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

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PAPER 1: ACCOUNTING PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR NOVEMBER, 2014 EXAMINATION A. Applicable for November, 2014 examination Revision in the Criteria for classifying Level II Non-Corporate Entities Due to recent changes in the enhancement of tax audit limit, the Council of the ICAI has recently decided to change the 1st criteria of Level II Non-Corporate Entities i.e. determination of SME on turnover basis from ` 40 lakhs to ` 1 Crore vide announcement Revision in the Criteria for classifying Level II Non-Corporate Entities issued by ICAI on 7th March, 2013. This revision is applicable with effect from the accounting year commencing on or after April 1, 2012. B. Not applicable for November, 2014 examination Ind ASs issued by the Ministry of Corporate Affairs The MCA has hosted on its website 35 converged Indian Accounting Standards (Ind AS) without announcing the applicability date. These are the standards which are being converged by eliminating the differences of the Indian Accounting Standards vis- -vis IFRS. These Ind ASs are not applicable for the students appearing in November, 2014 Examination. PART II : QUESTIONS AND ANSWERS QUESTIONS Financial Statements of Companies 1. Kapil Ltd. has authorized capital of `50 lakhs divided into 5,00,000 equity shares of `10 each. Their books show the following balances as on 31st March, 2014: ` Inventory 1.4.2013 6,65,000 ` Bank Current Account Discounts & Rebates 30,000 Cash in hand Carriage Inwards 57,500 Debenture interest (for the period of 6 Patterns Rate, Taxes Insurance Furniture & Fixtures Purchases 3,75,000 and 55,000 20,000 8,000 10,000 months ended 30.9.2013) Interest (bank loan) 91,000 1,50,000 Calls in Arrear @ `2 per share 10,000 12,32,500 Equity share capital (2,00,000 shares of ` 10 each) 20,00,000 The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Wages 13,68,000 4% Debentures after 10 years) (repayable Freehold Land 16,25,000 Bank Overdraft 7,57,000 2,40,500 Plant & Machinery 7,50,000 Trade Payables (for goods) Engineering Tools 1,50,000 Sales Trade Receivables 4,00,500 Rent (Cr.) 5,00,000 36,17,000 30,000 Advertisement 15,000 Transfer fees received 6,500 Commission & Brokerage 67,500 Profit & Loss A/c (Cr.) 67,000 Business Expenses 56,000 Repairs to Building 56,500 Bad debts 25,500 The inventory (valued at cost or market value, which is lower) as on 31st March, 2014 was ` 7,08,000. 4% Debentures amounting ` 5,00,000 were issued on 1.04.2013. Outstanding liabilities for wages ` 25,000 and business expenses ` 36,000. Dividend declared @ 12% on paid-up capital and it was decided to transfer to reserve @ 2.5% of profits. Charge depreciation on closing written down amount of Plant & Machinery @ 5%, Engineering Tools @ 20%; Patterns @ 10%; and Furniture & Fixtures @10%. Provide 25,000 as doubtful debts after writing off `16,000 as bad debts. Create debenture redemption reserve @ 10% of Debentures. Provide for income tax @ 30%. Corporate Divided Tax Rate @ 16.995%. You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2014 and Balance Sheet as on that date. Cash Flow Statement 2. The summarized Balance Sheets of Z Ltd. as on 31st March, 2013 and 31st March, 2014 are as under: Liabilities Equity share capital 12% Redeemable pref. share capital General Reserve 2012-13 ` 2013-14 ` 15,00,000 20,00,000 7,50,000 5,00,000 2,00,000 Profit & Loss A/c 1,50,000 Trade Payables Outstanding 2,75,000 1,00,000 Assets Goodwill Land & Building 3,50,000 Plant & Machinery 2,40,000 Trade receivables 4,15,000 Inventory 80,000 Cash and The Institute of Chartered Accountants of India 2012-13 ` 2013-14 ` 5,75,000 4,50,000 10,00,000 8,50,000 4,00,000 10,00,000 8,00,000 12,60,000 4,85,000 1,25,000 4,35,000 90,000 PAPER 1: ACCOUNTING Expenses Provision for Tax Proposed Dividend 3 Bank 2,00,000 2,50,000 2,10,000 33,85,000 2,50,000 40,85,000 33,85,000 40,85,000 Additional Information: (i) Depreciation charged on Plant & Machinery and Land & Building during the year was ` 50,000 and ` 1,00,000 respectively. (ii) Income-tax ` 1,75,000 was paid during the year 2013-14. Prepare Cash Flow Statement as per AS 3 (Revised), using indirect method. Profit or Loss for Pre and Post Incorporation Period 3. The Business carried on by Kamal under the name "K" was taken over as a running business with effect from 1st April, 2013 by Sanjana Ltd., which was incorporated on 1st July, 2013. The same set of books was continued since there was no change in the type of business and the following particulars of profits for the year ended 31st March, 2014 were available. Sales: Company period Prior period Selling Expenses Preliminary Expenses written off Salaries Directors' Fees Interest on Capital (Upto 30.6.2013) Depreciation Rent Purchases Carriage Inwards Net Profit ` 40,000 10,000 3,500 1,200 3,600 1,200 700 2,800 4,800 25,000 1,019 ` 50,000 43,819 6,181 The purchase price (including carriage inwards) for the post-incorporation period had increased by 10 percent as compared to pre-incorporation period. No stocks were carried either at the beginning or at the end. You are required to draw up a statement showing the amount of pre and post in corporation period profits stating the basis of allocation of expenses. The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Accounting for Bonus Issue 4. Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 2014 Authorised capital: ` 3,00,000 30,000 12% Preference shares of ` 10 each 30,00,000 3,00,000 Equity shares of ` 10 each 33,00,000 Issued and Subscribed capital: 24,000 12% Preference shares of ` 10 each fully paid 2,40,000 21,60,000 2,70,000 Equity shares of ` 10 each, ` 8 paid up Reserves and surplus: General Reserve 3,60,000 Capital Reserve (profit realized on sale of plant) 1,20,000 Securities premium 75,000 Profit and Loss Account 6,00,000 On 1st April, 2014, the Company has made final call @ ` 2 each on 2,70,000 equity shares. The call money was received by 20th April, 2014. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate of one share for every four shares held. Company decides to use Capital Reserve for bonus issue as it has been realized in cash. Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30th April, 2014 after bonus issue. Internal Reconstruction of a Company 5. Vinod Limited decided to reconstruct its business as it has accumulated huge losses. The following is the summarized Balance Sheet of the company as on 31.03.2014 before reconstruction: Summarized Balance Sheet as on 31.03.2014 Particulars 6,00,000 Equity shares of ` 10 each fully paid up 3,20,000, 6% Preference shares of ` 10 each fully paid up 6% Debentures (secured against land & building) The Institute of Chartered Accountants of India ` Particulars Goodwill 60,00,000 Patents Land & building 32,00,000 Plant & machinery Investments (at cost) 30,00,000 Trade receivables ` 10,40,000 3,00,000 34,00,000 4,00,000 4,40,000 34,80,000 PAPER 1: ACCOUNTING 5 Bank overdraft 11,60,000 Inventory 34,00,000 Trade payables 24,00,000 Profit & loss A/c 37,00,000 Provision for income tax 4,00,000 1,61,60,000 1,61,60,000 Following scheme of reconstruction is approved by all interested parties and the Court: (1) All equity shares are reduced to ` 3 each and preference shares to ` 7 each. (2) Debentureholders agreed to take over a part of land and building, book value of which is ` 14,00,000, towards their 50% claim. Rate of interest of balance 50% debentures will be increased to 9%. (3) Goodwill and Patent will be written off. (4) 10% of Trade receivables to be provided for bad debts. (5) Inventory to be written off by ` 5,20,000. (6) 50% of balance of Land & Building sold for ` 12,00,000 and remaining Land & Building valued at ` 12,00,000. (7) Investments to be sold for ` 4,00,000. (8) There are pending contracts amounting to ` 20,00,000. These contracts are to be cancelled on payment of penalty @ 5% of pending contract amount. (9) The income tax liability of the company is settled at ` 6,12,000. Provision for income tax will be raised accordingly. (10) 1/3 of trade payables decided to forgo their claim. (11) After making all the above adjustments, balance amount available through scheme, will be utilized to write off the value of plant & machinery to that extent. You are required to pass the necessary Journal Entries. Amalgamation of Companies 6. The following are the summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st December, 2013: Liabilities P Ltd. Q Ltd. Assets ` of 10% Pref. Shares of ` 100 each 6,00,000 2,00,000 80,000 2,40,000 3,20,000 3,00,000 Current 1,00,000 Inventory 2,50,000 80,000 Investment ` 7,00,000 Fixed Assets Q Ltd. ` ` Share Capital Equity Shares ` 10 each P Ltd. The Institute of Chartered Accountants of India Assets: 6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Reserves Surplus and 3,00,000 2,00,000 Secured Loans: 12% Debentures Trade receivables 4,20,000 2,10,000 1,10,000 40,000 2,00,000 1,50,000 Cash at Bank 2,50,000 1,50,000 9,00,000 15,50,000 Current Liabilities: Trade payables 15,50,000 9,00,000 Details of Trade receivables and trade payables are as under: P Ltd. (`) Q Ltd. (`) 3,60,000 1,90,000 60,000 20,000 4,20,000 2,10,000 2,20,000 1,25,000 30,000 25,000 2,50,000 1,50,000 Trade receivables Debtors Bills Receivable Trade payables Sundry Creditors Bills Payable Fixed Assets of both the companies are to be revalued at 15% above book value. Inventory in Trade and Debtors are taken over at 5% lesser than their book value. Both the companies are to pay 10% Equity dividend, Preference dividend having been already paid. After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms: (i) 8 Equity Shares of ` 10 each will be issued by P Ltd. at par against 6 shares of Q Ltd. (ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of 10% Preference Shares of ` 100 each at par in P Ltd. (iii) 12% Debentureholders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued at a discount of 10%. (iv) ` 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry Creditors of Q Ltd. include ` 10,000 due to P Ltd. Prepare: (a) Journal entries in the books of P Ltd. (b) Statement of consideration payable by P Ltd. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 7 Average Due Date 7. A had the following bills receivable and bills payable against B. Calculate average due date when the payment can be made or received without any loss or gain of interest to either party. Bills Receivable Bills Payable Date of the Bill Amount Tenure in months (`) Date of bill Amount (`) Tenure in months 1.6.13 18,000 3 29.5.13 12,000 2 5.6.13 15,000 3 3.6.13 18,000 3 9.6.13 20,000 1 10.6.13 20,000 2 12.6.13 16,000 2 13.6.13 14,000 2 20.6.13 24,000 3 27.6.13 22,000 1 Gazetted holiday intervening in the period are 15th August, 2013, 16th August, 2013, and 6th September, 2013. Account Current 8. The following are the transactions that took place between Geet and Hari during the period from 1st October, 2013 to 31st March, 2014: ` Oct.1, 2013 Balance due to Geet by Hari 6,000 Oct. 18, 2013 Goods sold by Geet to Hari 5,000 Nov. 16, 2013 Goods sold by Hari to Geet (due date November, 26) 8,000 Dec.7, 2013 Goods sold by Hari to Geet (due date December, 17) 7,000 Jan. 3, 2014 Promissory note given by Geet to Hari, at three months Feb. 4, 2014 Cash paid by Geet to Hari 2,000 March 21, 2014 Goods sold by Geet to Hari 8,600 March 28, 2014 Goods sold by Hari to Geet (due date April, 8) 5,400 10,000 Draw up an Account Current upto March 31st, 2014 to be rendered by Geet to Hari, charging interest @10% per annum. Interest is to be calculated to the nearest rupee. Self Balancing Ledgers 9. How will you show the following items in General Ledger Adjustment Account in Debtors Ledger and General Ledger Adjustment Account in Creditors Ledger: Opening Balance of debtors ledger The Institute of Chartered Accountants of India ` 40,000 8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Opening Balance of creditors ledger Credit sales Credit purchases Transfer from Debtors' Ledger to Creditors' Ledger Transfer from Creditors' Ledger to Debtors' Ledger Bill receivable endorsed to Creditors Endorsed Bills dishonoured Bad Debts written off (after deducting bad debts recovered ` 600) Provision for Doubtful Debts Provision for Discount on Debtors Reserve for Discount on Creditors Cash Sales Cash Purchases Bill Receivable Collected on maturity Bills Receivable discounted Bills Payable matured Discount allowed Discount received Allowances from Creditors Discount allowed to debtors ` 1,000 was recorded as discount received from creditors Closing Debtors Balance (As per General Ledger Adjustment Account) Closing Creditors Balance (As per General Ledger Adjustment Account) 20,000 92,000 59,600 2,200 3,800 8,000 2,000 4,400 1,100 2,000 4,000 6,000 8,000 10,000 12,000 14,000 3,000 1,200 6,400 1,20,000(Cr.) 60,000 (Dr) Financial Statements of Not-For-Profit Organizations 10. From the following information, prepare Opening and Closing Balance Sheet of a Club: 31st Dec. 2012 31st Dec. 2013 Building (subject to 10% depreciation for the current year) 60,000 ? Furniture (subject to 10% depreciation for the current year) - 20,000 Stock of Sports Materials 5,000 2,000 Prepaid Insurance 3,000 6,000 12,000 8,000 6,000 4,000 Outstanding Subscription Advance Subscription The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 9 Outstanding Locker Rent Advance Locker Rent received 6,000 - 2,000 6,000 3,000 2,00,000 2,00,000 - 4,000 Cash Balance 1,000 64,000 Bank Balance 2,000 - Outstanding Rent for Godown 12% General Fund Investments Accrued Interest on above Bank Overdraft 2,000 Entrance Fees received ` 20,000, Life Membership Fees received ` 20,000, surplus from income & expenditure Account ` 60,000. It is the policy of the club to treat 60% of entrance fees and 40% of Life Membership Fees as of revenue nature. The furniture was purchased on 01.01.2013 Accounts from Incomplete Records 11. Mr. H had ` 1,65,000 in the bank account on 1.1.2013 when he started his business. He closed his accounts on 31st March, 2014. His single entry books (in which he did not maintain any account for the bank) showed his position as follows: 31.3.2013 31.3.2014 ` ` Cash in hand 1,100 1,650 Stock in trade 10,450 15,950 550 1,100 2,750 1,650 Debtors Creditors On and from 1.2.2013, he began drawings ` 385 per month for his personal expenses from the cash box of the business. His account with the bank had the following entries: Deposits ` 1.1.2013 Withdrawals ` 1,65,000 - 1.1.2013 to 31.3.2013 1.4.2013 to 31.3.2014 1,22,650 1,26,500 1,48,500 The above withdrawals included payment by cheque of ` 1,10,000 and ` 33,000 respectively during the period from 1.1.2013 to 31.3.2013 and from 1.4.2013 to 31.3.2014 respectively for the purchase of machineries for the business. The deposits after 1.1.2013 consisted wholly of sale price received from the customers by cheques. The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Draw up Mr. H s Statement of Affairs as at 31.3.2013 and 31.3.2014 respectively and work out his profit or loss for the year ended 31.3.2014. Accounting for Hire -Purchase Transactions 12. (a) On 1.1.2011 Shaan Ltd. purchased a machine on hire purchase basis. The terms of agreement provided for 40% as cash down payment and the balance in three instalments of ` 1,63,000 on 31.12.2012, ` 1,20,000 on 31.12.2013 and ` 1,10,000 on 31.12.2014. The rate of interest charged by the vendor is 10% p.a. compound annually. You are required to calculate the cash Price and periodic interest charged by higher vendor. (b) On 1.1.2011 Beeta Ltd. purchased a machine from Yama Ltd. on hire purchase basis. The terms of agreement provided for 40% as cash down payment and the balance in three instalment of ` 1,30,000 on 31.12.2011, ` 1,42,000 on 31.12.2013 and `1,10,000 on 31.12.2014. The rate of interest charged by the vendor is 10% p.a. compounded annually. You are required to calculate the cash price when 2nd instalment is payable after two years. Investment Accounts 13. Meera carried out the following transactions in the shares of Kumar Ltd.: (a) On 1st April, 2013 she purchased 40,000 equity shares of ` 1 each fully paid up for ` 60,000. (b) On 15th May 2013, Meera sold 8,000 shares for ` 15,200. (c) At a meeting on 15th June 2013, the company decided: (i) To make a bonus issue of one fully paid up share for every four shares held on 1st June 2013, and (ii) To give its members the right to apply for one share for every five shares held on 1st June 2013 at a price of ` 1.50 per share of which 75 paise is payable on or before 15th July 2013 and the balance, 75 paise per share, on or before 15th September, 2013. The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st December 2013. (a) Meera received his bonus shares and took up 4000 shares under the right issue, paying the sum thereon when due and selling the rights of the remaining shares at 40 paise per share; the proceeds were received on 30th September 2013. (b) On 15th March 2014, he received a dividend from Kumar Ltd. of 15 per cent in respect of the year ended 31st Dec 2013. (c) On 30th March he received ` 28,000 from the sale of 20,000 shares. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 11 You are required to record these transactions in the Investment Account in Meera s books for the year ended 31st March 2014 transferring any profits or losses on these transactions to Profit and Loss account. Apply average cost basis. Expenses and tax to be ignored. Insurance Claim 14. The premises of Anmol Ltd. caught fire on 22nd January 2014, and the stock was damaged. The firm makes account up to 31st March each year. On 31st March, 2013 the stock at cost was ` 6,63,600 as against ` 4,81,100 on 31st March, 2012. Purchases from 1st April, 2013 to the date of fire were ` 17,41,350 as against ` 22,62,500 for the full year 2012 -13 and the corresponding sales figures were ` 24,58,500 and ` 26,00,000 respectively. You are given the following further information: (i) In July, 2013, goods costing ` 50,000 were given away for advertising purposes, no entries being made in the books. (ii) During 2013-14, a clerk had misappropriated unrecorded cash sales. It is estimated that the defalcation averaged ` 1,000 per week from 1st April, 2013 until the clerk was dismissed on 18th August, 2013. (iii) The rate of gross profit is constant. From the above information calculate the stock in hand on the date of fire. Partnership Accounts 15. (a) R and G are partners sharing profits and losses in the ratio of 3:2 after allowing ` 1,000 p.m. salary for each partner. However, the accounts have not been prepared for the last three years. From the following details, you are required to calculate the distribution of profits between the partners in total for the three years. ` Assets as at the end of 3rd year 1,60,000 Liabilities as at the end of 3rd year 40,000 Drawings for three years in addition to Salaries: R G 30,000 22,000 Capital on commencement: R 50,000 G 40,000 Introduction of fresh capital during three years R The Institute of Chartered Accountants of India 10,000 12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 (b) T and W are equal partners in Timber Business. The Balance Sheet of their firm as on 31st March, 2014 was as under: Liabilities Amount Capital Accounts Assets Fixed Assets Amount 2,50,000 T 1,60,000 Stocks 65,200 W 1,60,000 Cash & Bank 54,800 Creditors & Other payables 50,000 3,70,000 3,70,000 On 1st April, 2014, P is admitted as an equal partner. Prior to his admission, the partners agreed to bring into the books of the firm, stocks worth ` 80,000 that was received free of cost from a Business Associate. Consequent to P s entry into the firm the capital base of the firm was expanded to ` 6 lakhs with all the partners agreeing to adopt the proportionate capital principle. P brought in the agreed sum of ` 2,80,000 (` 2,00,000 towards capital and ` 80,000 towards his share of goodwill). The partners decided not to raise goodwill in the books of accounts. You are requested to show Capital Accounts of the three partners and the Balance Sheet of the Firm as on 1st April, 2014. Accounting in Computerized Environment 16. (a) A large business entity wants to go in for an ERP (Enterprise Resource Planning) package. Which factors should it consider for the choice of an ERP package? (b) Briefly describe the advantages and disadvantages of using an Enterprise Resource Planning (ERP) software in computerized accounting system. AS 1 Disclosure of Accounting Policies 17. A limited has sold its building for ` 50 lakhs and the purchaser has paid the full price. The Company has given possession to the purchaser. The book value of the building is ` 35 lakhs. As at 31st March 2013, documentation and legal formalities are pending. The company has not recorded the sale. It has shown the amount received as advance. Do you agree with this treatment? What accounting treatment should the buyer give in its financial statements? AS 2 Valuation of Inventories 18. (a) A company had 5,000 units of stock A , costing @ ` 50 each on 31.3.2014. Out of this stock, 3,000 units are to be supplied under a firm contract at ` 45 each. Show how the valuation will be done of such stock when (i) the general selling price is ` 49 each. (ii) the general selling price is ` 52 each. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 13 AS 6 Depreciation Accounting (b) An item of machinery was purchased on 1-4-2012 for ` 2,00,000. The WDV depreciation rate applicable to the machinery was 15%. The written down value of the machinery as on 31-3-2014 was ` 1,44,500. On 1-4-2014, the enterprise decided to change the method from written down value (WDV) to straight line method (SLM). The enterprise decided to write off the book value of ` 1,44,500, over the remaining useful life of machinery i.e. 5 years. Out of the total useful life 7 years, 2 years have already elapsed. Comment whether the accounting treatment is correct. If not, give the correct accounting treatment with reasons. AS 7 Construction Contracts 19. (a) PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the records of the company, the following data is available pertaining to year ended on 31st March, 2014. Using this data and applying the relevant Accounting Standard you are required to: (i) Compute the amount of profit/loss for the year ended 31st March, 2014. (ii) Arrive at the contract work in progress (cost incurred till date) as at the end of financial year 2013-14. (iii) Determine the amount of revenue to be recognized out of the total contract value. (` crore) Total Contract Price 2,400 Work Certified 1,250 Work pending certification 250 Estimated further cost to completion 1,750 Stage wise payments received 1,100 Progress payments in pipe line 300 AS-9 Revenue Recognition (b) Victory Ltd. purchased goods on credit from Lucky Ltd. for ` 250 crores for export. The export order was cancelled. Victory Ltd. decided to sell the same goods in the local market with a price discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by Victory Ltd. Discuss whether this treatment is justified. The Institute of Chartered Accountants of India 14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 AS 10 Accounting for Fixed assets 20. (a) A Company is in the process of setting up a production line for manufacturing a new product. Based on trial runs conducted by the company, it was noticed that the production lines output was not of the desired quality. However, company has taken a decision to manufacture and sell the sub-standard product over the next one year due to the huge investment involved. In the background of the relevant accounting standard, advise the company on the cut-off date for capitalization of the project cost. AS 13 Accounting for Investment (b) Albert Ltd. has made the following investments: (i) Purchased the following equity shares from stock exchange on 1st June, 2013: Cost ` Scrip X 1,80,000 Scrip Y 50,000 Scrip Z 1,70,000 4,00,000 (ii) Purchased government securities at a cost of ` 5,00,000 on 1st April, 2013. How will you treat these investments as per applicable AS in the books of the company for the year ended on 31st March, 2014, if the values of these investments are as follows: Shares ` Scrip X 1,90,000 Scrip Y 40,000 Scrip Z 70,000 Government securities The Institute of Chartered Accountants of India ` 3,00,000 7,00,000 PAPER 1: ACCOUNTING 15 SUGGESTED ANSWERS / HINTs 1. Kapil Ltd. BALANCE SHEET as at 31st March, 2014 Particulars I Note No. (`) Equity and Liabilities (1) Shareholders' Funds (a) Share Capital 19,90,000 (b) Reserves and Surplus (2) 1 2 67,616 Non-Current liabilities (a) Long-term Borrowings [4% Debentures] (3) 5,00,000 Current Liabilities (a) Trade Payables 2,40,500 (b) Other Current Liabilities 3 8,28,000 (c) Short-Term Provisions 4 3,99,384 Total II 40,25,500 ASSETS (1) Non-Current Assets (a) Fixed Assets (i) (2) Tangible Assets 5 29,30,000 Current Assets (a) Inventories 7,08,000 (b) Trade Receivables 6 3,59,500 (c) Cash and Cash Equivalents 7 28,000 Total 40,25,500 Kapil Ltd. Statement of Profit and Loss for the year ended 31st March, 2014 I II III Particulars Revenue from Operations Other Income Total Revenue [I + II] The Institute of Chartered Accountants of India Note No. 8 (`) 36,17,000 36,500 36,53,500 16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 IV V VI VII Expenses: Cost of purchases Changes in Inventories [6,65,000-7,08,000] Employee Benefits Expenses Finance Costs Depreciation and Amortization Expenses Other Expenses Total Expenses Profit before Tax (III-IV) Tax Expenses @ 30% Profit for the period 9 10 11 12,32,500 (43,000) 13,93,000 1,11,000 1,20,000 4,40,000 32,53,500 4,00,000 (1,20,000) 2,80,000 Notes to Accounts: 1. Share Capital Authorised Capital 5,00,000 Equity Shares of ` 10 each Issued Capital 2,00,000 Equity Shares of ` 10 each Subscribed Capital and fully paid 1,95,000 Equity Shares of `10 each Subscribed Capital but not fully paid 5,000 Equity Shares of `10 each ` 8 paid Call unpaid `10,000 2. 50,00,000 20,00,000 19,50,000 40,000 19,90,000 Reserves and Surplus Debenture Redemption Reserve General Reserve Surplus i.e. Balance In Statement of Profit & Loss: Opening Balance Add: Profit for the period Less: Transfer to Reserve @ 2.5% Less: Proposed Equity Dividend [12% of (20,00,00010,000)] Less: Corporate Dividend Tax [16.995% of 2,38,800] Less: Debenture Redemption Reserve [10% of ` 5,00,000] The Institute of Chartered Accountants of India 50,000 7000 67,000 2,80,000 (7,000) (2,38,800) (40,584) (50,000) 10,616 67,616 PAPER 1: ACCOUNTING 3. 17 Other Current Liabilities Bank Overdraft Outstanding Expenses [25,000+36,000] Interest accrued on Borrowings 4. 7,57,000 61,000 10,000 8,28,000 Short-term Provisions Provision for Tax Proposed Equity Dividend Corporate Dividend Tax 5. 1,20,000 2,38,800 40,584 3,99,384 Tangible Assets Value Depreciation Depreciation Written down given rate Charged value at the end (`) (`) (`) Particulars Land 16,25,000 - 16,25,000 Plant & Machinery 7,50,000 5% 37,500 7,12,500 Furniture & Fixtures 1,50,000 10% 15,000 1,35,000 Patterns 3,75,000 10% 37,500 3,37,500 Engineering Tools 1,50,000 20% 30,000 1,20,000 1,20,000 29,30,000 30,50,000 6. Trade Receivable Trade receivables (4,00,500-16,000) Less: Provision for doubtful debts 7. 3,84,500 (25,000) 3,59,500 Cash & Cash Equivalent Cash Balance Bank Balance in current A/c 8,000 20,000 28,000 8. Other Income Miscellaneous Income (Transfer fees) Rental Income The Institute of Chartered Accountants of India 6,500 30,000 36,500 18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 9. Employee benefits expenses Wages 13,68,000 Add: Outstanding wages 25,000 13,93,000 10. Finance Cost Interest on Bank loan 91,000 Debenture Interest 20,000 1,11,000 11. Other Expenses Carriage Inward 57,500 Discount & Rebates 30,000 Advertisement 15,000 Rate, Taxes and Insurance 55,000 Repairs to Buildings 56,500 Commission & Brokerage 67,500 Miscellaneous Expenses [56,000+36,000] (Business Expenses) 92,000 Bad Debts [25,500+16,000] 41,500 Provision for Doubtful Debts 25,000 4,40,000 2. Cash Flow Statement for the year ending 31st March, 2014 ` A. Cash flow from operating activities Profit and Loss A/c as on 31.3.2014 Less: Profit and Loss A/c as on 31.3.2013 Net profit for the year after taxation Add Transfer to General Reserve Back: Provision for Tax Proposed Dividend Profit before Tax Adjustment for Depreciation: Land and Building Plant and Machinery The Institute of Chartered Accountants of India ` 2,40,000 (1,50,000) 90,000 1,50,000 2,25,000 2,50,000 1,00,000 50,000 6,25,000 7,15,000 1,50,000 PAPER 1: ACCOUNTING Goodwill written off Operating profit before working capital changes Adjustment for working capital changes: Decrease in outstanding expenses (20,000) Decrease in inventory 50,000 Increase in trade receivables (4,60,000) Increase in trade payables 1,40,000 Cash generated from operations Income tax paid Net Cash generated from operating activities (a) B. Cash flow from investing activities Proceeds from sale of Building Purchase of Plant and Machinery Net Cash used in investing activities (b) C. Cash flow from financing activities Proceeds from issuance of share capital Redemption of Preference Shares Dividend paid Net cash inflow from financing activities (c) Net increase in cash and cash equivalents during the year (a+b+c) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 19 1,25,000 9,90,000 (2,90,000) 7,00,000 (1,75,000) 5,25,000 50,000 (6,50,000) (6,00,000) 5,00,000 (2,50,000) (2,10,000) 40,000 (35,000) 1,25,000 90,000 Working Notes: 1. Provision for Tax Account ` To Bank To Balance c/d 2. 1,75,000 2,50,000 4,25,000 ` By Balance b/d By Profit and Loss A/c 2,00,000 2,25,000 4,25,000 Plant and Machinery Account ` To Balance b/d 4,00,000 To Bank A/c (Purchases) (Balancing figure) ` 6,50,000 By Balance c/d 10,50,000 The Institute of Chartered Accountants of India By Depreciation A/c 50,000 10,00,000 10,50,000 20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 3. Land and Building Account ` To Balance b/d 10,00,000 ` By Depreciation A/c 1,00,000 By Bank a/c (Sales) (Balancing figure) 50,000 By Balance c/d 8,50,000 10,00,000 3 10,00,000 Statement showing the calculation of profits/losses for pre incorporation and Post incorporation period profits of Sanjana Ltd. for the year ended 31st March, 2014 Particulars Basis Pre Post 10,000 40,000 1:3.3 5,814 19,186 1:3.3 237 782 3,949 20,032 700 2,800 Sales (given) Less: Purchases Carriage Inwards Gross Profit (i) Less: Selling Expenses 1:4 Preliminary Expenses 1,200 Salaries 1:3 900 Director Fees 2,700 1,200 Interest on capital 700 Depreciation 1:3 700 2,100 Rent 1:3 1,200 3,600 Total of Expenses(ii) 4,200 13,600 Capital Loss/Net Profit (i-ii) (251) 6,432 Working Notes: 1: Sales Ratio = 10,000 : 40,000 = 1 :4 2: Time Ratio = 3:9 = 1:3 3: Purchase Price Ratio Ratio is 3 : 9 But purchase price was 10% higher in the company period Ratio is 3 : 9 + 10% 3:9.9 = 1:3.3. The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 4. 21 Journal Entries in the books of Manoj Ltd. ` 1-4-2014 Equity share final call A/c To Equity share capital A/c (For final calls of ` 2 per share on 2,70,000 equity shares due as per Board s Resolution dated .) 20-4-2014 Bank A/c To Equity share final call A/c (For final call money on 2,70,000 equity shares received) Securities Premium A/c Capital Reserve A/c General Reserve A/c Profit and Loss A/c To Bonus to shareholders A/c (For making provision for bonus issue of one share for every four shares held) Bonus to shareholders A/c To Equity share capital A/c (For issue of bonus shares) Dr. ` 5,40,000 5,40,000 Dr. 5,40,000 5,40,000 Dr. Dr. Dr. Dr. 75,000 1,20,000 3,60,000 1,20,000 6,75,000 Dr. 6,75,000 6,75,000 Extract of Balance Sheet as at 30th April, 2014 (after bonus issue) ` Authorised Capital 30,000 12% Preference shares of `10 each 3,67,500 Equity shares of `10 each (refer W.N.) 3,00,000 36,75,000 Issued and subscribed capital 24,000 12% Preference shares of `10 each, fully paid 3,37,500 Equity shares of `10 each, fully paid 2,40,000 33,75,000 (Out of the above, 67,500 equity shares @ `10 each were issued by way of bonus shares) Reserves and surplus Profit and Loss Account The Institute of Chartered Accountants of India 4,80,000 22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Working Note: The authorized capital should be increased as per details given below: Existing authorized Equity share capital ` 30,00,000 Add: Issue of bonus shares to equity shareholders (25% of ` 27,00,000) 6,75,000 36,75,000 Note: It is assume that all legal formalities for increasing of authorized share capital have already been complied with before issue of bonus shares. 5. Journal Entries in the books of Vinod Limited Dr. (`) 1. 2. 3. 4. Equity share capital A/c (` 10) To Equity share capital A/c (` 3) To Capital reduction A/c (Reduction of equity share of ` 10 each to shares of ` 3 each as per the reconstruction scheme) Dr. 60,00,000 6% Preference share capital A/c (` 10) To 6% Preference share capital A/c (` 7) To Capital reduction A/c (Reduction of preference share of ` 10 each to shares of ` 7 each as per the reconstruction scheme) Dr. 32,00,000 6 % Debentures A/c To Land & building A/c To 9% Debentures A/c To Capital reduction A/c (50% claim of debentureholders discharged by transfer of a part of land & building having book value ` 14,00,000 and rate of interest of balance 50% debentures increased to 9% as per the reconstruction scheme) Dr. 30,00,000 Bank A/c To Land & building A/c To Capital reduction A/c (50% of balance land & building having book value ` 10,00,000 sold as per the reconstruction scheme) Cr. (`) Dr. 12,00,000 The Institute of Chartered Accountants of India 18,00,000 42,00,000 22,40,000 9,60,000 14,00,000 15,00,000 1,00,000 10,00,000 2,00,000 PAPER 1: ACCOUNTING 5. 6. 7. 8. 6. (a) 23 Land & building A/c To Capital Reduction A/c (50% of balance land & building having book value ` 10,00,000, valued at ` 12,00,000, as per the reconstruction scheme) Dr. Bank A/c Capital reduction A/c To Investment A/c (All the investment sold as per the reconstruction scheme) Dr. Dr. Trade payables A/c To Capital reduction A/c (1/3 of Trade payables decided to forgo their claim as per the reconstruction scheme) Dr. Capital reduction A/c To Goodwill A/c To Patents A/c To Provision for doubtful debts A/c To Inventory A/c To Bank A/c To Provision for tax A/c To Profit & loss A/c To Plant & machinery A/c (Bal. fig.) (Written off goodwill, patent, profit & loss, part value of stock, plant & machinery, penalty paid for cancellation of contracts and provision made for doubtful debts, income tax, as per the reconstruction scheme) Dr. 64,20,000 2,00,000 2,00,000 4,00,000 40,000 4,40,000 8,00,000 8,00,000 10,40,000 3,00,000 3,48,000 5,20,000 1,00,000 2,12,000 37,00,000 2,00,000 Journal Entries in the Books of P Ltd. Dr. ` Fixed Assets To Revaluation Reserve (Revaluation of fixed assets at 15% above book value) Reserve and Surplus The Institute of Chartered Accountants of India Cr. ` Dr. 1,05,000 1,05,000 Dr. 60,000 24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 To Equity Dividend (Declaration of equity dividend @ 10%) Equity Dividend To Bank Account (Payment of equity dividend) Business Purchase Account To Liquidator of Q Ltd. (Consideration payable for the business taken over from Q Ltd.) Fixed Assets (115% of ` 2,50,000) Inventory (95% of ` 3,20,000) Debtors Bills Receivable Investment Cash at Bank (` 40,000 ` 30,000 dividend paid) To Provision for Bad Debts (5% of ` 1,90,000) To Sundry Creditors To 12% Debentures in Q Ltd. To Bills Payable To Business Purchase Account To Capital Reserve (Balancing figure) (Incorporation of various assets and liabilities taken over from Q Ltd. at agreed values and difference of net assets and purchase consideration being credited to capital reserve) Liquidator of Q Ltd. To Equity Share Capital To 10% Preference Share Capital (Discharge of consideration for Q Ltd. s business) 12% Debentures in Q Ltd. (` 1,50,000 108%) Discount on Issue of Debentures To 12% Debentures (Allotment of 12% Debentures to debenture holders of Q Ltd. at a discount of 10%) Sundry Creditors The Institute of Chartered Accountants of India 60,000 Dr. 60,000 60,000 Dr. 4,90,000 4,90,000 Dr. 2,87,500 Dr. 3,04,000 Dr. 1,90,000 Dr. 20,000 Dr. 80,000 Dr. 10,000 9,500 1,25,000 1,62,000 25,000 4,90,000 80,000 Dr. 4,90,000 4,00,000 90,000 Dr. 1,62,000 Dr. 18,000 1,80,000 Dr. 10,000 PAPER 1: ACCOUNTING 25 10,000 To Sundry Debtors (Cancellation of mutual owing) Capital Reserve To Bank (Being liquidation expenses reimbursed to Q Ltd.) Dr. 30,000 30,000 (b) Statement of Consideration payable by P Ltd. for 30,000 shares (payment method) Shares to be allotted 30,000 8 = 40,000 shares of P Ltd. 6 Issued 40,000 shares of ` 10 each i.e ` 4,00,000 (i) For 10% preference shares, to be paid at 10% discount ` 1,00,000 90 100 ` Consideration amount [(i) + (ii)] 7. 90,000 (ii) ` 4,90,000 Calculation of Average Due Date (taking base date as 12th July, 2013) Date Due date including days of grace Amount No. of Days Products (`) from July (`) 12, 2013 Remarks 1.6.13 4.9.13 18,000 54 9,72,000 Bills Receivable 5.6.13 8.9.13 15,000 58 8,70,000 9.6.13 12.7.13 20,000 0 12.6.13 14.8.13 16,000 33 5,28,000 20.6.13 23.9.13 24,000 73 17,52,000 93,000 41,22,000 29.5.13 1.8.13 12,000 20 2,40,000 3.6.13 5.9.13 18,000 55 9,90,000 10.6.13 13.8.13 20,000 32 6,40,000 13.6.13 14.8.13 14,000 33 4,62,000 27.6.13 30.7.13 22,000 18 3,96,000 86,000 Bills Payable 27,28,000 Difference of Products = ` 41,22,000 ` 27,28,000 = ` 13,94,000 Difference of Amount = ` 93,000 ` 86,000 = ` 7,000 The Institute of Chartered Accountants of India 26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Average Due Date = = Base Date + July 12 + Difference of Products Difference of Amount 13,94,000 7,000 = July 12 + 199.14 or 199 days = 27th January, 2014 Note: (i) B/R of 12.6.13 Due date changed due to holidays i.e. immediately preceding working day (ii) B/P of 3.6.13 Due date changed due to holidays i.e. immediately preceding working day (iii) B/P of 13.6.13 Due date changed due to holidays i.e. immediately preceding working day The Institute of Chartered Accountants of India Due date 2013 Oct. 1, Oct. 18 2014 Apr. 6 Feb. 4 Mar. 21 Mar. 31 Date 2013 Oct. 1, Oct. 18, 2014 Jan. 3 Feb. 4 Mar. 21 Mar. 31 8. The Institute of Chartered Accountants of India (3,63,200 x 10%) /365 To Interest To Sales To Cash To Bills payable To Sales To Balance b/d Particulars 10 55 (6) 164 182 No. of days till 31.3.14 Product Date - 86,000 1,10,000 Mar. 31 (60,000) Mar. 28 2014 8,20,000 Dec 7 31,700 20,48,000 100 8,600 2,000 10,000 5,000 2013 ` 6,000 10,92,000 Nov. 16 Amount Mar. 31 Apr. 8 2014 Dec. 17 Nov. 26 2013 Due date Hari in Account Current with Geet (Interest upto 31st March, 2014 @ 10% p.a.) In the books of Geet By Balance c/d By Balance of product By Purchases By Purchases By Purchases Particulars (8) 104 125 No. of days till 31.3.14 Product 3,63,200 (43,200) 7,28,000 31,700 20,48,000 11,300 5,400 7,000 8,000 10,00,000 ` Amount PAPER 1: ACCOUNTING 27 28 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 9. In Debtors Ledger General Ledger Adjustment Account Particulars ` Particulars To Debtors Ledger Adjustment A/c: By Balance b/d By Debtors Ledger 4,000 5,000 Adjustment A/c: Sales Transfer to creditor ledger 2,200 3,800 receivable dishonoured 40,000 Endorsed Bills Transfer from creditor ledger ` Discount Allowed (` 3,000+ BadDebts(4,400+600) ` 1,000) To Balance c/d (1,20,000 1,000) 92,000 2,000 1,19,000 1,34,000 1,34,000 In Creditors Ledger General Ledger Adjustment Account Particulars To Balance b/d ` 20,000 Particulars By Creditors Ledger Adjustment A/c To Creditors Leger Transfer from Debtors ledger 59,600 Endorsed Bills 2,200 Transfer to Debtors ledger Adjustment A/c: Purchases 3,800 Bill receivable endorsed to creditors 8,000 Discount received receivable dishonoured 2,000 By Balance c/d (60,000+1,000) 81,600 Notes: The following items do not appear in GLA Account in Debtors ledger: 1. Cash Sales 2. Provision for Doubtful Debts 3. Provision for Discount on Debtors 4. Bad Debts Recovered 5. Bills Receivable matured/collected on maturity 6. Bills Receivable discounted 7. Bills Receivable endorsed The Institute of Chartered Accountants of India 200 (` 1,200 `1,000) Allowances (i) ` 6,400 61,000 81,600 PAPER 1: ACCOUNTING (ii) 29 The following items do not appear in GLA Account in Creditors ledger: 1. Cash Purchases 2. Reserve for Discount on Creditors 3. Bills Payable matured 10. Balance Sheet as at 31st Dec., 2012 Liabilities Outstanding Rent for godown Advance Subscription Capital Fund (Balancing Figure) ` Assets ` 6,000 Building Stock of Sports Materials 6,000 Prepaid Insurance 2,71,000 Outstanding Subscription 12% General Fund Investments Cash Balance Bank Balance 2,83,000 60,000 5,000 3,000 12,000 2,00,000 1,000 2,000 2,83,000 Balance Sheet as at 31st Dec. 2013 Liabilities ` ` Outstanding Rent 3,000 Advance Subscription 4,000 Advance Locker Rent 2,000 Bank Overdraft 2,000 Capital Fund: Opening Balance 2,71,000 Add: Entrance Fees 8,000 [20,000 x 40%] Add: Life Membership 12,000 Fees [` 20,000 x 60%] Add: Surplus 60,000 3,51,000 3,62,000 The Institute of Chartered Accountants of India Assets Building Book Value Less: Depreciation Furniture Cost Less: Depreciation Stock of Sports Materials Prepaid Insurance Outstanding Subscription Outstanding Locker Rent 12% General Fund Investment Accrued interest on 12% General Fund Investments Cash Balance ` 60,000 (6,000) 20,000 (2,000) 54,000 18,000 2,000 6,000 8,000 6,000 2,00,000 4,000 64,000 3,62,000 30 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 11. (a) Statement of Affairs as on 31st March, 2013 Liabilities Capital (bal.fig.) Sundry creditors (b) ` Assets ` 1,61,700 Machinery 2,750 Stock Debtors Cash at bank (W.N.1) Cash in hand 1,64,450 Calculation of loss for 3 months (1.1.2013 to 31.3.2013) ` 1,61,700 770 1,62,470 (1,65,000) 2,530 Capital as on 31.3.2013 Add: Drawings for 2 months (1.2.2013 to 31.3.2013) Less: Capital as on 1.1.2013 Loss for 3 months (c) Statement of Affairs as on 31st March, 2014 Liabilities Capital (Bal. Figure) Sundry Creditors (d) 1,10,000 10,450 550 42,350 1,100 1,64,450 ` Assets 1,80,400 Machinery 1,650 Add: Additions Stock Debtors Cash at bank (W.N.2) Cash in hand 1,82,050 ` 1,10,000 33,000 1,43,000 15,950 1,100 20,350 1,650 1,82,050 Statement of Profit and Loss for the year ended 31.3.2014 Particulars Capital as on 31.3.2014 Add: Drawings (` 385 12) Less: capital as on 31.3.2013 Net profit for the year ended 31.3.14 Note: Depreciation has been ignored in the absence of information. The Institute of Chartered Accountants of India ` 1,80,400 4,620 1,85,020 (1,61,700) 23,320 PAPER 1: ACCOUNTING 31 Working Notes: ` 1. Bank balance as on 31.3.2013 Balance as on 1.1.2013 1,65,000 Less: Withdrawals during 1.1.2013 to 31.3.2013 (1,22,650) Balance as on 31.3.2013 2. 42,350 Bank Balance as on 31.3.2014: Balance as on 1.4.2013 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 31.3.2014 20,350 12. (a) Statement Showing the Computation of Cash Price and Periodic Interest A B C D=B+C Instalment Balance due at Instalment Total Amount the end after Amount Due at the end the payment of before the payment of instalment instalment E= F=D-E Interest Balance Dx10/110 Due at the Beginning III NIL 1,10,000 1,10,000 10,000 1,00,000 II 1,00,000 1,20,000 2,20,000 20,000 2,00,000 I 2,00,000 1,63,000 3,63,000 33,000 3,30,000 3,30,000 - 3,30,000 30,000 3,00,000 Let Cash Price be X X= ` 3,00,000 + 40% of X 0.6 X = ` 3,00,000 X= ` 3,00,000/0.6 = ` 5,00,000, cash price = ` 5,00,000 The Institute of Chartered Accountants of India 32 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 (b) Statement Showing the Computation of Cash Price and Periodic Interest A B Balance Due at the end After the Payment of Instalment C Instalment D = B +C Total Amount Due at the end Before the payment of instalment E =Dx10/110 interest F=D-E Balance Due at the Beginning III Nil 1,10,000 1,10,000 10,000 1,00,000 II 1,00,000 1,42,000 2,42,000 22,000 2,20,000 2,20,000 - 2,20,000 20,000 2,00,000 2,00,000 1,30,000 3,30,000 30,000 3,00,000 I Let Cash Price be X X = ` 3,00,000 + 40% of X 0.6 X = ` 3,00,000 X = ` 3,00,000/0.6 = ` 5,00,000, cash price = ` 5,00,000 The Institute of Chartered Accountants of India The Institute of Chartered Accountants of India Profit & Loss A/c To To To To June 15 July 15 Sept. 15 2014 To March 31 Bonus Issue Bank (@ 75 p. paid on 4,000 shares) Bank (@ 75 p. paid on 4,000 shares) Profit & Loss A/c (W.N.2) To To 52,000 3,890 Mar. 31 3,000 Mar. 30 Nil 2014 3,000 Mar. 15 4,800 73,090 4,800 - - - - 8,000 4,000 By By By Balance c/d 24,000 44,000 53,040 Bank (Sale) Bank (Dividend @ 15% on ` 32,000) Bank (Sale) Bank (Sale of Right of 2,400 shares @ 40 paise per share) Particulars Investment Account (Shares in Kumar Limited) In the books of Meera No. of Income Amoun Date Shares t ` ` 2013 Bank (Purchases) 40,000 - 60,000 May 15 By Profit & Loss A/c - 3,200 Sept. 30 By (W.N.1) Particulars 2013 April 1 May 15 Date 13. 52,000 24,000 20,000 8,000 - 4,800 - - 4,800 - ` 73,090 28,930 28,000 - 15,200 960 ` No. of Income Amount Shares PAPER 1 : ACCOUNTING 33 34 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Working Notes: (1) (2) Profit on Sale on 15-5-2013: Cost of 8,000 shares @ `1.50 Less: Sales price Profit Cost of 20,000 shares sold: Cost of 44,000 shares (48,000 + 6,000) Less: Amount received from rights Cost of 44,000 shares ` 12,000 ` 15,200 ` 3,200 ` 54,000 ` 960 ` 53,040 Cost of 20,000 shares 44,000 shares 20,000 shares Profit on sale of 20,000 shares (` 28,000 ` 24,110) ` 53,040 ` 24,110 ` 3,890 14. Ascertainment of rate of gross profit for the year 2012-13 Trading A/c for the year ended 31-3-2013 ` 4,81,100 By Sales 22,62,500 By Closing stock 5,20,000 32,63,600 To Opening stock To Purchased To Gross profit Rate of gross profit = = ` 26,00,000 6,63,600 32,63,600 GP 100 Sales 5,20,000 26,00,000 100 = 20% Memorandum Trading A/c for the period from 1-4-2013 to 22-01-2014 ` ` ` To Opening stock 6,63,600 By Sales 24,58,500 To Purchases 17,41,350 Add: Unrecorded cash 20,000 sales (W.N.) Less: Goods used for advertisement (50,000) 16,91,350 By Closing stock To Gross profit (20% 4,95,700 of ` 24,78,500) 28,50,650 Estimated stock in hand on the date of fire was ` 3,72,150. The Institute of Chartered Accountants of India ` 24,78,500 3,72,150 28,50,650 PAPER 1: ACCOUNTING 35 Working Note: Cash sales defalcated by the Accountant: Defalcation period = 1.4.2013 to 18.8.2013 = 140 days Since, 140 days / 7 weeks = 20 weeks Therefore, amount of defalcation = 20 weeks ` 1,000 = ` 20,000. 15. (a) Statement showing distribution of profits between the partners ` ` Assets at the end of the 3rd year 1,60,000 Less: Liabilities at the end of the 3rd year (40,000) 1,20,000 Add: Drawings including partnership salary: R[30,000 + (1,000 x 12 x 3)] 66,000 G [22,000 + (1,000 x 12 x 3)] 58,000 1,24,000 2,44,000 Less: Opening Capital: R 50,000 G 40,000 (90,000) 1,54,000 Less: Introduction of capital: R (10,000) Net Profit 1,44,000 Profit and Loss Appropriation Account for 3 years Particulars ` Particulars To Partner s Salary ` By Net Profit for three years 1,44,000 R (1,000 x 12 x 3) 36,000 G (1,000 x 12 x 3) 36,000 To Share of Profit R 43,200 G 28,800 72,000 1,44,000 The Institute of Chartered Accountants of India 1,44,000 36 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 (b) Partners Capital Accounts Particulars To T & W (Goodwill) To Bank To Balance c/d T ` W ` 40,000 40,000 2,00,000 2,00,000 2,40,000 2,40,000 P Particulars ` By Balance 80,000 b/d - By Bank By P 2,00,000 By Stock A/c 2,80,000 T ` W ` P ` 1,60,000 40,000 1,60,000 - 2,80,000 40,000 - 40,000 2,40,000 40,000 2,40,000 2,80,000 Balance Sheet of M/s T, W & P as on 1st April, 20114 Liabilities Capital Accounts T W P Creditors & Other Payables ` Assets Fixed Assets 2,00,000 Stocks 2,00,000 Cash & Bank 2,00,000 50,000 6,50,000 ` 2,50,000 1,45,200 2,54,800 6,50,000 16. (a) The business entity should consider the following factors while choosing an ERP package: (i) Functional requirement of the organization: The ERP that matches most of the requirements of the organization should be preferred to others. (ii) Reports available in the ERP: The organization should visualize the reporting requirements and choose a vendor which fulfils them. (iii) Background of the vendors: The service and deliverable record of a vendor is extremely important in choosing the vendor. (iv) Budget of the organization: The budget constraint and fund position of the enterprise should also be taken into consideration. (b) The followings are the advantages of using an Enterprise Resource Planning (ERP) software in computerized accounting: (i) It covers most of the common functions. (ii) It generates most of the desired reports which are standardize across industries and acceptable to users. (iii) It being an integrated package, duplication is avoided. (iv) Much more information is made available by this package than what is The Institute of Chartered Accountants of India PAPER 1: ACCOUNTING 37 available otherwise. The followings are the disadvantages of ERP: (i) The user may have to modify his business procedures to use ERP effectively. (ii) It is often too expensive for small and medium sized organizations. (iii) There may be implementation hurdles. (iv) It is a complex software. Large number of modules, parameter settings and configuration makes it a complex. 17. Although legal title has not been transferred, the economic reality and substance is that the rights and beneficial interest in the immovable property have been transferred. Therefore, recording of acquisition/disposal (by the transferee and transferor respectively) would, in substance, represent the purchase/sale. In view of this A Ltd., should record the sales and recognize the profit of `15 lakhs in its profit and loss account. It should eliminate building from its balance sheet. In notes to accounts, it should disclose that building has been sold, full consideration has been received, possession has been handed over to the buyer and documentation and legal formalities are pending. The buyer should recognize the building as an asset in his balance sheet and charge depreciation on it. The buyer should disclose in his notes to account that possession has been received however documentation and legal formalities are pending. 18. (a) (i) Valuation of stock as on 31.3.2014 when general selling price is ` 49 each. Value 3,000 units at ` 45 each (lower of cost and net realizable value). Value remaining 2,000 units at ` 49 each (lower of cost and net realizable value). Units 1 3000 2000 Cost 2 50 50 NRV 3 45 49 Lower of cost and NRV 4 45 49 Valuation 5 = 1x4 1,35,000 98,000 2,33,000 Valuation of stock should be ` 2,33,000. (ii) Valuation of stock as on 31.3.2014 when general selling price is ` 52 each Units 1 3000 2000 Cost 2 50 50 NRV 3 45 52 Lower of cost and NRV 4 45 50 Valuation of stock should be ` 2,35,000. The Institute of Chartered Accountants of India Valuation 5 = 1x4 1,35,000 1,00,000 2,35,000 38 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 (b) As per para 15 of Accounting Standard 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 01-04-2012 Less: Depreciation as per SLM, for the year 2012-13 (` 2,00,000 7 years) Balance as on 31-3-2013 Less: Depreciation for the year 2013-14 (` 2,00,000 7 years) Balance as on 31-3-2014 Book value as per WDV method Book value as per SLM Deficiency ` 2,00,000 28,571 1,71,429 28,571 1,42,858 1,44,500 1,42,858 1,642 Deficiency of ` 1,642 should be charged to Profit & 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 method of depreciation from WDV to SLM, it re-calculated the depreciation amount on the basis of useful life and has not continued with rate of depreciation as applied in WDV method. 19. (a) (i) Calculation of profit/ loss for the year ended 31 st March, 2014 Total estimated cost of construction (1,250 + 250 + 1,750) Less: Total contract price Total foreseeable loss to be recognized as expense (` in crores) 3,250 (2,400) 850 According to para 35 of AS 7 (Revised 2002) Construction Contracts , when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately. (ii) Contract work-in-progress i.e. cost incurred to date Work certified Work not certified The Institute of Chartered Accountants of India (` in crores) 1,250 250 1,500 PAPER 1: ACCOUNTING 39 (iii) Proportion of total contract value recognised as revenue Percentage of completion of contract to total estimated cost of construction = (1,500 / 3,250) 100 = 46.15% Revenue to be recognized till date = 46.15% of ` 2,400 crores = ` 1,107.60 crores. (b) Lucky Ltd. had sold goods to Victory Ltd on credit worth for ` 250 crores and the sale was completed in all respects. Victory Ltd s decision to sell the same in the domestic market at a discount does not affect the amount recorded as sales by Lucky Ltd. The price discount of 15% offered by Lucky Ltd. after request of Victory Ltd. was not in the nature of a discount given during the ordinary course of trade because otherwise the same would have been given at the time of sale itself. It is the special discount which is being allowed at the request of the buyer. Therefore, it would be appropriate to make a separate provision rather than to adjust the amount of revenue originally recorded. Therefore, such discount should be written off to the profit and loss account and not shown as deduction from the sales figure. 20. (a) As per provisions of AS 10 Accounting for Fixed Assets , expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalized as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production i.e., production intended for sale or captive consumption, is not capitalized and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period. In the present case, the company did not stop production even when the output was not of the desired quality, and continued the sub-standard production due to huge investment involved in the project. Capitalization should cease at the end of the trial run, since the cut-off date would be the date when the trial run was completed. (b) As per para 14 and 15 of AS 13 Accounting for Investments , current investments should be carried at lower of cost and fair value 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 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 as current investment 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, 2013 is to be charged to profit and loss account The Institute of Chartered Accountants of India 40 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 for the year ended 31st March, 2014. If investment is intended to be held as long term investment 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) Value of government securities (purchased on 1st April, 2013) is to be shown at cost of ` 5,00,000 in the balance sheet as on 31.3.2014. The Institute of Chartered Accountants of India Applicability of Pronouncements/Legislative Amendments/Circulars etc. for November, 2014 Intermediate (IPC) Examination Paper 1: Accounting Accounting Standards AS 1 : Disclosure of Accounting Policies AS 2 : Valuation of Inventories AS 3 : Cash Flow Statements AS 6 : Depreciation Accounting AS 7 : Construction Contracts (Revised 2002) AS 9 : Revenue Recognition AS 10 : Accounting for Fixed Assets AS 13 : Accounting for Investments AS 14 : Accounting for Amalgamations Non-Applicability of Ind ASs for November, 2014 Examination The MCA has hosted on its website 35 Indian Accounting Standards (Ind AS) without announcing the applicability date. Students may note that these Ind ASs are not applicable for November, 2014 Examination. Paper 2: Business Laws, Ethics and Communication The Companies Act, 2013 The 53 sections of the Companies Act, 2013 along with the clarifications notified by the Ministry of Corporate Affairs. Supplementary study material in this regard has been hosted on the student portal, ICAI at the following link http://220.227.161.86/32794ssp-p2blec-ipcc.pdf Non-Applicability of the following /Circulars/Notifications S.No. Subject Matter 1. *New 184 sections of the Companies Act, 2013 notified on 27 th February, 2014 and 26th March, 2014. 2. *Rules notified under the Companies Act, 2013 The Institute of Chartered Accountants of India Paper 4: Taxation Applicability of the Finance Act, Assessment Year etc. for November, 2014 examination The provisions of income-tax and indirect tax laws, as amended by the Finance Act, 2013, including circulars and notifications issued upto 30th April, 2014. The relevant assessment year for income-tax is A.Y. 2014-15. The Institute of Chartered Accountants of India

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