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

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PAPER 1 : ACCOUNTING Question No. 1 is compulsory Answer any five questions from the remaining six questions. Wherever appropriate, suitable assumption/s should be made and indicated in answer by the candidate. Working notes should form part of the answer. Question 1 Answer the following questions: (a) Calculate the maximum remuneration payable to the Managing Director based on effective capital of a non-investment company for the year, from the information given below: (` in 000) (i) Profit for the year (calculated as per Section 349, 350 & 351 of the Companies Act, 1956) (ii) Paid up capital (iii) (iv) Reserves & surplus Securities premium 7,200 1,200 (v) (vi) Long term loans Investment 6,000 3,600 (vii) Preliminary expenses not written off (viii) Remuneration paid to the Managing Director during the year 3,000 18,000 3,000 600 (b) M/s Vijoy Electricals sends goods to its customers on sale or returnable basis. The following transactions took place during January to March 2011: 2011 ` January-10 Sent goods to customers on sale or returnable basis at cost plus 25% 5,00,000 January -30 Goods returned by customers 2,00,000 February -28 March -31 Received letter of approval from customers Goods with customers awaiting approval 2,00,000 1,00,000 Vijoy Electricals records sale or return transactions as ordinary sales transaction. You are required to pass the necessary journal entries in the books of account assuming that the accounting year closes on 31st March, 2011. The Institute of Chartered Accountants of India 2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 (c) In the Trial Balance of M/s. Sun Ltd. as on 31-3-2011, balance of machinery appears ` 5,60,000. The company follows rate of depreciation on machinery @ 10% p.a. on Straight Line Method *. On scrutiny it was found that a machine appearing in the books on 1-4-2010 at ` 1,60,000 was disposed of on 30-9-2010 at ` 1,35,000 in part exchange of a new machine costing ` 1,50,000. You are required to calculate: (i) Total depreciation to be charged in the Profit and Loss Account. (ii) Loss on exchange of machine. (iii) Book value of machinery in the Balance Sheet as on 31.3.2011. (d) A and B are in partnership sharing profits and losses in the ratio of 3:2. The capitals of A and B are ` 80,000 and ` 60,000 respectively. They admit C as a partner who contributes ` 35,000 as capital for 1/5th share of profits to be acquired equally from both A & B. The capital accounts of old partners are to be adjusted on the basis of the proportion of C s capital to his share in the business. Calculate the amount of actual cash to be paid off or brought in by the old partners for the purpose and pass the necessary journal entries. (4 x 5 = 20 Marks) Answer (a) Calculation of Effective Capital ** of the Company ` in '000 Paid-up capital 18,000 Add: Reserves and surplus 7,200 Securities premium 1,200 Long term loans 6,000 32,400 Less: Investments Preliminary expenses 3,600 3,000 Effective capital for the purpose of managerial remuneration * (6,600) 25,800 Straight line method given in the question should be read as Written Down Value method due to absence of related information for solving the question on the basis of straight line method. ** It is assumed that the company is having inadequate net profit and is not exceeding the ceiling limit of ` 24,00,000 p.a. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3 As effective capital is less than ` 5 crores but more than ` 1 crore, therefore maximum remuneration payable to the Managing Director should be @ ` 1,00,000 per month. So, maximum remuneration payable to the Managing Director for the year (` 1,00,000 x 12) = ` 12,00,000 (b) In the books of M/s. Vijoy Electricals Journal Entries Date 2011 Particulars Debit Jan.10 Sundry Debtors Account ` Dr. Returns Inward Account* To Sundry Debtors Account Dr. ` 5,00,000 To Sales Account (Being the goods sent to customers on sale or returnable basis) Jan.30 Credit 5,00,000 2,00,000 2,00,000 (Being the goods returned by customers as not approved or cancellation of sales on return of goods) Feb.28 No entry on receiving letter of approval from the customer Mar. 31 Sales Account To Sundry Debtors Account Dr. 1,00,000 1,00,000 (Being cancellation of original entry at the year end on goods with customer awaiting approval) Mar. 31 Stock with customer on sale or return Account Dr. To Trading Account (Refer W.N.) 80,000 80,000 (Being the adjustment for cost of goods lying with customers awaiting approval at the year end) * Alternatively, Sales account can be debited in place of Returns Inward account . Working Note: Cost of goods with customers = ` 1,00,000 100 = ` 80,000 125 The Institute of Chartered Accountants of India 4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 (c) (i) Total Depreciation to be charged in the Profit and Loss Account ` Depreciation on old machinery in use [10% of (5,60,000-1,60,000)] 40,000 Add: Depreciation on new machine @ 10% for six months 6 1,50,000 10% 12 7,500 Total depreciation on machinery in use 47,500 Add: Depreciation on machine disposed of (10% for 6 months) 6 1,60,000 10% 12 8,000 So, total depreciation to be charged in Profit and Loss A/c 55,500 (ii) Loss on Exchange of Machine ` Book value of machine as on 1.4.2010 1,60,000 Less: Depreciation for 6 months @ 10% Written Down Value as on 30.9.2010 (8,000) 1,52,000 Less: Exchange value (1,35,000) Loss on exchange of machine 17,000 (iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011 ` Balance as per trial balance Less: Book value of machine sold 5,60,000 (1,60,000) 4,00,000 1,50,000 Add: Purchase of new machine 5,50,000 Less: Depreciation on machinery in use (47,500) 5,02,500 (d) Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each Calculation of New Profit Sharing Ratio Existing ratio Less: Share of profit transferred to C New share The Institute of Chartered Accountants of India A 3/5 (1/10) 5/10 B 2/5 (1/10) 3/10 PAPER 1 : ACCOUNTING 5 New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10 Calculation of Total Capital of the Reconstituted Firm Capital brought in by C for 1/5th share = ` 35,000 Total Capital = ` 35,000 x (5/1) = ` 1,75,000 Calculation of Actual Cash to be paid or brought in by old partners A (`) New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 Less: Adjusted old capital of A & B (80,000) Cash brought in 7,500 Cash to be paid Journal Entries B (`) 52,500 (60,000) (7,500) C (`) 35,000 35,000 L.F. Cash A/c To A s Capital A/c Dr. Cr. Amount ` Particulars Dr. Amount ` 7,500 7,500 (Being the shortage of capital brought in cash by A) B s Capital A/c To Cash A/c Dr. 7,500 7,500 (Being the excess capital withdrawn by B) Note: Entries for cash brought in and paid off only, have been passed. Question 2 The Balance Sheet of M/s. Ice Ltd. as on 31-03-2011 is given below: Liabilities 1,00,000 Equity shares ` 10 each fully paid up ` Assets of 4,000, 8% Preference shares of ` 100 each fully paid 10,00,000 Freehold property Plant and machinery 4,00,000 Trade investment (at cost) Sundry debtors The Institute of Chartered Accountants of India ` 5,50,000 2,00,000 2,00,000 4,50,000 6 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 6% Debentures 4,00,000 Stock-in trade 3,00,000 Deferred advertisement expenses * 50,000 Sundry creditors 1,01,000 Profit and loss account 4,75,000 Director s loan 3,00,000 (secured by freehold property) Arrear interest 24,000 4,24,000 22,25,000 22,25,000 The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective stakeholders: (i) Preference shares are to be written down to ` 80 each and equity shares to ` 2 each. (ii) Preference dividend in arrear for 3 years to be waived by 2/3 rd and for balance 1/3rd, equity shares of ` 2 each to be allotted. (iii) Debentureholders agreed to take one freehold property at its book value of ` 3,00,000 in part payment of their holding. Balance debentures to remain as liability of the company. (iv) Arrear debenture interest to be paid in cash. (v) Remaining freehold property to be valued at ` 4,00,000. (vi) Investment sold out for ` 2,50,000. (vii) 75% of Director s loan to be waived and for the balance, equity shares of ` 2 each to be allotted. (viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to be written off. (ix) Company s contractual commitments amounting to ` 6,00,000 have been settled by paying 5% penalty of contract value. Show the Journal Entries for giving effect to the internal re-construction and draw the Balance Sheet of the company after effecting the scheme. (16 Marks) Answer In the books of Ice Ltd. Journal Entries Particulars i 8% Preference share capital A/c (` 100 each) To 8% Preference share capital A/c (` 80 each) * Debit ` Dr. Credit ` 4,00,000 3,20,000 As per para 56 of AS 26, deferred advertisement expenses should not appear in the Balance Sheet. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 7 To Capital reduction A/c 80,000 (Being the preference shares of ` 100 each reduced to ` 80 each as per the approved scheme) ii Equity share capital A/c (` 10 each) Dr. 10,00,000 To Equity share capital A/c (` 2 each) 2,00,000 To Capital reduction A/c 8,00,000 (Being the equity shares of ` 10 each reduced to ` 2 each) iii Capital reduction A/c Dr. 32,000 To Equity share capital A/c (` 2 each) 32,000 (Being arrears of preference share dividend of one year to be satisfied by issue of 16,000 equity shares of ` 2 each) iv 6% Debentures A/c Dr. 3,00,000 To Freehold property A/c 3,00,000 (Being claim settled in part by transfer of freehold property) v Accrued debenture interest A/c Dr. 24,000 To Bank A/c 24,000 (Being accrued debenture interest paid) vi Freehold property A/c Dr. 1,50,000 To Capital reduction A/c 1,50,000 (Being appreciation in the value of freehold property) vii Bank A/c Dr. 2,50,000 To Trade investment A/c 2,00,000 To Capital reduction A/c 50,000 (Being trade investment sold on profit) viii Director s loan A/c To Equity share capital A/c (` 2 each) To Capital reduction A/c (Being director s loan waived by 75% and balance being discharged by issue of 37,500 equity shares of ` 2 each) The Institute of Chartered Accountants of India Dr. 3,00,000 75,000 2,25,000 8 ix INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Capital Reduction A/c Dr. 12,73,000 To Profit and loss A/c 4,75,000 To Sundry debtors A/c 1,80,000 To Stock-in-trade A/c To Deferred advertisement expenses A/c 2,40,000 50,000 To Bank A/c 30,000 To Capital reserve A/c 2,98,000 (Being various assets, penalty on cancellation of contract, profit and loss account debit balance written off, and balance transferred to capital reserve account as per the scheme) Balance Sheet of Ice Ltd. (As reduced) Liabilities ` Assets Share capital Freehold property 1,53,500 Equity shares of ` 2 each (out of which 53,500 shares have been issued for consideration other than cash) 3,07,000 Plant and machinery ` 4,00,000 2,00,000 Sundry debtors Stock-in-trade Cash at bank 4,000, 8% Preference shares of ` 80 2,70,000 60,000 1,96,000 each fully paid up 3,20,000 (2,50,000 24,000 Capital reserve 6% Debentures 2,98,000 30,000) 1,00,000 Sundry creditors 1,01,000 11,26,000 11,26,000 Question 3 Bear Bar club was registered in a city and the accountant prepared the following Receipts and Payments Account for the year ended 31st March, 2011 and showed a deficit of ` 14,520. Receipts Subscriptions Fair receipts Variety show receipt (net) Interest Bar collection Amount Payments Amount 62,130 Premises 30,000 ` 7,200 Honorarium to Secretary 12,810 Rent 690 Rates & taxes 22,350 Printing & stationary The Institute of Chartered Accountants of India ` 12,000 2,400 3,780 1,410 PAPER 1 : ACCOUNTING Excess cash spent Deficit 9 1,000 Sundry expenses 5,350 14,520 Wages 2,520 Fair expenses 7,170 Bar purchases payments Repair 17,310 960 New car (less proceeds of old car ` 9,000) 37,800 1,20,700 1,20,700 The following additional information are: Cash in hand Bank balances as per pass book Cheque issued but not presented - for sundry expenses Subscriptions due Premises at cost Accumulated depreciation on premises Car at cost Accumulated depreciation on car Bar stock Creditors for the bar purchases 01-04-2010 450 24,690 270 3,600 87,000 56,400 36,570 30,870 2,130 1,770 31-03-2011 10,440 90 2,940 1,17,000 46,800 2,610 1,290 Cash excess spent represent honorarium to secretary not withdrawn due to cash deficit. His annual honorarium is ` 12,000. Depreciation on premises and car is to be provided at 5% and 20% on written down value method. You are required to prepare the correct Receipts and Payments Account, Income and Expenditure Account and Balance Sheet as on 31st March, 2011. (16 Marks) Answer In the books of Bear Bar Club Receipts & Payments Account for the year ended 31.03.2011 Receipts Amount Payments ` To Balance b/d ` By Honorarium to Secretary Cash in hand 450 Bank (W.N.6) 24,420 Amount 11,000 (12,000 1,000) 24,870 The Institute of Chartered Accountants of India By Rent 2,400 10 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 To Subscriptions 62,130 To Fair receipts 7,200 To Variety show receipts 12,810 To Interest 690 By Rates & taxes 3,780 By Printing & stationery 1,410 By Sundry expenses 5,350 By Wages 2,520 To Bar collection 22,350 By Fair expenses 7,170 To Car sold (old) 9,000 By Bar purchases 17,310 By Repairs 960 By Premises 30,000 By Car (37,800 + 9,000) 46,800 By Balance c/d Bank (W.N.6) 10,350 1,39,050 1,39,050 Income & Expenditure Account for the year ended 31.03.2011 Expenditure Amount Income Amount ` To Honorarium to secretary ` 12,000 By Subscription To Rent 2,400 Less: Outstanding as on 1.4.10 To Rates & taxes 3,780 Add: Outstanding as on 1.3.11 To Printing & stationery 1,410 By Fair receipts To Sundry expenses 5,350 To Wages 2,520 By Variety show To Repairs Less: Fair expenses 960 By Interest To Depreciation on: By Profit from bar (W.N.3) Premises (1,530+1,500) 3,030 By Profit on sale of car (W.N.5) Car 62,130 (3,600) 2,940 61,470 7,200 (7,170) 30 12,810 690 6,000 9,360 To Surplus (excess of income over expenditure) 3,300 43,490 84,300 The Institute of Chartered Accountants of India 84,300 PAPER 1 : ACCOUNTING 11 Balance Sheet as on 31.03.2011 Liabilities Amount Assets Amount ` Capital fund ` Premises Add: Addition in the year Opening balance (W.N.1) 65,130 Add: Surplus 87,000 30,000 43,490 1,08,620 Sundry creditors Outstanding Honorarium 1,17,000 1,290 Less: Accumulated depreciation (W.N.4) 1,000 (59,430) Car 36,570 Add: Addition in the year 57,570 46,800 83,370 Less: Book value of the car sold Less: Depreciation of new car (36,570) (9,360) 37,440 Bar stock 2,610 Subscription due 2,940 Cash at bank (W.N.6) 1,10,910 10,350 1,10,910 Working Notes: 1. Balance Sheet as on 31.03.2010 Liabilities Amount Assets ` Capital fund (bal. fig.) ` 65,130 Premises Sundry creditors for bar 1,770 Car Accumulated depreciation on Amount 87,000 36,570 Bar stock Premises Car 30,870 Subscription due 56,400 2,130 3,600 87,270 Cash at bank (W.N.6) Cash in hand 1,54,170 The Institute of Chartered Accountants of India 24,420 450 1,54,170 12 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 2. Creditors for Bar Purchases ` To Bank 17,310 To Balance c/d 1,290 ` By Balance b/d 1,770 By Purchases (Bal. fig.) 18,600 3. 18,600 Trading Account (of Bar) ` To Opening stock To Purchases (W.N.2) ` 2,130 By Bar collections 16,830 To Profit (Bal. fig.) 22,350 (Cash) 6,000 By Closing stock 2,610 24,960 4. 16,830 24,960 Accumulated Depreciation on Premises ` Opening Balance 56,400 Add: Depreciation on old premises [(87,000 56,400) 5%] 1,530 Depreciation on new premises (30,000 5%) 1,500 59,430 5. Profit on sale of car ` Sales price of a car Less: Book value of old car sold Less: Accumulated depreciation Profit on sale The Institute of Chartered Accountants of India ` 9,000 36,570 (30,870) (5,700) 3,300 PAPER 1 : ACCOUNTING 6. 13 Bank balance as per cash book 1.4.2010 31.3.2011 ` ` 24,690 10,440 (270) (90) 24,420 10,350 Bank balance as per Pass book Less: Cheque issued but not presented for payment Bank balance as per cash book Question 4 (a) Balance Sheet of M/s Hero Ltd. as on 31st March, 2010 and 2011 are as follows: (` in 000) Liabilities Equity share capital Capital reserve 31-3-10 31-03-11 Assets 1,000 - 1,150 Land & buildings 31-3-10 31-03-11 500 480 10 Machinery 750 820 General reserve 250 300 Investments 100 50 Profit and loss A/c 150 180 Stock 300 280 Long term loan from bank 500 400 Sundry debtors 400 420 Sundry creditors 500 400 Cash in hand 200 165 Provision for taxation 50 60 Cash at bank 300 410 Proposed dividends 100 125 2,550 2,625 2,550 2,625 Additional information: (i) Dividend of ` 1,00,000 was paid during the year ended 31st March, 2011. (ii) Machinery purchased during the year for ` 1,25,000. (iii) Company sold some investment at a profit of ` 10,000 which was credited to capital reserve. (iv) Depreciation written off on land and building ` 20,000. (v) Income tax provided during the year ` 55,000. From the above particulars, prepare a cash flow statement for the year ended 31st March, 2011 as per AS 3 using indirect method. (b) A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself incorporated as a company on 1st November, 2010. The first accounts are drawn upto The Institute of Chartered Accountants of India 14 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 31st March 2011. The gross profit for the period is ` 56,000. The general expenses are ` 14,220; Director's fee ` 12,000 p.a.; Incorporation expenses ` 1,500. Rent upto 31st December was ` 1,200 p.a after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of the company was made a director, is ` 6,000 p.a. His remuneration thereafter is included in the above figure of fee to the directors. Give profit and loss account showing pre and post incorporation profit. The net sales are ` 8,20,000, the monthly average of which for the first four months is one-half of that of the remaining period. The company earned a uniform profit. Interest and tax may be ignored. (10 + 6 = 16 Marks) Answer (a) Cash Flow Statement for the year ended on 31st March, 2011 ` I Cash flow from Operating Activities Net profit made during the year (W.N.1) 2,60,000 Add: Depreciation on machinery (W.N.2) 55,000 Add: Depreciation on land and building 20,000 Operating profit before change in working capital 3,35,000 Add: Decrease in stock (3,00,000 2,80,000) 20,000 Less: Increase in sundry debtors(4,20,000 4,00,000) (20,000) Less: Decrease in sundry creditors (5,00,000 4,00,000) (1,00,000) Less: Income tax paid (W.N.3) (45,000) Net cash generated from operating activities II 1,90,000 Cash flow from Investing Activities Purchase of machinery (1,25,000) Sale of investment (50,000 + 10,000) 60,000 Net cash used in investing activities III ` (65,000) Cash flow from Financing Activities Issue of equity shares (11,50,000 10,00,000) Repayment of long (5,00,000 4,00,000) term loan Dividend paid Net cash used in financing activities The Institute of Chartered Accountants of India from 1,50,000 bank (1,00,000) (1,00,000) (50,000) PAPER 1 : ACCOUNTING Net increase in cash and cash equivalent 15 75,000 Add: Cash and Cash Equivalents at the beginning of the period (2,00,000 + 3,00,000) 5,00,000 Cash and cash equivalents at the end of the period (1,65,000 + 4,10,000) 5,75,000 Working Notes: 1. Net profit (before tax) made during the year ` Increase in Profit and Loss A/c balance (1,80,000 1,50,000) 30,000 Add: Transfer to General Reserve (3,00,000 2,50,000) 50,000 Add: Provision for taxation made during the year 55,000 Add: Provided for proposed dividend during the year (W.N.4) 1,25,000 2,60,000 2. Machinery Account ` ` To Balance b/d 7,50,000 By Bank (machinery sold) (Bal. Fig.) To Bank (machinery purchased) 1,25,000 By Balance c/d 8,75,000 3. 55,000 8,20,000 8,75,000 Provision for Taxation ` ` To Cash (Bal. fig.) 45,000 By Balance b/d 50,000 To Balance c/d 60,000 By Profit & Loss A/c 55,000 1,05,000 4. 1,05,000 Proposed Dividend A/c ` ` To Bank 1,00,000 By Balance b/d 1,00,000 To Balance c/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000 2,25,000 The Institute of Chartered Accountants of India 2,25,000 16 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 (b) Profit & Loss Account for 9 months ended on 31st March, 2011 Particulars Basis Pre Postincorporati incorporat on period ion period Total Particulars ` Time ratio Actual Actual W.N. 2 Actual 6,320 400 2,000 7,900 5,000 1,500 950 - - 7,280 - 24,650 14,220 By Gross Profit 5,000 1,500 1,350 2,000 31,930 - 16,000 To General expenses To Directors fee To Formation expenses To Rent (600 + 750) To Manager s salary To Net Profit transfd to: Capital Reserve P & L Appr. A/c ` 40,000 Basis PrePostIncorporati Incorporati on period on period ` 56,000 ` ` 16,000 40,000 56,000 16,000 Sales ratio ` 40,000 56,000 Working Notes: 1. Calculation of sales ratio Let the average monthly sales of first four months = 100 and next five months = 200 Total sales of first four months = 100 x 4 = 400 and total sales of next five months = 200 x 5 = 1,000 The ratio of sales = 400 : 1,000 =2 : 5 2. Rent Till 31st December, 2010, rent was ` 1,200 p.a. i.e. ` 100 p.m. So, Pre-incorporation rent = ` 100 x 4 months Post-incorporation rent The Institute of Chartered Accountants of India Total = ` 400 = (`100 x 2 months) + (` 250 x 3 months) = ` 950 PAPER 1 : ACCOUNTING 17 Question 5 (a) A fire occurred in the premises of M/s. Fireproof Co. on 31 st August, 2010. From the following particulars relating to the period from 1st April, 2010 to 31st August, 2010, you are requested to ascertain the amount of claim to be filed with the insurance company for the loss of stock. The concern had taken an insurance policy for ` 60,000 which is subject to an average clause. ` (i) Stock as per Balance Sheet at 31-03-2010 99,000 (ii) (iii) Purchases Wages (including wages for the installation of a machine ` 3,000) 1,70,000 50,000 (iv) (v) Sales Sale value of goods drawn by partners 2,42,000 15,000 (vi) Cost of goods sent to consignee on 16th August, 2010, lying unsold with them 16,500 (vii) Cost of goods distributed as free samples 1,500 31st While valuing the stock at March, 2010, ` 1,000 were written off in respect of a slow moving item. The cost of which was ` 5,000. A portion of these goods were sold at a loss of ` 500 on the original cost of ` 2,500. The remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged was estimated at ` 20,000. The average rate of gross profit was 20% throughout. (b) Explain the factors to be considered before selecting the pre-packaged accounting software. (10 + 6 = 16 Marks) Answer (a) Memorandum Trading Account for the period 1st April, 2010 to 31st August, 2010 Normal Items Abnormal Items Total ` ` ` 95,000 5,000 1,56,500 - To Wages 47,000 - 47,000 By Loss To Gross profit @ 20% 48,000 - 48,000 By Closing stock (Bal.fig.) 3,46,500 5,000 To Opening stock To Purchases (Refer W.N.) 1,00,000 By Sales 1,56,500 By Goods sent to consignee 3,51,500 The Institute of Chartered Accountants of India Normal Abnormal Items Items Total ` ` ` 2,40,000 2,000 2,42,000 16,500 - 16,500 - 500 500 90,000 2,500 92,500 3,46,500 5,000 3,51,500 18 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Statement of Claim for Loss of Stock ` Book value of stock as on 31.08.2010 Less: Stock salvaged Loss of stock 92,500 (20,000) 72,500 Amount of claim to be lodged with insurance company Policy value = Loss of stock x Value of stock on the date of fire = ` 72,500 x 60,000 92,500 = ` 47,027 Working Note: Calculation of Adjusted Purchases ` Purchases 1,70,000 Less: Drawings (12,000) Free samples (1,500) Adjusted purchases 1,56,500 (b) Some of the factors to be considered before selecting the pre-packaged accounting software are: (a) Fulfillment of business requirements: The enterprise may try to match his requirement with the available solutions. (b) Completeness of reports: Some packages might provide extra reports or the reports match the requirements more then the others. (c) Ease of use: Some packages could be very detailed and cumbersome compare to the others. (d) Cost: The budgetary constraints could be an important deciding factor. (e) Reputation of Vendor: Vendor support is essential for any software. A stable vendor with good reputation and track records will always be preferred. (f) Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be preferred to a vendor unwilling to give updates. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 19 Question 6 (a) Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31st March, 2011: (`) Authorised capital: 5,00,000 50,000, 10% Preference shares of ` 10 each 20,00,000 2,00,000 Equity shares of ` 10 each Issued and subscribed capital: 4,00,000 40,000, 10% Preference shares of ` 10 each fully paid 13,50,000 1,80,000, Equity shares of ` 10 each, of which ` 7.50 paid up Reserves and Surplus: General reserve 2,40,000 Capital reserve Securities premium 1,50,000 50,000 Profit and loss account 3,00,000 On 1st April, 2011, the company has made a final call @ ` 2.50 each on 1,80,000 equity shares. The call money was received by 30th April, 2011. There after the company decided to capitalize its reserves by issuing bonus shares at the rate of one share for every three shares held. Securities premium of ` 50,000 includes a premium of ` 20,000 for shares issued to vendor for purchase of a special machinery. Capital reserve includes ` 60,000 being profit on exchange of plant and machinery. Show necessary Journal Entries in the books of the company and prepare the extract of the Balance Sheet after bonus issue. Necessary assumption, if any, should form part of your answer. (b) Mr. Black accepted the following bills drawn by Mr. White: Date of Bill Period 09-03-2010 4 months 4,000 16-03-2010 3 months 5,000 07-04-2010 18-05-2010 5 months 3 months 6,000 5,000 Amount (`) He wants to pay all the bills on a single date. Interest chargeable is @ 18% p.a. and Mr. Black wants to save ` 150 on account of interest payment. Find out the date on The Institute of Chartered Accountants of India 20 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 which he has to effect the payment to save * interest of ` 150. Base date to be taken shall be the earliest due date. (8 + 8 = 16 Marks) Answer (a) In the books of M/s. Yahoo Ltd. Journal Entries Date Particulars 1.4.2011 Equity share final call A/c ` Dr. ` 4,50,000 To Equity share capital A/c 4,50,000 (Being the final call of ` 2.50 per share on 1,80,000 equity shares made) 30.4.2011 Bank A/c Dr. 4,50,000 To Equity share final call A/c 4,50,000 (Being final call money on 1,80,000 shares received) 30.4.2011 Securities premium A/c (50,000 20,000) Dr. 30,000 Capital reserve A/c (1,50,000 60,000) General reserve A/c Dr. Dr. 90,000 2,40,000 Profit and loss A/c To Bonus to shareholders A/c Dr. 2,40,000 6,00,000 (Being utilisation of reserves for bonus issue of one share for every three shares held) 30.4.2011 Bonus to equity shareholders A/c To Equity share capital A/c Dr. 6,00,000 6,00,000 (Being bonus shares issued) Extract of Balance Sheet (After bonus issue) ` Authorised capital: 50,000, 10% Preference shares of ` 10 each 2,40,000, Equity shares of ` 10 each (refer W.N.) Issued and subscribed capital: 40,000, 10% Preference shares of ` 10 each fully paid 2,40,000, Equity shares of ` 10 each fully paid * 5,00,000 24,00,000 4,00,000 24,00,000 The word save should be read as earn for better understanding of the requirement of the question. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 21 (Out of the above, 60,000 equity shares of ` 10 each have been issued by way of bonus) Reserves and Surplus: Capital reserve Securities premium Profit and loss A/c (3,00,000 2,40,000) 60,000 20,000 60,000 Assumption: 1. As per SEBI Guidelines, Capital Reserve and Securities Premium collected in cash only can be utilized for the purpose of issue of bonus shares. It is assumed that balance of capital reserve and securities premium is collected in cash only. 2. It is also assumed that necessary resolutions have been passed and requisite legal requirements related to the issue of bonus shares have been complied with before issue of bonus shares. Working Note: On the basis of the above assumptions, the Authorised Capital should be increased as under: Required for bonus issue ` 6,00,000 Less: Balance of authorised equity share capital (available) (` 2,00,000) Authorised capital to be increased ` 4,00,000 Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000. (b) Calculation of Average Due Date taking base date as 19.06.2010 Date of Bill Period Maturity date No. of days from the base date Amount (`) Products 09.03.2010 4 months 12.07.2010 23 4,000 92,000 16.03.2010 07.04.2010 3 months 5 months 19.06.2010 10.09.2010 0 83 5,000 6,000 0 4,98,000 18.05.2010 3 months 21.08.2010 63 5,000 3,15,000 20,000 9,05,000 Average due date = Base date + Total of pr oduct Total of amount = 19.06.2010 + 9,05,000 = 45 days (approx.) 20,000 = 3rd August, 2010. The Institute of Chartered Accountants of India 22 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Computation of date of payment to earn interest of ` 150 Interest per day = [` 20,000 x (18/100)]/365 days = ` 3,600/365 = ` 10 per day (approx.) To earn interest of ` 150, the payment should be made 15 days (` 150 / ` 10 per day) earlier to the due date. Accordingly, the date of payment would be: Date of payment to earn interest of ` 150 = 3rd August, 2010 15 days = 19th July, 2010. Question 7 Answer any four of the following: (a) M/s. Tiger Ltd. allotted 7,500 equity shares of ` 100 each fully paid up to Lion Ltd. in consideration for supply of a special machinery. The shares exchanged for machinery are quoted at National Stock Exchange (NSE) at ` 95 per share, at the time of transaction. In the absence of fair market value of the machinery acquired, show how the value of the machinery would be recorded in the books of Tiger Ltd.? (b) M/s. Sea Ltd. recognized ` 5.00 lakhs, on accrual basis, income from dividend during the year 2010-11, on shares of the face value of ` 25.00 lakhs held by it in Rock Ltd. as at 31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10 th April, 2011. However, dividend was declared on 30th June, 2011. Please state with reference to relevant Accounting Standard, whether the treatment accorded by Sea Ltd. is in order. (c) What disclosures should be made in the first financial statements following the amalgamation? (d) From the following data, show Profit and Loss A/c (Extract) as would appear in the books of a contractor following Accounting Standard-7: (` in lakhs) Contract price (fixed) 480.00 Cost incurred to date 300.00 Estimated cost to complete 200.00 (e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended 31st March, 2011, it changed to WDV basis. The impact of the change when computed from the date of the assets putting into use amounts to ` 18 lakhs being additional depreciation. Discuss, when should an enterprise change method of charging depreciation and how it should be dealt with in the Profit and Loss Alc. (4 x 4 = 16 Marks) Answer (a) As per para 11 of AS 10 Accounting for Fixed Assets , fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value, The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 23 or the fair market value of the securities issued, whichever is more clearly evident. Since, in the given situation, the market value of the shares exchanged for the asset is more clearly evident, the company should record the value of machinery at ` 7,12,500 (i.e., 7,500 shares x ` 95 per share) being the market price of the shares issued in exchange. (b) Para 8.4 of AS 9 Revenue Recognition states that dividend from investments in shares are not recognized in the statement of Profit and Loss until the right to receive dividend is established. In the given case, the dividend is proposed on 10th April, 2011, while it was declared on 30th June, 2011. Hence, the right to receive dividend is established on 30th June, 2011 only. Therefore, on applying the provisions stated in the standard, income from dividend on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only. Therefore, the recognition of income from dividend of ` 5 lakhs, on accrual basis, in the financial year 2010-11 is not in accordance with AS 9. (c) Para 24 of AS 14 Accounting for Amalgamations states that for all amalgamations (whether for amalgamations accounted for under the pooling of interests method or amalgamations accounted for under the purchase method), the following disclosures are considered appropriate in the first financial statements following the amalgamation: (a) Names and general nature of business of the amalgamating companies; (b) Effective date of amalgamation for accounting purposes; (c) The method of accounting used to reflect the amalgamation; and (d) Particulars of the scheme sanctioned under a statute. (d) Calculation of Estimated Total Cost (` in lakhs) Cost incurred to date 300 Estimate of cost to completion 200 Estimated total cost in completing the contract 500 Percentage of completion (300/500) x 100 = 60% Revenue recognised as a percentage to contract price = 60% of ` 480 lakhs = ` 288 lakhs As per para 35 of AS 7 Construction Contracts , when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. Accordingly, expenses to be recognized in the Profit and Loss Account will be The Institute of Chartered Accountants of India 24 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 (` in lakhs) Total foreseeable loss (500-480) Less: Loss for the current year (300-288) 20 (12) Expected loss to be recognized immediately as per para 35 of AS 7 8 Profit and Loss A/c (An Extract) (` in lakhs) To Construction cost To Estimated loss on completion of contract 300 (` in lakhs) By Contract price 288 8 ? ? (e) As per para 21 of AS 6 Depreciation Accounting , an enterprise can change one method of charging depreciation to another method only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts through statement of profit and loss in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. The Institute of Chartered Accountants of India

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