ` For the year 2013-14 25,200 For the year 2014-15 6,98,400 For the year 2015-16 7,200 7,30,800 On 31st March, 2015 it was noted that a sum of ` 3,600 was still in arrears for the year ended 31st March, 2014. 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, 2015. Also show how items relating to subscriptions will appear in the Balance Sheet dated 31st March, 2015. (b) The following is the Income and Expenditure Account of Gama Club for the year ended 31st March, 2015: Income and Expenditure Account for the year ended 31st March, 2015 ` To Salaries 19,500 To Rent 4,500 To Printing By Donation 68,000 5,000 500 To Audit Fees By Subscription 750 To Insurance ` 750 To Games & Sports 3,500 To Subscriptions written off 350 To Miscellaneous Expenses 14,500 To Loss on sale of furniture 2,500 To Depreciation: Sports Equipment Furniture To 6,000 3,100 Excess of expenditure income over 17,050 73,000 The Institute of Chartered Accountants of India 73,000 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Additional information: 31-3-2014 31-3-2015 ` ` Subscriptions in arrears 2,600 3,700 Advance Subscriptions 1,000 1,500 500 800 1,200 350 500 750 Sports Equipment less depreciation 25,000 24,000 Furniture less depreciation 30,000 27,900 - 150 Outstanding expenses: Rent Salaries Audit Fee Prepaid Insurance Book value of furniture sold is ` 7,000. Entrance fees capitalized ` 4,000. On 1st April, 2014 there was no cash in hand but Bank Overdraft was for ` 15,000. On 31st March, 2015. Cash in hand amounted to ` 850 and the rest was Bank balance. Prepare the Receipts and Payments Account of the Club for the year ended 31st March, 2015. Investment Accounts 12. A Pvt. 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 P Ltd. on 1st May 2014 @ ` 105 on cum interest basis. The interest on these instruments is payable on 31st March & 30th September respectively. On August 1st 2014 the company again purchased 2,500 of such debentures @ ` 102.50 each on cum interest basis. On October 1st, 2014 the company sold 2,000 Debentures @ ` 103 each. On 31st December, 2014 the company received 10,000 equity shares of ` 10 each in P 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 A Pvt. Ltd. for the year 2014 on Average Cost Basis. Accounts from Incomplete Records 13. From the following information in respect of Mr. X, prepare Trading and Profit and Loss Account for the year ended 31st March, 2015 and a Balance Sheet as at that date: The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 11 31-03-2014 31-03-2015 ` Stock in trade 1,60,000 1,40,000 Debtors for sales 3,20,000 ? - ? Creditors for purchases 2,20,000 3,00,000 Furniture at written down value 1,20,000 1,27,000 Expenses outstanding 40,000 36,000 Prepaid expenses 12,000 14,000 Cash on hand 4,000 3,000 Bank Balance (1) ` 20,000 9,500 Liabilities and Assets: Bills receivable (2) Receipts and Payments during 2014-2015: Collections from Debtors (after allowing 2-1/2% discount) 11,70,000 Payments to Creditors (after receiving 2% discount) 7,84,000 Proceeds of Bills receivable discounted at 2% 1,22,500 Proprietor s drawings 1,40,000 Purchase of furniture on 30.09.2014 20,000 4% Government securities purchased at 96% on 1-10-2014 1,92,000 Expenses 3,50,000 Miscellaneous Income 10,000 (3) Sales are effected so as to realize a gross profit of one third on the sale proceeds. (4) Goods costing ` 18,000, were issued as samples to distributors. (5) Purchases and Sales are made only on credit. (6) During the year, Bills Receivable of ` 2,00,000 were drawn on debtors. Of these, Bills amounting to ` 40,000 were endorsed in favour of creditors. Out of this latter amount, a Bill for ` 8,000 was dishonoured by the debtor. (7) Capital introduced during the year by the proprietor by cheques was omitted to be recorded in the Cash Book, though the bank balance of 9,500 on 31st March, 2015 (as shown above), is after taking the same into account. The Institute of Chartered Accountants of India 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Insurance Claims for loss of Profit and Loss of Stock 14. (a) The premises of X Ltd. caught fire on 22nd January, 2015 and the stock was damaged. The value of goods salvaged was negligible. The firm made up accounts to 31st March each year. On 31st March, 2014 the stock at cost was `13,27,200 as against ` 9,62,200 on 31st March 2013. Purchases from 1st April, 2014 to the date of fire were ` 34,82,700 as against ` 45,25,000 for the full year 2013-2014 and the corresponding sales figures were ` 49,17,000 and ` 52,00,000 respectively. You are given the following further information: (i) In July, 2014, goods costing ` 1,00,000 were given away for advertising purposes, no entries being made in the books. (ii) The rate of gross profit is constant. X Ltd. had taken an insurance policy of ` 5,50,000 which was subject to the average clause. From the above information, you are required to make an estimate of the stock in hand on the date of fire and compute the amount of the claim to be lodged to the insurance company. (b) A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide the policy amount. From the following details, suggest the policy amount: ` Turnover in last financial year Standing charges in last financial year 4,50,000 90,000 Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year. Increase in turnover expected 25%. To achieve additional sales, trader has to incur additional expenditure of ` 30,000. Issues in Partnership Accounts 15. Laurel and Hardy are partners of the firm LH & Co., from 1.4.2011. Initially both of them contributed ` 1,00,000 each as capital. They did not contribute any capital thereafter. They maintain accounts of the firm on mercantile basis. They were sharing profits and losses in the ratio of 5:4. After the accounts for the year ended 31.3.2015 were finalized, the partners decided to share profits and losses equally with effect from 1.4.2011. It was also discovered that in ascertaining the results in the earlier years certain adjustments, details of which are given below, had not been noted. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 13 2012 2013 2014 2015 ` ` ` ` Profit as per accounts prepared and finalized 1,40,000 2,60,000 3,20,000 3,60,000 Expenses not provided for (as at 31st March) 30,000 20,000 36,000 24,000 Incomes not taken into account (as at 31st March) 18,000 15,000 12,000 21,000 Year ended 31st March The partners decided to admit Chaplin as a partner with effect from 1.4.2015. It was decided that Chaplin would be allotted 20% share in the firm and he must bring 20% of the combined capital of Laurel and Hardy. Following is the Balance sheet of the firm as on 31.3.2015 before admission of Chaplin and before adjustment of revised profits between Laurel and Hardy. Balance Sheet of LH & Co. as at 31.3.2015 Liabilities ` Assets Capital Accounts: Plant and machinery Laurel 2,11,500 Cash on hand Hardy 1,51,500 Trade Payables ` 60,000 10,000 Cash at bank 5,000 2,27,000 Stock in trade 3,10,000 Trade Receivables 5,90,000 2,05,000 5,90,000 You are required to prepare: (i) Profit and Loss Adjustment account; (ii) Capital accounts of the partners; and (iii) Balance Sheet of the firm after the admission of Chaplin. 16. A large size hospital decided to outsource the accounting functions. Hospital invited proposals from vendors through open tender and received three proposals. How will you select the vendor? 17. (a) A company was classified as Non-SMC in 2013-14. In 2014-15 it has been classified as SMC. The management desires to avail the exemption or relaxations available for SMCs in 2014-15. However, the accountant of the company does not agree with the same. Comment. (b) Calculate the value of raw materials and closing stock based on the following information: The Institute of Chartered Accountants of India 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Raw material X Closing balance 500 units ` per unit Cost price including excise duty 200 Excise duty (Cenvat credit is receivable on the excise duty paid) 10 Freight inward 20 Unloading charges 10 Replacement cost 150 Finished goods Y Closing Balance 1200 units ` per unit Material consumed 220 Direct labour 60 Direct overhead 40 Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20,000 units. Calculate the value of the closing stock, when Net Realizable Value of the Finished Goods Y is ` 400. 18. (a) On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a useful life of 10 years. The residual value was estimated at 10% of the original cost. At the beginning of the 4th year, an attachment was made to the machine at a cost of ` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10 years and zero terminal value. During the same time the original machine was revalued upwards by ` 90,000 and remaining useful life was reassessed at 9 years and residual value was reassessed at NIL. Find depreciation for the year 2013 14, if (i) attachment retains its separate identity. (ii) attachment becomes integral part of the machine. (b) Mr. A purchased a machine on 01.04.2009 for ` 1,00,000. On 01.07.2010 he purchased another machine for ` 1,50,000. On 01.10.2011, he purchased the third machine for ` 2,00,000 and on 31.12.2012 he sold the second machine for ` 1,25,000. On 31.03.2014 he decided to change the method of charging depreciation from Straight Line Method @ 10% p.a. to Written Down Value Method @ 15%. Show Machine Account from 1.4.2009 to 31.3.2014. 19. (a) On 1st December, 2014, Sampath Construction Company Limited undertook a The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 15 contract to construct a building for ` 108 lakhs. On 31st March, 2015 the company found that it had already spent ` 83.99 lakhs on the construction. A prudent estimate of additional cost for completion was ` 36.01 lakhs. What is the provision for foreseeable loss, which must be made in the Final Accounts for the year ended 31st March, 2015 based on AS 7 Accounting for Construction Contracts. (b) The Board of Directors decided on 31.3.2014 to increase the sale price of certain items retrospectively from 1st January, 2014. In view of this price revision with effect from 1st January 2014, the company has to receive ` 15 lakhs from its customers in respect of sales made from 1st January, 2014 to 31st March, 2014. Accountant cannot make up his mind whether to include ` 15 lakhs in the sales for 2013-2014. Advise. 20. (a) On March 01, 2014, X Ltd. purchased ` 5 lakhs worth of land for a factory site. Company demolished an old building on the property and sold the material for ` 10,000. Company incurred additional cost and realized salvaged proceeds during the March 2014 as follows: Legal fees for purchase contract and recording ownership ` 25,000 Title guarantee insurance ` 10,000 Cost for demolition of building ` 50,000 Compute the balance to be shown in the land account in balance sheet on March 31, 2014. (b) X Ltd. on 1-1-2015 had made an investment of ` 600 lakhs in the equity shares of Y Ltd. of which 50% is made in the long term category and the rest as temporary investment. The realizable value of all such investment on 31-3-2015 became ` 200 lakhs as Y Ltd. lost a case of copyright. How will you recognize the reduction in financial statements for the year ended on 31-3-2015. SUGGESTED ANSWERS / HINTS 1. (a) (i) (ii) Current Liabilities/ Other Current Liabilities Shareholders' Fund / Reserve & Surplus (iii) Current liabilities/Other Current Liabilities (iv) Contingent Liabilities and Commitments (v) Shareholders' Fund / Share Capital (vi) Fixed Assets (vii) Shareholders' Fund / Money received against share warrants The Institute of Chartered Accountants of India 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (b) Computation of effective capital: ` Paid-up share capital15,000, 14% Preference shares 15,00,000 1,20,000 Equity shares 96,00,000 Capital reserves (excluding revaluation reserve) 45,000 Securities premium 50,000 15% Debentures 65,00,000 Public Deposits 3,70,000 (A) 1,80,65,000 Investments 75,00,000 Profit and Loss account (Dr. balance) 15,25,000 (B) Effective capital 90,25,000 (A B) 90,40,000 (c) Note 6 (B) given under Part I of Schedule III to the Companies Act, 2013 provides that debit balance of Statement of Profit and Loss (after all allocations and appropriations) shall be shown as a negative figure under the head Surplus . Similarly, the balance of Reserves and Surplus , after adjusting negative balance of surplus, shall be shown under the head Reserves and Surplus even if the resulting figure is in the negative. In this case, the debit balance of profit and loss i.e. ` 250 lakhs exceeds the total of all the reserves i.e. ` 230 lakhs. Therefore, balance of Reserves and Surplus after adjusting debit balance of profit and loss is negative by ` 20 lakhs, which should be disclosed on the face of the balance sheet. Thus the treatment done by the company is incorrect. 2. Cash flow Statement of PQ Ltd. for the year ended 31.3.2014 Cash flows from Operating activities Net Profit Add :Adjustment for Depreciation (`7,90,000 `6,10,000) Operating profit before working capital changes Add: Decrease in Inventories (`20,10,000 `19,20,000) ` 22,40,000 1,80,000 24,20,000 90,000 Increase in provision for doubtful debts (` 4,20,000 `1,50,000) 2,70,000 27,80,000 Less: Increase in Current Assets: The Institute of Chartered Accountants of India ` PAPER 1: ACCOUNTING Trade receivables (` 30,60,000 `23,90,000) 17 6,70,000 Prepaid expenses (` 1,20,000 `90,000) 30,000 Decrease in current liabilities: Trade payable (` 8,80,000 ` 8,20,000) 60,000 Expenses outstanding (` 3,30,000 `2,70,000) 60,000 8,20,000 Net cash from operating activities 19,60,000 Cash flows from Investing activities Purchase of Plant & Equipment (` 40,70,000 ` 27,30,000) 13,40,000 Net cash used in investing activities (13,40,000) Cash flows from Financing Activities Bank loan raised (` 3,00,000 ` 1,50,000) 1,50,000 Issue of debentures 9,00,000 Payment of Dividend (` 12,00,000 ` 1,50,000) (10,50,000) Net cash used in financing activities NIL Net increase in cash during the year 6,20,000 Add: Cash and cash equivalents as on 1.4.2013 27,00,000 Cash and cash equivalents as on 31.3.2014 33,20,000 Note: Bad debts amounting ` 2,30,000 were written off against provision for doubtful debts account during the year. In the above solution, Bad debts have been added back in the balances of provision for doubtful debts and debtors as on 31.3.2014. Alternatively, the adjustment of writing off bad debts may be ignored and the solution can be given on the basis of figures of debtors and provision for doubtful debts as appearing in the balance sheet on 31.3.2014. 3. Statement showing the calculation of Profits for the pre-incorporation and postincorporation periods For the year ended 31st March, 2014 Total Basis of PrePostAmount Allocation incorporation incorporation Particulars Gross Profit 3,90,800 Sales Less: Directors fee Bad debts The Institute of Chartered Accountants of India 39,080 30,000 Post 7,200 Sales 3,51,720 30,000 720 6,480 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 24,000 Sales 2,400 21,600 1,28,000 Time 32,000 96,000 Advertising Salaries & general expenses Preliminary expenses 10,000 Post Net Profit Pre-incorporation profit transfer to Capital Reserve 10,000 1,91,600 1,87,640 3,960 Working Notes: 1. Sales ratio Particulars ` 2,40,000 Sales for period up to 30.06.2013 (4,80,000 3/6) Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 2,40,000) 21,60,000 Thus, Sales Ratio = 1 : 9 2. Time ratio 1st April, 2013 to 30 June, 2013: 1st July, 2013 to 31st March, 2014 = 3 months: 9 months = 1: 3 Thus, Time Ratio is 1: 3 4. Journal Entries ` Capital Redemption Reserve A/c Dr. 30,000 Securities Premium A/c Dr. 40,000 Capital Reserve (Realized in cash) Dr 40,000 General Reserve A/c Dr. 1,05,000 P & L A/c Dr. ` 10,000 To Bonus to Shareholders 2,25,000 (Being issue of bonus shares by utilization of various Reserves, as per resolution dated .) Bonus to Shareholders A/c To Equity Share Capital (Being capitalization of Profit) The Institute of Chartered Accountants of India Dr. 2,25,000 2,25,000 PAPER 1: ACCOUNTING 5. 19 In the books of M Ltd. Journal Entries Particulars 1. Equity Share Capital (` 100) A/c Dr. Cr. Amount (`) Amount (`) Dr. 35,00,000 To Equity Share Capital (` 25) A/c To Capital Reduction A/c 2. 8,75,000 26,25,000 (Being Equity shares of ` 100 each reduced to ` 25 each and balance transferred to Capital Reduction A/c) Dr. 10% Preference Share Capital (` 100) A/c 15,00,000 To 10% Preference Share Capital (` 75) A/c 11,25,000 To Capital Reduction A/c 3. 3,75,000 (Being Preference shares of ` 100 each reduced to ` 75 each and balance transferred to Capital Reduction A/c. Total Pref Shares = 15,000) Dr. 10% Preference Share Capital (` 75) A/c 11,25,000 To 13% Preference Share Capital (` 50) A/c To Equity Share Capital A/c (` 25) 4. 5. 6. 7. 7,50,000 3,75,000 (Being one new 13% Preference share of ` 50 each and one equity share of ` 25 each issued against 10% Preference Share of ` 75 each. Total Pref Shares = 15,000) Capital Reduction A/c To Preference share dividend payable A/c (Being arrear of Preference share dividend payable for one year) Preference share dividend payable A/c To Equity Share Capital A/c (Being Equity Shares of ` 25 each issued for arrears of Preference Share dividend) 7% Debentures A/c To Debenture holders A/c (Being balance of 7% Debentures transferred to Debenture holders A/c ) Debenture holders A/c The Institute of Chartered Accountants of India Dr. 1,50,000 1,50,000 Dr. 1,50,000 1,50,000 Dr. 5,00,000 5,00,000 Dr. 5,00,000 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 8. 9. To 13% Preference Share Capital A/c To Bank A/c To Capital Reduction A/c (Being 50% of Debenture holders opted to take 13% Preference shares at par and remaining took 90% cash payment for their claims) Loan from Director A/c Dr. To Provision for Contingent Liability A/c (Being provison for contingent liability of ` 1,50,000 as it is payable and the same is adjusted against Loan from director A/c) Bank A/c Dr. To Equity Share Application & Allotment A/c (Being application money received on 40,000 Equity shares @ ` 25 each) 10. Equity Share Application & Allotment A/c Dr. To Equity Share Capital A/c (Being application money transferred to capital A/c, on allotment) 11. Land & Buildings A/c Dr. To Capital Reduction A/c 2,50,000 2,25,000 25,000 1,50,000 1,50,000 10,00,000 10,00,000 10,00,000 10,00,000 3,00,000 3,00,000 (Being value of Land & Buildings appreciated) 12. Expenses on Reconstruction A/c Dr. 15,000 To Bank A/c 15,000 (Being payment of expenses on reconstruction ) 13. Capital Reduction A/c Dr. 31,75,000 To Plant & Machinery A/c 4,00,000 To Inventory A/c 1,00,000 To Trade receivables A/c 1,50,000 To Profit & Loss A/c To Expenses on Reconstruction A/c To Capital Reserve A/c (bal fig) (Being various losses written off and balance of Capital Reduction A/c transferred to Capital Reserve A/c) The Institute of Chartered Accountants of India 23,00,000 15,000 2,10,000 PAPER 1: ACCOUNTING 6. 21 Calculation of Purchase Consideration P Ltd. (`) Q Ltd. (`) Goodwill 50,000 1,50,000 Building 1,00,000 1,90,000 25,000 80,000 - 35,000 1,35,000 50,000 Trade Receivables - 1,42,000 Cash at Bank - 58,000 3,10,000 7,05,000 8% Debentures (1,21,000) - Trade Payables - (1,40,000) Net Assets taken over 1,89,000 5,65,000 18,900 56,500 Assets taken over: Plant & Machinery Furniture & Fixtures Inventories Less :Liabilities taken over To be satisfied by issue of shares of PQ Ltd. of ` 10 each at par PQ Limited Balance Sheet as at 1st April, 2014 Particulars I. Note No. Equity and Liabilities (1) Shareholder s Funds (a) Share Capital (b) Reserve & Surplus (2) Non-current Liabilities (a) Long term borrowings (3) Current Liabilities (a) Trade Payables 1 2 Assets (1) Non-current assets Fixed Assets The Institute of Chartered Accountants of India 7,54,000 11,000 3 1,10,000 1,40,000 Total II. Amount (`) 10,15,000 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Tangible Intangible (2) Current Assets a) Inventories b) Trade Receivables c) Cash at Bank 4 5 4,30,000 2,00,000 1,85,000 1,42,000 58,000 Total 10,15,000 Notes to Accounts: ` 1 2 3 4 5 Share Capital Authorized 1,00,000 shares of ` 10 each Issued, Subscribed and Paid up 75,400 shares of ` 10 each (All the above shares are allotted as fully paid up pursuant to scheme of amalgamation without payments being received in cash) Reserve & Surplus Securities Premium Account Long term borrowings 8 % Debentures Tangible Fixed Assets Building P Ltd. 1,00,000 Q Ltd. 1,90,000 Plant & Machinery P Ltd. 25,000 Q Ltd. 80,000 Furniture & Fixture Q Ltd. Intangible Asset Goodwill P Ltd. Q. Ltd. 50,000 1,50,000 The Institute of Chartered Accountants of India 10,00,000 7,54,000 11,000 1,10,000 2,90,000 1,05,000 35,000 4,30,000 2,00,000 PAPER 1: ACCOUNTING 23 Working Note: Computation of Securities Premium Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 10% premium. Securities Premium = ` 1,10,000 x 10% = ` 11,000. 7. Calculation of number of days from base date Transaction date Due date Amount ` No. of days from Base date (Base date 19.6.2014) Product 8.3.2014 11.7.2014 4,000 22 88,000 16.3.2014 19.6.2014 5,000 0 0 7.4.2014 10.9.2014 6,000 83 4,98,000 17.5.2014 20.8.2014 5,000 62 3,10,000 20,000 Average due date = Base date + 8,96,000 Total of Pr oduct Total of Amount = 19.6.2014 + ` 8,96,000 / ` 20,000 = 19.6.2014 + 45 days approximately = 3.8.2014 8. In the books of Sunil Rohan in Account Current with Sunil as on 30th June, 2014 Date Particulars Days Interest ` 6,480.00 3,560.00 2,280.00 ` 237.90 95.58 5.00 June 30 To Balance of interest June 30 To Balance c/d 134 98 8 107.08 2,497.08 14,817.08 Amount Days Interest 2014 Jan. 1 By Balance b/d Jan. 7 By Purchases Feb 18 By Returns inward Apr. 22 By B/R (maturing on 25 July, 2014) Apr. 29 By Cash ` 3,010.00 4,430.00 560.00 ` 181 149.26 174 211.18 132 20.25 1,500.00 (25) (10.27)* 2,500.00 62 42.47 May 17 By Purchases June 30 By Interest 2014 Feb. 16 To Sales Mar. 24 To Sales June 22 To Sales Amount Date Particulars 2,710.00 107.08 14,817.08 2,497.08 44 32.67 445.56 July 1 By Balance b/d 445.56 * Interest on amount of Bill receivable maturing on 25th July, 2014 is a red ink interest. The Institute of Chartered Accountants of India 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 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. 9. Calculation of total Interest and Interest included in each installment Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000 Total Interest = 1,80,000 1,50,000 = 30,000 Calculation of Ratio of HPP in beginning of each year Outstanding HPP at beginning Installment Paid Outstanding balance at end 1 1,50,000 50,000 1,00,000 2 1,00,000 50,000 50,000 3 50,000 30,000 20,000 4 20,000 20,000 - Year Ratio of outstanding HPP at beginning for each year = 15:10:5: 2 Total Interest is of ` 30,000 I st Year II nd year III rd year IV th year = 30,000 = 30,000 32 10 32 = 30,000 = 30,000 The Institute of Chartered Accountants of India 15 5 32 2 32 = 14,062 = 9,375 = 4,688 = 1,875 (rounded off) 10. The Institute of Chartered Accountants of India 5,000 1,68,400 Bills receivable Bad debts Written off 3,24,160 1,55,280 40,200 Returns 31.3.2014 To Balance c/d (balancing figure) 5,200 Bank Discount 480 1,16,400 1,600 To Balance b/d 1-4-2013 To Debtor s ledger adjustment to account: 31-3-2014 1.4.2013 ` 31.3.2014 By Balance c/d dishonoured Endorsed bills receivable dishonoured Sales Bills receivable 1-4-2013 to By Debtors ledger adjustment 31-3-2014 account: 1.4.2013 By Balance b/d General Ledger Adjustment Account in Debtors Ledger 3,24,160 760 2,000 2,29,000 3,000 2,24,000 94,400 ` PAPER 1: ACCOUNTING 25 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 11. (a) Income and Expenditure Account for the year ended 31st March, 2015 (An Extract) Income ` Subscriptions 7,20,000 (` 3,600 x 200 members) Balance Sheet as on 31st March, 2015 (An Extract) Liabilities Subscription received in advance ` Assets 7,200 Subscription in arrear: For 2013-14 For 2014-15 ` 3,600 21,600 25,200 Working Note: Subscription due for 2014-15 (` 3,600 x 200) ` 7,20,000 Subscription received for 2014-15 ` 6,98,400 Subscription in arrear for 2014-15 21,600 (b) Receipts and Payments Account For the year ended 31-3-2015 To Subscription A/c (W.N.1) 67,050 To Donation A/c 5,000 To Entrance Fees A/c 4,000 To Furniture A/c (Sale of furniture) (7,000 2,500) By Balance b/d (Bank overdraft) 4,500 By Salary Add: Outstanding of last year Less: Outstanding of this year By Rent 15,000 19,500 1,200 (350) 4,500 Add: Outstanding of last year 500 Less: Outstanding of this year (800) By Printing By Insurance Add: Prepaid in this year By Audit Fees 4,200 750 500 150 650 750 Add: Outstanding of last year 500 Less: Outstanding of this year (750) By Games & Sports The Institute of Chartered Accountants of India 20,350 500 3,500 PAPER 1: ACCOUNTING 27 By Miscellaneous Expenses 14,500 By Sports Equipment (Purchased) (W.N. 2) 5,000 By Furniture (Purchased)(W.N.3) 8,000 By Balance c/d Cash 850 Bank (bal. fig.) 7,250 80,550 80,550 Working Notes: 1. Calculation of subscription received during the year 2014-2015 ` Subscription as per Income & Expenditure A/c Less: Arrears of 2014-2015 Advance in 2013-2014 3,700 1,000 Add: Arrears of 2013-2014 Advance for 2015-2016 2,600 1,500 Less: Written off during 2014-2015 2. ` 68,000 (4,700) 63,300 4,100 67,400 (350) 67,050 Calculation of Sports Equipment purchased during 2014-2015 Sports Equipment A/c To Balance b/d To Receipts & Payments A/c (Purchases) (bal. fig.) 3. ` 25,000 By Income & Expenditure A/c 5,000 (Depreciation) By Balance c/d 30,000 ` 6,000 24,000 30,000 Calculation of Furniture purchased during 2014-2015 Furniture A/c ` To Balance b/d To Receipts & Payments A/c (Purchases)(Bal.fig.) The Institute of Chartered Accountants of India 30,000 By Receipts & Payments A/c 8,000 By Income & Expenditure A/c (Loss on sale) By Income & Expenditure A/c ` 4,500 2,500 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (Depreciation) By Balance c/d 3,100 27,900 38,000 38,000 12. Books of A Pvt. Ltd. Investment in 13.5% Convertible Debentures in Pergot Ltd. Account (Interest payable 31st March & 30th September) Date Particulars Nominal Interest ` ` 5,00,000 Amount Date 5,625 Particulars Nominal Interest Amount ` ` ` ` 2014 2014 May 1 To Bank 5,19,375 Sept.30 By Bank 50,625 (6 months Int) Aug.1 To Bank 2,50,000 To P&L A/c 2,45,000 Oct.1 2,00,000 2,06,000 Dec.31 To P&L A/c Dec.31 By Bank By Equity share 1,10,000 1,12,108 Dec.31 Oct.1 11,250 By Bank 2,167 52,313 (See note1) Dec.31 7,50,000 69,188 By Balance c/d 3,713 14,850 4,48,434 7,50,000 7,66,542 4,40,000 69,188 7,66,542 Note 1: ` 3,713 received on 31.12.2014 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 P Ltd. Account Date Particulars Nominal Amount Date ` 2014 Dec 31 To 13.5% Deb. 1,00,000 Particulars Amount ` 2014 1,12,108 Dec.31 By P&L A/c Dec.31 By Bal. c/d 1,00,000 Nominal ` ` 1,12,108 22,108 1,00,000 1,00,000 90,000 1,12,108 Note 1: Cost being higher than Market Value the shares are carried forward at Market Value. Working Notes: 1. Interest paid on ` 5,00,000 purchased on May 1st, 2014 for the month of April 2014, as part of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625 The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 2. 29 Interest received on 30th Sept. 2014 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. as part of purchase price: 1st 2014 for April 2014 to July 2014 2,50,000 x 13.5% x 4/12 = ` 11,250 4. Loss on Sale of Debentures Cost of acquisition (` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = Less: Sale Price (2000 x 103) = 2,06,000 Profit on sale 5. 2,03,833 = ` 2,167 Interest on 1,100 Debentures (being those converted) for 3 months i.e. Oct-Dec. 2014 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. 2014 carried forward (accrued interest) ` 4,40,000 x 13.5% x 3/12 = ` 14,850 13. Trading and Profit and Loss Account of Mr. X for the year ended 31st March, 2015 Particulars To Opening stock To Purchases (W.N.5) 9,12,000 Less: Advertisement (18,000) To Gross profit c/d To To Expenses (W.N.7) Discount allowed (W.N.9) ` 1,60,000 By By Particulars Sales (W.N. 11) Closing stock 8,94,000 4,57,000 15,11,000 3,44,000 By Gross profit b/d 32,500 By Discount received (W.N.10) The Institute of Chartered Accountants of India ` 13,71,000 1,40,000 _______ 15,11,000 4,57,000 16,000 30 To INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Advertisement To Depreciation (W.N.1) To Net profit 18,000 on furniture 13,000 By Interest on Govt. Securities (W.N.8) By Miscellaneous income 79,500 4,87,000 4,000 10,000 ______ 4,87,000 Balance Sheet of Mr. X as on 31st March, 2015 Liabilities Capital (W.N.6) Add: Additional capital (W.N.2) Add: Profit during the year Less: Drawings Creditors Outstanding expenses ` Assets 3,76,000 1,72,000 79,500 6,27,500 (1,40,000) ` Furniture 4% Government Securities Accrued interest on Govt. securities (W.N.8) Debtors (W.N.3) 4,87,500 Bills Receivable (W.N.4) 3,00,000 Stock 36,000 Prepaid expenses Cash on hand Bank balance 8,23,500 1,27,000 1,92,000 4,000 2,99,000 35,000 1,40,000 14,000 3,000 9,500 8,23,500 Working Notes: 1. Furniture account ` To Balance b/d To Bank ` 1,20,000 By 20,000 By Depreciation (bal.fig.) Balance c/d 1,40,000 2. 13,000 1,27,000 1,40,000 Cash and Bank account ` To Balance b/d ` By Creditors 7,84,000 Cash 4,000 By Drawings 1,40,000 Bank 20,000 By Furniture 20,000 11,70,000 By 4% Govt. securities 1,92,000 1,22,500 By Expenses 3,50,000 10,000 By Balance c/d To Debtors To Bill Receivable To Miscellaneous income The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING To 31 Additional Capital (bal.fig.) 1,72,000 Cash 3,000 _______ Bank 9,500 14,98,500 3. 14,98,500 Debtors account ` To Balance b/d To Creditors (Bills receivable dishonoured) To Sales (W.N.11) ` 3,20,000 By Cash and Bank 8,000 By Discount 13,71,000 By Bills Receivable 2,00,000 By Balance c/d (bal.fig.) 2,99,000 30,000 16,99,000 4. 11,70,000 16,99,000 Bills Receivable account ` To Debtors ` 2,00,000 By Bank 1,22,500 By Discount 2,500 By Creditors 40,000 By Balance c/d (bal. fig.) 35,000 2,00,000 5. 2,00,000 Creditors account ` To Bank ` 7,84,000 By Balance b/d 2,20,000 To Discount 16,000 By Debtors (Bills dishonoured) To Bills receivable 40,000 By Purchases (bal.fig.) To Balance c/d 8,000 9,12,000 3,00,000 11,40,000 6. receivable 11,40,000 Balance Sheet as on 1st April, 2014 Liabilities Creditors Outstanding expenses Capital (balancing figure) The Institute of Chartered Accountants of India ` Assets 2,20,000 Furniture 40,000 Debtors 3,76,000 Stock ` 1,20,000 3,20,000 1,60,000 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Prepaid expenses Cash _______ Bank balance 6,36,000 7. 12,000 4,000 20,000 6,36,000 Expenses incurred during the year ` Expenses paid during the year 3,50,000 Add: Outstanding expenses as on 31.3.2015 36,000 Prepaid expenses as on 31.3.2014 12,000 48,000 3,98,000 Less: Outstanding expenses as on 31.3.2014 40,000 Prepaid expenses as on 31.3.2015 14,000 Expenses incurred during the year 8. (54,000) 3,44,000 Interest on Government securities 6 1,92,000 96% 4% 12 = ` 4,000 Interest on Government securities receivables for 6 months = ` 4,000. 9. Discount allowed ` Discount to Debtors 11,70,000 97.5% 2.5% Discount on Bills Receivable 1,22,500 98% 2% 30,000 2,500 32,500 10. Discount received ` Discount to Creditors 7,84,000 98% 2% 16,000 11. Credit sales Cost of Goods sold = Opening stock + Net purchases Closing stock = ` 1,60,000 + ` (9,12,000 18,000) ` 1,40,000 = ` 9,14,000 The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING Sales price = ` 9,14,000 x 33 3 = ` 13,71,000 2 14. (a) Memorandum Trading Account from 1st April, 2014 to 22nd January, 2015 ` To Opening Stock ` 13,27,200 By Sales To Purchases 34,82,700 Less : Cost of goods used for advertising 49,17,000 By Stock on 22nd January, (1,00,000) 33,82,700 2015- Balancing figure 7,76,300 To Gross Profit 20% of sales (Working Note) 9,83,400 56,93,300 56,93,300 Stock in hand on date of fire = ` 7,76,300. Computation of claim for loss of stock ` 22nd Stock on the date of fire i.e. on January, 2015 As the value of goods salvaged was negligible, therefore Loss of stock 7,76,300 7,76,300 Since policy amount is less than claim amount, claim will be restricted to policy amount only. Therefore, claim of ` 5,50,000 should be lodged by X Ltd. to the insurance company Working Note: Trading Account for the year ended on 31st March, 2014 ` ` To Opening Stock 9,62, 200 By Sales 52,00,000 To Purchases 45,25,000 By Closing Stock 13,27,200 To Gross Profit 10,40,000 65,27,200 65,27,200 Rate of gross profit to sales = 10,40,000 /52,00,000 x 100 == 20%. (b) Calculation of Gross Profit Gross Profit = Net Profit + Standing Charges The Institute of Chartered Accountants of India Turnover 100 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 45,000 + 90,000 = 4,50,000 100 = 30% Calculation of policy amount to cover loss of profit ` Turnover in the last financial year 4,50,000 Add: 25% increase in turnover 1,12,500 5,62,500 Gross profit on increased turnover (5,62,500 x 30%) 1,68,750 Add: Additional standing charges 30,000 Policy Amount 1,98,750 Therefore, the trader should go in for a loss of profit policy of ` 1,98,750. Profit and Loss Adjustment Account 15. (i) ` To Expenses not provided for (years 2012-2015) ` By 1,10,000 By Income not considered (for years 2012-2015) Partners capital accounts (loss) Laurel Hardy 1,10,000 (ii) 66,000 22,000 22,000 1,10,000 Partners Capital Accounts Laurel Hardy Chaplin ` ` To P & L Adjustment A/c 22,000 22,000 To Hardy 60,000 To Balance c/d Laurel Hardy Chaplin ` ` ` - By Balance 2,11,500 1,51,500 b/d - ` By Laurel By Cash 1,29,500 1,89,500 63,800 60,000 - - - 63,800 63,800 2,11,500 2,11,500 - 2,11,500 2,11,500 63,800 By Balance 1,29,500 1,89,500 63,800 b/d It is assumed that expenses and incomes not taken into account in earlier years were fully ignored. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING (iii) 35 Balance Sheet of LH & Co. as on 1.4.2015 (After admission of Chaplin) Liabilities ` Assets Capital accounts: Plant and machinery Laurel 1,29,500 Trade receivables Hardy 1,89,500 Stock in trade Chaplin 63,800 Accrued income Trade payables 2,27,000 Cash on hand (10,000 + 63,800) Outstanding expenses 1,10,000 Cash at bank 7,19,800 ` 60,000 2,05,000 3,10,000 66,000 73,800 5,000 7,19,800 Working Notes: 1. Computation of Profit and Loss distributed among partners ` Profit for the year ended 31.3.2012 31.3.2013 31.3.2014 31.3.2015 Total Profit Laurel ` 1,40,000 2,60,000 3,20,000 3,60,000 10,80,000 Hardy Total ` ` Profit shared in old ratio i.e 5:4 6,00,000 4,80,000 10,80,000 Profit to be shared as per new ratio i.e. 1:1 5,40,000 5,40,000 10,80,000 Excess share Deficit share 60,000 (60,000) Laurel to be debited by ` 60,000 and Hardy to be credited by ` 60,000. 2. Capital brought in by Chaplin ` Capital to be brought in by Chaplin must be equal to 20% of the combined capital of Laurel and Hardy Capital of Laurel (2,11,500 22,000 60,000) Capital of Hardy (1,51,500 22,000 + 60,000) Combined Capital 20% of the combined capital brought in by Chaplin (20% of ` 3,19,000) The Institute of Chartered Accountants of India 1,29,500 1,89,500 3,19,000 63,800 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 16. The proposals will be evaluated and vendor will be selected considering the following criteria: 1. Quantum of services provided and whether the same matches with the requirements of the hospital. 2. Reputation and background of the vendor. 3. Comparative costs of the various propositions. 4. Organizational set up of the vendor particularly technical staffing to obtain services without inordinate delay. 5. Assurance of quality, confidentiality and secrecy. 6. Data storage and processing facilities. 17. (a) As per Rule 5 of the Companies (Accounting Standards) Rules, 2006, an existing company, which was previously not an SMC and subsequently becomes an SMC, shall not be qualified for exemption or relaxation in respect of accounting standards available to an SMC until the company remains an SMC for two consecutive accounting periods. Therefore, the management of the company cannot avail the exemptions available with the SMCs for the year ended 31st March, 2015. (b) Working Notes: Raw Material X ` Cost Price 200 Less: Cenvat Credit (10) 190 Add: Freight Inward Unloading charges Cost 20 10 220 Finished goods Y Materials consumed ` 220 Direct Labour 60 Direct overhead 40 Fixed overheads (` 2,00,000/20,000 units) 10 Cost 330 If Net Realisable Value of the Finished Goods Y is ` 400 NRV is greater than the cost of Finished Goods Y i.e. ` 330 Hence, Raw Material and Finished Goods are to be valued at cost The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 37 Value of Closing Stock: Qty Rate Amount (`) 500 220 1,10,000 1,200 330 3,96,000 Raw Material X Finished Goods Y Total Cost of Closing Stock 5,06,000 18. (a) Depreciation of Original Machine ` Original cost of Machine as on 01.04.2010 4,00,000 Less: Residual Value 10% (40,000) Depreciable Value 3,60,000 Useful life 10 Years Depreciation per year 36,000 Depreciation for 3 Years 1,08,000 Written down value at the beginning of 4th year (as on 01.04.2013) (4,00,000 1,08,000) 2,92,000 Add: Revaluation 90,000 Total Book Value after revaluation Reassessed remaining useful life 3,82,000 9 Years Depreciation per year from 2013-14 42,444 Depreciation of Attachment ` Original cost of Attachment as on 01.04.2013 Useful life 1,80,000 10 Years Depreciation per year from 2013-14 18,000 Depreciation for the year 2013-14 (i) If Attachment retains its separate identity: Depreciation of Original Machine Depreciation of Attachment ` 18,000 Total Depreciation for 2013-14 (ii) ` 42,444 ` 60,444 If Attachment becomes integral part of the Machine: Total value of Machine as on 01.04.2013 The Institute of Chartered Accountants of India 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Original Machine at revalued cost (W.N.1) ` 3,82,000 Cost of attachment ` 1,80,000 ` 5,62,000 Useful life 9 Years Depreciation for 2013-14 ` 62,444 Note: Since, upward revaluation of the machine and reassessment of remaining useful life had been made at the beginning of the 4th year, it is implied that depreciation for the 3rd year has been charged on the basis of old calculation & remaining useful life of 9 years is to be calculated from the beginning of the 4th year onwards. (b) Machine Account Date 01.04.2009 Particulars To Bank 01.04.2010 01.07.2010 To Balance b/d To Bank 01.04.2011 01.10.2011 To Balance b/d To Bank 01.04.2012 31.12.2012 To Balance b/d To Profit on Sale ` Date 1,00,000 31.03.2010 1,00,000 90,000 1,50,000 2,40,000 2,18,750 2,00,000 4,18,750 383,750 12,500 Particulars By Depreciation By Balance c/d 31.03.2011 By Depreciation By Balance c/d 31.03.2012 By Depreciation By Balance c/d 31.12.2012 31.03.2013 By Bank By Depreciation By Balance c/d 3,96,250 01.04.2013 01.04.2014 To Balance b/d To Balance b/d 2,30,000 31.03.2014 2,30,000 1,67,195 The Institute of Chartered Accountants of India By Profit & Loss A/c. By Depreciation (1,96,700 x 15%) By Balance c/d ` 10,000 90,000 1,00,000 21,250 2,18,750 2,40,000 35,000 3,83,750 4,18,750 125,000 41,250 2,30,000 3,96,250 33,300 29,505 1,67,195 2,30,000 PAPER 1: ACCOUNTING 39 Working Note 1: Depreciation charged under old method: Particulars Purchase of first machine Depreciation for 4 years (1,00,000 x 10% x 4) Purchase of third machine Depreciation for 1.5 years (2,00,000 x 10% x 1.5) Total Depreciation charged ` ` 1,00,000 40,000 2,00,000 30,000 70,000 Working Note 2: Depreciation to be charged under new method: Year Opening WDV Purchases ` 2009-10 2010-11 2011-12 2012-13 19. (a) --85,000 72,250 2,31,412 Balance ` Depreciation Closing WDV ` ` ` 1,00,000 1,00,000 --85,000 2,00,000 2,72,250 --2,31,412 Total Depreciation 15,000 12,750 40,838 34,712 1,03,300 85,000 72,250 2,31,412 1,96,700 Calculation of foreseeable loss for the year ended 31st March, 2015 (as per AS 7 Construction Contracts ) (` in lakhs) Cost incurred till 31st March, 2015 Prudent estimate of additional cost for completion Total cost of construction Less: Contract price Foreseeable loss 83.99 36.01 120.00 (108.00) 12.00 According to para 35 of AS 7 (Revised 2002) Construction Contracts , when it is probable that total contract costs will exceed total contract revenue; the expected loss should be recognized as an expense immediately. Therefore, amount of `12 lakhs is required to be provided for in the books of Sampath Construction Company for the year ended 31st March, 2015. (b) Price revision was effected during the current accounting period 2013-2014. As a result, the company stands to receive ` 15 lakhs from its customers in respect of sales made from 1st January, 2014 to 31st March, 2014. If the company is able to assess the ultimate collection with reasonable certainty, then additional revenue arising out of the said price revision may be recognised in 2013-2014 vide para 10 of AS 9. The Institute of Chartered Accountants of India 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 20. (a) Calculation of the cost for Purchase of Land (` in lakhs) Cost of Land Legal Fees Title Insurance Cost of Demolition Less: Salvage value of Material Cost of the Asset 5,00,000 25,000 10,000 50,000 (10,000) 40,000 5,75,000 (b) X limited invested ` 600 lakhs in the equity shares of Y Ltd. Out of the same, the company intends to hold 50% shares for long term period i.e. ` 300 lakhs and remaining as temporary (current) investment i.e. ` 300 lakhs. Irrespective of the fact that investment has been held by X Limited only for 3 months (from 1.1.2015 to 31.3.2015), AS 13 lays emphasis on intention of the investor to classify the investment as current or long term even though the long term investment may be readily marketable. In the given situation, the realizable value of all such investments on 31.3.2015 became ` 200 lakhs i.e. ` 100 lakhs in respect of current investment and ` 100 lakhs in respect of long term investment. As per AS 13, Accounting for Investment , the carrying amount for current investments is the lower of cost and fair value. In respect of current investments for which an active market exists, market value generally provides the best evidence of fair value. Accordingly, the carrying value of investment held as temporary investment should be shown at realizable value i.e. at ` 100 lakhs. The reduction of ` 200 lakhs in the carrying value of current investment will be included in the profit and loss account. Standard further states that long-term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of long term investment, the carrying amount is reduced to recognise the decline. Here, Y Limited lost a case of copyright which drastically reduced the realisable value of its shares to one third which is quiet a substantial figure. Losing the case of copyright may affect the business and the performance of the company in long run. Accordingly, it will be appropriate to reduce the carrying amount of long term investment by ` 200 lakhs and shown the investments at ` 100 lakhs, considering the downfall in the value of shares as decline other than temporary. The reduction of ` 200 lakhs in the carrying value of long term investment will be included in the profit and loss account. If one assumes that the decline in the value of long term investment is temporary and Y Limited will overcome this downfall in short period by filing a case against this decision of government, with strong arguments. In such a case, long term investment will be shown at cost. The Institute of Chartered Accountants of India

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