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

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DISCLAIMER The Suggested Answers hosted in the website do not constitute the basis for evaluation of the students answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for the correctness or otherwise of the answers published herein. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING Question No. 1 is compulsory. Answer any five questions from the remaining six questions. Wherever necessary suitable assumptions should be made by the candidates. Working Notes should form part of the answer. Question 1 (a) In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000 on 1.4.2013. However on scrutiny it was found that machinery worth ` 1,20,000 was included in the purchases on 1.6.2013. On 30.6.2013 the company disposed a machine having book value of ` 1,89,000 on 1.4.2013 at ` 1,75,000 in part exchange of a new machine costing ` 2,56,000. The company charges depreciation @ 20% WDV on plant and machinery. You are required to calculate: (i) Depreciation to be charged to P/L (ii) Book value of Plant and Machinery A/c as on 31.3.2014 (iii) Loss on exchange of machinery. (b) Sarita Publications publishes a monthly magazine on the 15 th of every month. It sells advertising space in the magazine to advertisers on the terms of 80% sale value payable in advance and the balance within 30 days of the release of the publication. The sale of space for the March 2014 issue was made in February 2014. The magazine was published on its scheduled date. It received ` 2,40,000 on 10.3.2014 and ` 60,000 on 10.4.2014 for the March 2014 issue. Discuss in the context of AS 9 the amount of revenue to be recognized and the treatment of the amount received from advertisers for the year ending 31.3.2014. What will be the treatment if the publication is delayed till 2.4.2014 ? (c) Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2013-14 the Company used 12,000 MT of raw material costing ` 150 per MT. At the end of the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be treated in the books. Explain in the context of AS 2 the treatment of abnormal loss and abnormal loss and also find out the amount of abnormal loss if any. (d) Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13. (i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as current. The company had reduced the value of these investments to ` 6.5 lakhs to The Institute of Chartered Accountants of India recognize a permanent decline in value. The fair value on date of transfer is ` 6.8 lakhs. (ii) Long term investments in Company B, costing ` 7 lakhs are to be re-classified as current. The fair value on date of transfer is ` 8 lakhs and book value is ` 7 lakhs. (iii) Current investment in Company C, costing ` 10 lakhs are to be re-classified as long term as the company wants to retain them. The market value on date of transfer is ` 12 lakhs. (iv) Current investment in Company D, costing ` 15 lakhs are to be re-classified as long (4 x 5 = 20 Marks) term. The market value on date of transfer is ` 14 Lakhs. Answer (a) (i) Depreciation to be charged in the Profit and Loss Account (`) Depreciation on old Machinery [20% on `6,32,000 for 3 months(01.4.13 to 30.6.13)] Add: Depreciation machinery acquired on 01.06.2013 (` 1,20,000 x 20% x 10/12) Depreciation on Machinery after adjustment of Exchange [20% of `(6,32,000 -1,89,000+2,56,000) for 9 months] 31,600 1,04,850 Total Depreciation to be charged in Profit and Loss A/c 1,56,450 20,000 (ii) Book Value of Plant and Machinery as on 31.03.2014 ` Balance as per books on 01.04.2013 ` 6,32,000 Add: Included in purchases on 01.06.2013 1,20,000 Add: Purchase on 30.06.2013 2,56,000 Less: Book value of Machine sold on 30.06.2013 3,76,000 10,08,000 (1,89,000) 8,19,000 Less: Depreciation on machinery in use (1,56,450-9,450) Book Value as on 31.03.2014 (1,47,000) 6,72,000 (iii) Loss on exchange of Machinery Book value of machinery as on 01.04.2013 Less: Depreciation for 3 months 1,89,000 9,450 WDV as on 30.06.2013 1,79,550 The Institute of Chartered Accountants of India Less: Exchange value 1,75,000 Loss on exchange of machinery 4,550 (b) As per AS 9 Revenue Recognition , in a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method as the service is performed, whichever relates the revenue to the work accomplished. In the given case, income accrues when the related advertisement appears before public. The advertisement service would be considered as performed on the day the advertisement is seen by public and hence revenue is recognized on that date. In this case, it is 15.03.2014, the date of publication of the magazine. Hence, ` 3,00,000 (` 2,40,000 + ` 60,000) is recognized as income in March, 2014. The terms of payment are not relevant for considering the date on which revenue is to be recognized. ` 60,000 is treated as amount due from advertisers as on 31.03.2014 and ` 2,40,000 will be treated as payment received against the sale. However, if the publication is delayed till 02.04.2014 revenue recognition will also be delayed till the advertisements get published in the magazine. In that case revenue of ` 3,00,000 will be recognized for the year ended 31.03.2015 after the magazine is published on 02.04.2014. The amount received from sale of advertising space on 10.03.2014 of ` 2,40,000 will be considered as an advance from advertisers as on 31.03.2014. (c) As per AS 2 (Revised) Valuation of Inventories , abnormal amounts of wasted materials, labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred. The normal loss will be included in determining the cost of inventories (finished goods) at the year end. Amount of Abnormal Loss: Material used 12,000 MT @ `150 = `18,00,000 Normal Loss (12,000 MT 4%) 480 MT Net quantity of material 11,520 MT Abnormal Loss in quantity 150 MT Abnormal Loss ` 23,437.50 [150 units @ ` 156.25 (` 18,00,000/11,520)] Amount ` 23,437.50 will be charged to the Profit and Loss statement. (d) As per AS 13 Accounting for Investments , where long-term investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at The Institute of Chartered Accountants of India the date of transfer. And where investments are reclassified from current to long term, transfers are made at lower of cost and fair value on the date of transfer. Accordingly, the re-classification will be done on the following basis: (i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence this re-classified current investment should be carried at ` 6.5 lakhs in the books. (ii) The carrying / book value of the long term investment is same as cost i.e. ` 7 lakhs. Hence this long term investment will be reclassified as current investment at book value of ` 7 lakhs only. (iii) In this case, reclassification of current investment into long-term investments will be made at ` 10 lakhs as cost is less than its market value of ` 12 lakhs. (iv) In this case, market value is ` 14 lakhs which is lower than the cost of ` 15 lakhs. The reclassification of current investment as long-term investments will be made at ` 14 lakhs. Note: The question simply states that Blue chip Equity Investment Ltd. wants to reclassify its investments in accordance with AS 13. The values, at which the investments have to be reclassified, have been given in the above answer Question 2 The following information relates to Country Sports Club for the year ended 31.3.2014. You are required to prepare the Receipts and Payments Account for the year ended 31.3.2014 and Balance Sheet as on that date. Expenditure ` Income To Salaries ` 3,36,000 By Subscriptions To Repairs and Maintenance 8,40,000 By Receipts for annual Sports 3,25,000 To Ground upkeep 1,66,500 Less: Expenses for Sports 2,75,000 To Electricity charges To Sports material used To Printing and Stationary 82,600 By Entrance fees 1,48,000 By Interest on 10% 42,200 government bond To Groundsman wages To Depreciation 80,000 By Rent on hire of club 1,36,000 ground 84,000 By Profit on sale of sports material 10,500 88,000 To Prizes distributed (Net of fund income) To Surplus carried capital fund 4,000 to 96,700 11,80,000 The Institute of Chartered Accountants of India By Sale of newspaper old 50,000 1,80,000 12,000 3,500 11,80,000 Additional information: (a) Balance as on 1.4.2013 (`) Balance as on 31.3.2014 (`) Fixed assets (net block) 6,36,000 7,20,000 Stock of sports material 1,24,000 1,38,000 Investment in 10% government bond Subscription received in advance 1,20,000 64,000 1,20,000 72,000 Outstanding subscriptions 1,24,000 88,000 Creditors for sports material 13,500 24,500 Salary paid in advance 78,600 62,500 Prize fund Prize fund investments 32,000 2,40,000 28,000 2,40,000 Bank balance 2,36,000 54,500 2,36,000 ? (b) During the year the club purchased sports material off ` 1,80,000, out of which 75% was credit purchase. (c) 25% of the entrance fees is to be capitalized. (d) As per the Club's policy any excess of expense for prizes distributed over prize fund income is to be charged to Income and Expenditure A/c and vice versa:prize fund income earned during the year ` 36,000 prizes distributed during the year ` 40,000 (e) Interest on Government bond is received half yearly on 30th June and 31st December each year. (16 Marks) Answer Country Sports Club Receipts and Payments Account for the year ended 31st March, 2014 Receipts ` Payments ` To Balance b/d To Subscription (W.N.3) 54,500 By Salaries (W.N.4) 8,84,000 By Repairs & maintenance (W.N.5) 3,32,000 77,000 To Receipts Sports 3,25,000 By Expenses for Annual Sports By Ground upkeep 2,75,000 1,66,500 for Annual The Institute of Chartered Accountants of India To Entrance fee (` 1,80,000 x 4/3) 2,40,000 By Electricity charges By Sports materials (Cash) To Interest To Rent received 82,600 45,000 12,000 By Sports material creditors paid 84,000 (W.N.2) To Sale of old newspapers To Prize fund income To Sale of Sports Material (W.N.2) 3,500 By Printing and Stationery 42,200 36,000 By Ground man wages 28,500 By Fixed Assets (W.N.6) By Prizes distributed ____ 1,51,100 80,000 2,20,000 40,000 By Balance c/d (Bal. fig) 1,56,100 16,67,500 16,67,500 Balance Sheet of Club as on 31.3.2014 Liabilities Amount (`) Capital fund (opening balance) (W.N.1) Add: Surplus Entrance fee 9,33,400 96,700 60,000 Prize fund Subscription received in advance Outstanding expenses Assets Amount (` ) Fixed Assets (net) Sports Material Investment 10,90,100 (10% Govt. Bonds) 2,40,000 Accrued Interest Outstanding 72,000 Subscriptions repair 62,500 1,20,000 3,000 88,000 Salary paid in advance 24,500 Prize fund investments Creditors (Sports Material) 7,20,000 1,38,000 Bank Balance 28,000 2,36,000 1,56,100 14,89,100 14,89,100 Working Notes:1. Balance Sheet of Club as on 1.4.2013 Liabilities Assets Amount (`) Capital fund opening (bal. fig.) 9,33,400 Fixed Assets (net) 6,36,000 Prize fund Subscription received in advance 2,40,000 Sports Material 64,000 Investment (10% Bonds) 1,24,000 1,20,000 O/s repair expenses Amount (`) 13,500 Accrued interest The Institute of Chartered Accountants of India Govt. 3,000 (` 1,20,000x 10% x 3/12) Creditors (Sports Material) 78,600 Outstanding Subscriptions Salary paid in advance Prize fund investments Bank Balance 2,36,000 54,500 13,29,500 2. 1,24,000 32,000 13,29,500 Stock of Sports Materials Amount (`) To Balance b/d 1,24,000 By Sale of Materials (Bal .fig.) To Cash (1,80,000x 0.25) To Creditors (Purchase on credit) To Profit on Sale Amount (`) 45,000 By Sports Materials (given) used 28,500 1,48,000 1,35,000 By Balance c/d 1,38,000 10,500 3,14,500 __ 3,14,500 Creditors for Sports Materials Amount (`) To Cash (bal. fig.) To Balance c/d Amount (`) 1,51,100 By Balance b/d 78,600 62,500 By Sports Materials 1,35,000 2,13,600 2,13,600 [Payments for Sports materials is `1,96,100 (`1,51,100 + ` 45,000)] 3. Subscriptions received during the year ` Subscription credited to Income and Expenditure A/c 8,40,000 Add: Outstanding subscription at the beginning of the year Advance subscription received at the end of the year 1,24,000 72,000 10,36,000 Less: Outstanding subscription at the end of the year 88,000 Advance subscription received at the beginning of the year Subscription received during the year 64,000 The Institute of Chartered Accountants of India (1,52,000) 8,84,000 4. Salaries paid during the year ` Amount debited to Income and Expenditure A/c Add: Salary paid in advance as on as on 31.3.2014 3,36,000 28,000 3,64,000 Less: Salary paid in advance as on as on 31.3.2013 (32,000) 3,32,000 5. Repairs and maintenance paid during the year Amount debited to Income and Expenditure A/c 88,000 Add: Outstanding as on as on 31.3.2013 13,500 1,01,500 Less: Outstanding as on as on 31.3.2014 (24,500) 77,000 6 Purchase of Fixed Assets Amount (`) Amount (`) To Balance b/d 6,36,000 By Depreciation 1,36,000 To Purchase of fixed assets (Bal. fig.) 2,20,000 By Balance c/d 7,20,000 _____ ____ 8,56,000 8,56,000 Note: The above solution is prepared on the basis that club has not been registered under the Companies Act. Question 3 (a) Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following information: (1) Sales for the year amounted to ` 135 crores out of which 60% was cash sales. (2) Purchases for the year amounted to ` 55 crores out of which credit purchase was 80%. (3) Administrative and selling expenses amounted to ` 18 crores and salary paid amounted to ` 22 crores. (4) The Company redeemed debentures of ` 20 crores at a premium of 10%. Debenture holders were issued equity shares of ` 15 crores towards redemption The Institute of Chartered Accountants of India and the balance was paid in cash. Debenture interest paid during the year was `1.5 crores. (5) Dividend paid during the year amounted to ` 10 crores. Dividend distribution tax @ 17% was also. paid. (6) Investment costing ` 12 crores were sold at a profit of ` 2.4 crores. (7) ` 8 crores was paid towards income tax during the year. (8) A new plant costing ` 21 crores was purchased in part exchange of an old plant. The book value of the old plant was ` 12 crores but the vendor took over the old plant at a value of ` 10 crores only. The balance was paid in cash to the vendor. (9) The following balances are also provided. ` in crores 1.4.2013 ` In crores 31.3.2014 Debtors 45 50 Creditors Bank 21 6 23 (b) From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st March 2014 as required by Part I, revised Schedule VI of the Companies Act. Particulars Debit ` 50,00,000 Equity Share Capital (Face value of ` 100 each) Call in Arrears 5,000 Land & Building Plant & Machinery 27,50,000 26,25,000 Furniture 2,50,000 General Reserve 10,50,000 Loan from State Financial Corporation Stock: Raw Materials Finished Goods 7,50,000 2,50,000 10,00,000 12,50,000 Provision for Taxation Sundry Debtors Advances Credit ` 3,40,000 10,00,000 2,13,500 Proposed Dividend 3,00,000 Profit & Loss Account Cash in Hand 5,00,000 The Institute of Chartered Accountants of India 1,50,000 Cash at Bank 12,35,000 Preliminary expenses 66,500 Unsecured Loan 6,05,000 Sundry Creditors (for Goods and Expenses) 10,00,000 The following additional information is also provided: (i) Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket expenses paid to the Auditors. (ii) 10000 Equity shares were issued for consideration other than cash. (iii) Debtors of ` 2,60,000 are due for more than 6 months. (iv) The cost of the Assets were: Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500 (v) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation is inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery. (vi) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled Bank. (6 + 10 = 16 Marks) Answer Gamma Ltd. (a) Cash Flow Statement for the year ended 31st March, 2014 (Using direct method) Particulars Cash flows from operating activities Cash sales (135 x.6) Cash receipts from Debtors [45+ (135x40%) - 50] Cash purchases (20% of 55) Cash payments to suppliers [21+ (55x80%) 23] Cash paid to employees Cash payments for overheads (Adm. and selling) Cash generated from operations Income tax paid Net cash generated from operating activities The Institute of Chartered Accountants of India ` in crores ` in crores 81 49 (11) (42) (22) (18) 37 (8) 29 Cash flows from investing activities Sale of investments (12+ 2.40) Payments for purchase of fixed assets Net cash used in investing activities Cash flows from financing activities Redemption of debentures (22-15) Interest paid Dividend paid DDT paid Net cash used in financing activities Net increase in cash Cash at beginning of the period Cash at end of the period (b) Elegant Ltd. 14.4 (11) 3.4 (7) (1.5) (10.0) (1.7) (20.2) 12.2 6.0 18.2 Balance Sheet as on 31st March, 2014 Particulars Notes ` Equity and Liabilities 1 1 49,95,000 b Reserves and Surplus 2 Shareholders' funds a Share capital 2 14,83,500 Non-current liabilities a Long-term borrowings 3 13,17,500 3 Current liabilities a Trade Payables 10,00,000 b Other current liabilities 4 37,500 c 5 6,40,000 Short-term provisions Total 94,73,500 Assets 1 Non-current assets a Fixed assets Tangible assets 2 6 56,25,000 Current assets a Inventories 7 12,50,000 The Institute of Chartered Accountants of India b Trade receivables 8 10,00,000 c 9 13,85,000 Cash and cash equivalents d Short-term loans and advances 2,13,500 Total 94,73,500 Notes to accounts ` 1 Share Capital Equity share capital Issued & subscribed & called up 50,000 Equity Shares of ` 100 each (of the above 10,000 shares have been issued for consideration other than cash) Less: Calls in arrears 50,00,000 (5,000) Total 49,95,000 49,95,000 2 Reserves and Surplus General Reserve Surplus (Profit & Loss A/c) 10,50,000 5,00,000 Less: Preliminary expenses (66,500) Total 4,33,500 14,83,500 3 Long-term borrowings Secured Term Loan State Financial Corporation (7,50,000- 37,500) (Secured by hypothecation of Plant and Machinery) 7,12,500 Unsecured Loan 6,05,000 Total 13,17,500 4 Other current liabilities Interest accrued but not due on loans (SFC) 37,500 Total 37,500 5 Short-term provisions Provision for taxation 3,40,000 Proposed Dividend 3,00,000 Total The Institute of Chartered Accountants of India 6,40,000 6 Tangible assets Land and Building 30,00,000 Less: Depreciation (2,50,000) 27,50,000 Plant & Machinery Less: Depreciation 35,00,000 (8,75,000) 26,25,000 Furniture & Fittings 3,12,500 Less: Depreciation (62,500) Total 2,50,000 56,25,000 7 Inventories Raw Materials 2,50,000 Finished goods 10,00,000 Total 12,50,000 8 Trade receivables Outstanding for a period exceeding six months Other Amounts 2,60,000 7,40,000 Total 10,00,000 9 Cash and cash equivalents Cash at bank with Scheduled Banks 12,25,000 with others (Global Bank Ltd.) Cash in hand 10,000 Total 12,35,000 1,50,000 13,85,000 As per Para 56 of AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off. The amount of ` 25,000 as audit fee and out of pocket expenses paid to auditors amounting ` 3,500 have been included in the amount of ` 66,500. The combined figure of `66,500 has been reduced from Profit and Loss Account balance in the given solution. Question 4 (a) The Balance Sheet of Vaibhav Ltd. as on 31st March 2014 is as follows: Liabilities Equity Shares of ` 100 each ` Assets 2,00,00,000 Fixed Assets 6%, Cumulative Preference Investments (Market 1,00,00,000 Shares of ` 100 each Value ` 19,00,000) 5% Debentures of ` 100 each 80,00,000 Current Assets The Institute of Chartered Accountants of India ` 2,50,00,000 20,00,000 2,00,00,000 Sundry Creditors Provision for taxation TOTAL 1,00,00,000 P & L A/c 12,00,000 2,00,000 4,82,00,000 TOTAL 4,82,00,000 The following scheme of Internal Reconstruction is sanctioned: (i) All the existing equity shares are reduced to ` 40 each. (ii) All preference shares are reduced for ` 60 each. (iii) The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing debentures of ` 100 each and exchange the same for fresh debentures of ` 70 each for every debenture held by them. (iv) Fixed assets are to be written down by 20%. (v) Current assets ale to be revalued at ` 90,00,000. (vi) Investments are to be brought to their market value. (vii) One of the creditors of the company to whom the company owes ` 40,00,000 decides to forgo 40% of his claim. The creditor is allotted with 60000 equity shares of ` 40 each in full and final settlement of his claim. (viii) The taxation liability is to be settled at ` 3,00,000. (ix) It is decided to write off the debit balance of Profit & Loss A/c. Pass journal entries and show the Balance Sheet of the company after giving effect to the above. (b) From the following particulars, prepare the Creditors' Ledger Adjustment Account as would, appear in the General Ledger of Mr. Sathish for the month of March 2014. Date 1 3 10 12 14 20 24 26 29 30 Particulars Purchase from Mr. Akash ` 7,500 Paid ` 3000 after adjusting the initial advance in full to Mr. Akash Paid ` 2,500 to Mr. Dev towards the purchases made in February in full. Paid advance to Mr. Giridhar ` 6,000 Purchase goods from Mr. Akash ` 6,200 Returned goods worth ` 1,000 to Mr. Akash Settled the balance due to Mr. Akash at a discount of 5%. Goods purchased from Mr. Giridhar against the advance paid already Purchased from Mr. Nathan ` 3,500 Goods returned to Mr. Prem 1,200. The goods were originally purchased form cash in the month of February 2014. (12 + 4 = 16 Marks) The Institute of Chartered Accountants of India Answer (a) Journal Entries in the books of Vaibhav Ltd. ` (i) Equity share capital (` 100) A/c Dr. ` 2,00,00,000 80,00,000 To Equity Share Capital (` 40) A/c To Capital Reduction A/c 1,20,00,000 (Being conversion of equity share capital of ` 100 each into `40 each as per reconstruction scheme) (ii) 6% Cumulative Preference Share capital (` 100) A/c Dr. 1,00,00,000 60,00,000 To 6% Cumulative Preference Share Capital (` 60)A/c To Capital Reduction A/c 40,00,000 (Being conversion of 6% cumulative preference shares capital of ` 100 each into ` 60 each as per reconstruction scheme) (iii) 5% Debentures (` 100) A/c Dr. 80,00,000 56,00,000 To 6% Debentures (` 70) A/c To Capital Reduction A/c 24,00,000 (Being 6% debentures of ` 70 each issued to existing 5% debenture holders. The balance transferred to capital reduction account as per reconstruction scheme) (iv) Sundry Creditors A/c Dr. 40,00,000 24,00,000 To Equity Share Capital (` 40) A/c To Capital Reduction A/c 16,00,000 (Being a creditor of ` 40,00,000 agreed to surrender his claim by 40% and was allotted 60,000 equity shares of ` 40 each in full settlement of his dues as per reconstruction scheme) (v) Provision for Taxation A/c Dr. 2,00,000 Capital Reduction A/c Dr. 1,00,000 To Liability for Taxation A/c (Being conversion of the provision for taxation into liability for taxation for settlement of the amount due) (vi) Capital Reduction A/c To P & L A/c The Institute of Chartered Accountants of India Dr. 3,00,000 199,00,000 12,00,000 To Fixed Assets A/c 50,00,000 To Current Assets A/c 110,00,000 To Investments A/c 1,00,000 To Capital Reserve A/c (Bal. fig.) (Being amount of Capital Reduction utilized in writing off P & L A/c (Dr.) Balance, Fixed Assets, Current Assets, Investments and the Balance transferred to Capital Reserve) (vii) Liability for Taxation A/c 26,00,000 Dr. 3,00,000 To Current Assets (Bank A/c) (Being the payment of tax liability) 3,00,000 Balance Sheet of Vaibhav Ltd. (After Reconstruction) as on 31.3.2014 1 2 a b 3 Particulars Equity and Liabilities Shareholders' funds Share capital Reserves and Surplus Non-current liabilities Long-term borrowings Current liabilities Trade Payables(1,00,00,000 less 40,00,000) Notes 1 2 164,00,000 26,00,000 3 56,00,000 60,00,000 3,06,00,000 Total 1 a b 2 ` Assets Non-current assets Fixed assets Tangible assets Investments Current assets 4 5 6 Total 200,00,000 19,00,000 87,00,000 3,06,00,000 Notes to accounts ` 1. Share Capital Equity share capital Issued, subscribed and paid up The Institute of Chartered Accountants of India 2,60,000 equity shares of ` 40 each (of the above 60,000 shares have been issued for consideration other than cash) 1,04,00,000 Preference share capital Issued, subscribed and paid up 1,00,000 6% Cumulative Preference shares of ` 60 each 60,00,000 Total 1,64,00,000 2. Reserves and Surplus Capital Reserve 26,00,000 3. Long-term borrowings Secured 6% Debentures 56,00,000 4. Tangible assets Fixed Assets 2,50,00,000 Adjustment under scheme of reconstruction (50,00,000) 5. Investments 2,00,00,000 20,00,000 Adjustment under scheme of reconstruction (1,00,000) 19,00,000 2,00,00,000 110,00,000 90,00,000 (3,00,000) 87,00,000 6. Current assets Adjustment under scheme of reconstruction Taxation liability paid Working Note: Capital Reduction Account To Liability for taxation A/c To P & L A/c To Fixed Assets To Current assets To Investment To Capital Reserve (Bal. fig.) 1,00,000 By Equity share capital 12,00,000 By 6% Cumulative 50,00,000 preferences Share capital 110,00,000 By 5% Debentures 1,00,000 By Sundry creditors 1,20,00,000 40,00,000 24,00,000 16,00,000 26,00,000 _________ 2,00,00,000 2,00,00,000 The Institute of Chartered Accountants of India (b) Creditors Ledger Adjustment Account in the General Ledger for month of March, 2014 2014 ` 2014 March 1 To Balance b/d (Advance to Akash) 4,500 March 1 March 31 To General Ledger Adjustment A/c (In Bought Ledger) Bank (WN 2) Returns (Akash) ` By Balance b/d (Due to Mr. Dev) March 31 By General Ledger Adjustment A/c (in Bought Ledger) 16,440 1,000 Discount (5% of 5,200) 2,500 Purchases (WN 1) 23,200 260 March 31 To Balance c/d (Due to Nathan) 3,500 25,700 ____ 25,700 Note: The above answer is given on the basis that Mr. Prem will pay in cash as the sale was on cash basis and was not recorded in Creditors Ledger Adjustment account earlier. Working Notes: (1) Purchases: 1.3.2013 14.3.2013 Akash Akash 7,500 6,200 26.3.2013 29.3.2013 Giridhar Nathan 6,000 3,500 23,200 (2) Payments: 3.3.2013 10.3.2013 Akash Dev 3,000 2,500 12.3.2013 24.3.2013 Giridhar Akash (95% of 5,200) 6,000 4,940 16,440 Question 5 (a) A fire occurred in the premises of M/s. Kailash & Co. on 30th September 2013. From the following particulars relating to the period from 1st April 2013 to 30th September 2013, you The Institute of Chartered Accountants of India are required to ascertain the amount of claim to be filed with the Insurance Company for the loss of Stock. The company has taken an Insurance policy for ` 75,000 which is subject to average clause. The value of goods salvaged was estimated at ` 27,000. The average rate of Gross Profit was 20% throughout the period. Particulars Amount in ` (i) (ii) Opening Stock Purchase made 1,20,000 2,40,000 (iii) (iv) Wages paid (including wages for the installation of a machine ` 5,000) Sales (v) Goods taken by the Proprietor (Sale Value) (vi) Cost of goods sent to Consignee on lying unsold with them 20th (vii) Free Samples distributed -Cost 75,000 3,10,000 25,000 September 2013, 18,000 2,500 (b) On 1st April 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of ` 20 per share (face value of ` 10 each). He provides the following information: (i) On 10th June 2014, he purchased another 5,000 shares in Vayu Ltd., @ ` 15 per share. (ii) On 1st August 2014 Vayu Ltd., issued one bonus share for every five shares held by the shareholders. (iii) On 31st August 2014, the directors of Vayu Ltd. announced a rights issue which entitle the shareholders to subscribe two shares for every six shares held @ of ` 15 per share. The shareholders can transfer their rights in full or in part. Hasan sold 1/4th of his right shares holding to Harsh for a consideration of ` 3 per share and subscribed the rest on 31st of October 2014. Prepare Investment A/c in the books of Hasan as on 31st October. 2014.(8 + 8 = 16 Marks) Answer (a) Memorandum Trading Account for the period 1st April, 2013 to 30th Sept. 2013 ` To Opening Stock 1,20,000 By Sales To Purchases 2,40,000 By Consignment stock Less: Advertisement (2,500) By Closing Stock (Bal. fig.) Cost of goods taken by proprietor (20,000) 2,17,500 To Wages 70,000 The Institute of Chartered Accountants of India ` 3,10,000 18,000 1,41,500 To Gross Profit [20% of Sales) 62,000 _____ 4,69,500 _____ 4,69,500 Statement of Insurance Claim ` Value of stock destroyed by fire 1,41,500 Less: Salvaged Stock (27,000) Insurance Claim 1,14,500 Note: Since policy amount is less than claim amount, average clause will apply. Therefore, claim amount will be computed by applying the formula Claim= Insured value Total cost Loss suffered Claim amount = ` 60,689 (1,14,500 x 75,000/ 1,41,500) Investment Account in the books of Hasan (Equity shares in Vayu Ltd.) (b) Date Particulars No. of Amount Date Particulars Shares ( `) 1.4.14 To Balance b/d 20,000 4,00,000 31.8.14 By Bank A/c (sale 10.6.14 To Bank A/c 5,000 75,000 of rights) (W.N.3) 1.8.14 To Bonus issue 5,000 0 31.10.14 By Balance c/d (W.N.1) (Bal. fig.) 31.10.14 To Bank A/c (Right shares) 7,500 1,12,500 (W.N.4) 37,500 5,87,500 Working Notes: (1) Bonus shares = 25,000/ 5 = 5,000 shares 25,000 + 5,000 (2) Right shares = (3) Sale of rights = 10,000 shares x x `3 = `7,500 (4) Rights subscribed 6 2 = 10,000 shares 3 = 10,000 ` 15 = ` 1,12,500 4 The Institute of Chartered Accountants of India No. of shares Amount ( `) 0 37,500 7,500 5,80,000 37,500 5,87,500 Question 6 Anuj Ayush and Piyush are in partnership sharing profits and losses in the ratio 2 : 2 : 1. Their Balance Sheet as on 31.3 .2014 is as follows: Liabilities ` Assets ` Capital account ` Fixed assets Anuj 3,75,000 Plant Ayush 2,80,000 Current assets Piyush 2,25,000 7,87,000 1,03,000 1,88,000 Debtors 2,16,000 Bank FD General Reserve Creditors 8,80,000 Stock 1,56,000 2,25,000 Bank balance 12,84,000 13,000 12,84,000 Anuj decided to retire with effect from 1.4.2014. The remaining partners agreed to share profits and losses equally in future. The following adjustments were agreed to be made upon retirement of Anuj. (i) Goodwill was to be valued at 1 year purchase of the average profits of the preceding 3 years on the date of retirement. The average profits of the past 3 years were as follows: Year ended ` 31.3.2014 3,30,000 31.3.2013 2,32,000 31.3.2012 (as per draft accounts) 2,20,900 The partners decided not to raise goodwill account in the books. (ii) The assets were revalued as follows: Plant to be depreciated by 10% Creditors amounting to ` 10,000 were omitted to be recorded; ` 6,000 is to be written off from stock; Provision for doubtful debts to be created @ 5% of the debtors; Interest accrued on FD amounting to ` 9,000 was omitted to be recorded. The above adjustments were to be made from the profit for the year ended 31.3 .2014 before calculation of goodwill. The Institute of Chartered Accountants of India (iii) Anuj agreed to take over the bank FD including interest accrued thereon in part payment of his dues and the balance would remain as a loan, carrying interest of 8% p.a. (iv) Ayush and Piyush agreed to bring in sufficient cash to make their capital proportionate and maintain a bank balance of ` 1,50,000. You are required to prepare (I) Capital accounts of partners as on 1.4.2014 giving effect to the above adjustments. (2) Balance Sheet as on 1.4.2014 after Anuj s retirement. (16 Marks) Answer Partners Capital Accounts as on 1.4.2014 Anuj Ayush 22,950 To Revaluation Loss 18,700 By General Reserves 75,200 By Ayush and Piyush 37,400 68,850 By Balance b/d 3,75,000 37,400 To Anuj Piyush 91,800 To Bank FD 2,34,000 To 8% Loan 2,70,600 To Balance c/d* Anuj 3,03,450 3,03,450 By Cash (Bal. fig.) 5,42,000 3,63,800 3,91,000 Ayush Piyush 2,80,000 2,25,000 75,200 37,600 - 8,600 1,28,400 5,42,000 3,63,800 3,91,000 Balance Sheet as on 1.4.2014 after Anuj s retirement Liabilities Amount (`) Assets Anuj s Loan 2,70,600 Plant(90% of ` 7,87,000) Creditors(2,16,000+10,000) 2,26,000 Stock (` 1,03,000 less ` 6,000) Capital Accounts*: Amount (`) 7,08,300 97,000 Debtors(95% of ` 1,56,000 Anuj 3,03,450 Piyush 1,48,200 Bank Balance 1,50,000 3,03,450 11,03,500 11,03,500 *Total of capital balances should be ` 6,06,900 which should be proportioned to individual partners in their profit sharing ratio. The Institute of Chartered Accountants of India Working Notes: 1. Profit / Loss on revaluation Revaluation Account Amount ( `) 78,700 By Interest on FD 10,000 By Loss on revaluation 6,000 7,800 1,02,500 To Plant To Creditors To Inventory To Provision for doubtful debts 2. Amount ( `) 9,000 93,500 1,02,500 Calculation of Goodwill Goodwill Valuation Profit of year ended 31.3.2014 (` 3,30,000 less ` 93,500) 31.3.2013 31.3.2012 Total Profits Average Profit = ` 2,36,500 2,32,000 2,20,000 6,88,500 6,88,500/3 = 2,29,500 Goodwill valued at 1 year purchase amounting ` 2,29,500 3. Adjustment for goodwill among partners Anuj s share of goodwill (2,29,500 x 2/5) = 91,800 Gaining ratio of Ayush and Piyush Ayush Piyush 1 2 2 1 5 2 5 4 10 = 1 5 1 5 2 10 10 = 3 10 Gaining Ratio = 1: 3 Entry for adjustment of goodwill ` Ayush s capital A/c Piyush s capital A/c To Anuj s capital A/c Dr. Dr. The Institute of Chartered Accountants of India 22,950 68,850 ` 91,800 Question 7 Answer any four from the following: (a) From the following information state the amount to be capitalized as per AS 10. Give the explanations for your answer. ` 5 lakhs as routine repairs and ` 1 lakh on partial replacement of a part of a machine. ` 10 lakhs on replacement of part of a machinery which will improve the efficiency of a machine. (b) What are the advantages of customized accounting software? (c) What are the differences between Hire Purchase and Installment System? (d) From the following particulars prepare a current account , as sent by Mr. Ram to Mr. Siva as on 31st October 2014 by means of product method charging interest @ 5% p.a. 2014 Particulars 1st Balance due from Siva 750 Sold goods to Siva Goods returned by Siva 1250 200 Siva paid by cheque Received cash from Siva 800 500 July 15th 20th August August 22nd Sep 15th Oct ` (e) Kishanlal has made the following sales to Babulal. He allows a credit period of 10 days beyond which he charges interest @ 12% per annum. Date of Sales Amount (`) 26.05.14 18.07.14 12,000 18,000 02.08.14 16,500 28.08.14 9,500 09.09.14 15,500 17.09.14 13,500 Babulal wants to settle his accounts on 30-9-2014. Calculate the interest payable by him using Average Due Date (ADD). If Babulal wants to save interest of ` 588, how many days before 30.9.2014 does he have to make payment? Also find the payment date in this case. (4 x 4 = 16 Marks) Current Account to be read as Account Current The Institute of Chartered Accountants of India Answer (a) As per AS 10 Accounting for Fixed Assets , only those expenditures that increase the future benefits from the existing assets, beyond its previously assessed standard of performance, is to be included in the gross book value. Hence, in the given case, amount of ` 5 lakhs spent on routine repairs and ` 1 lakh on partial replacement of a part of the machinery should be charged to Profit and Loss Account as these amounts will help in maintaining the capacity but will not improve the efficiency of the machine. However, ` 10 lakhs incurred on replacement of a part of the machinery, which will increase the efficiency of a machine, should be capitalized by inclusion in the gross book value of machinery. (b) Following are the advantages of the customized accounting packages: 1. The input screens can be tailor made to match the input documents for ease of data entry. 2. The reports can be as per the specification of the organization. Many additional MIS reports can be included in the list of reports. 3. Bar-code scanners can be used as input devices suitable for the specific needs of an individual organization. 4. The system can suitably match with the organizational structure of the company. (c) Statement showing differences between Hire Purchase and Installment System Basis of Distinction Hire Purchase Agreement 1. Governing Act It is governed by Hire It is governed by the Sale Purchase Act, 1972. of Goods Act, 1930. 2. Nature of Contract It is an agreement of hiring. 3. Passing of (ownership) 4. Right goods 5. Seller s right repossess 6. Right of Disposal to Installment Agreement Purchase It is an agreement of sale. Title The title to goods passes The title to goods passes on last payment. immediately as in the case of usual sale. Return The hirer may return goods Unless seller defaults, without further payment goods are not returnable. except for accrued installments. to The seller may take The seller can sue for possession of the goods if price if the buyer is in hirer is in default. default. He cannot take possession of the goods. Hirer cannot hire out sell, The buyer may dispose off The Institute of Chartered Accountants of India pledge or assign entitling the goods and give good transferee to retain title to the bona fide possession as against the purchaser. hire vendor. 7. Responsibility Risk of Loss. for The hirer is not responsible for risk of loss of goods if he has taken reasonable precaution because the ownership has not yet transferred. 8. Name of involved 9. Component other Component other than than cash price. Cash Price included in installment is called Hire charges. The buyer is responsible for risk of loss of goods because of the ownership has transferred. Parties The parties involved are The parties involved are called Hirer and Hire called buyer and seller. vendor. Component other than Cash Price included in Installment is called Interest. Note: Any four differences may be given in the answer. (d) Siva in Account Current with Ram as on 31st Oct, 2014 Dr. Cr. ` Days 750 123 92,250 20.08.14 77 01.07.14 To Bal. b/d 15.8.14 To Sales 1,250 31.10.14 To Interest Product (` ) ` Days Product (` ) By Sales Returns 200 72 14,400 96,250 22.09.14 By Bank 800 39 31,200 15.10.14 By Cash 500 16 8,000 18.48 By Balance of Products _____ ______ 31.10.14 2018.48 Interest = ` 1,34,900 x By Bal. c/d 1,34,900 518.48 ______ 2018.48 1,88,500 1,88,500 5 1 = ` 18.48 100 365 (e) Calculation of Average Due date (Taking 05th June as the base date) Date Due Date Amount ` 26.05.2014 18.07.2014 05.06.2014 28.07.2014 The Institute of Chartered Accountants of India 12,000 18,000 No. of days from Base date Product 0 53 0 9,54,000 ` 02.08.2014 12.08.2014 16,500 68 11,22,000 280.8.2014 07.09.2014 9,500 94 8,93,000 09.09.2014 19.09.2014 15,500 106 16,43,000 17.09.2014 27.09.2014 13,500 85,000 114 15,39,000 61,51,000 Average due date = 5.6.14 + 61,51,000 85,000 = 5.6.14 + 72 days (app.) = 16.08.2014 Interest if settlement is done on 30.9.14 85,000 x 12% x 45 = ` 1,258 (approx.) 365 If Babulal wants to save interest of ` 588, then the calculation of days before 30.09.2014 will be: 588/1258 X 45 days (16.08.2014 to 30.09.2014) = 21 days earlier Payment date in the above case will be 09.09.2014. The Institute of Chartered Accountants of India

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