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CA IPCC : Question Paper (with Answers) - ACCOUNTING May 2010

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PAPER 1 : ACCOUNTING Answer all questions Wherever appropriate, suitable assumption(s) should be made by the candidates. Working notes should form part of the answer Question 1 (i) A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their capitals are Rs. 60,000 and Rs. 40,000 respectively. They admit C as a new partner who will get 1/6th share in the profit of the firm. C brings in Rs. 25,000 as his capital. Find out the amount of goodwill on the basis of the above information. (ii) From the following, calculate the cash price of the asset: Rs. Hire purchase price of the asset 50,000 Down payment 10,000 Four annual instalments at the end of each year 10,000 Rate of interest 5% p.a (iii) Mr. X purchased 1,000, 6% Government Bonds of Rs. 100 each on 31st January, 2009 at Rs. 95 each. Interest is payable on 30th June and 31st December. The price quoted is cum interest. Journalise the transaction. (iv) Swaminathan owed to Subramanium the following sums : Rs. 5,000 on 20th January, 2009 Rs. 8,000 on 3rd March, 2009 Rs. 6,000 on 5th April, 2009 Rs. 11,000 on 30th April, 2009 Ascertain the average due date. (v) A company acquired a machine on 1.4.2006 for Rs. 5,00,000. The company charged depreciation upto 2008-09 on straight line basis with estimated working life of 10 years and scrap value of Rs. 50,000. From 2009-10, the company decided to change depreciation method at 20% on reducing balance method. Compute the amount of depreciation to be debited to Profit and Loss Account for the year 2009-10. (vi) An unquoted long-term investment is carried in the books at cost of Rs. 2 lacs. The published accounts of unlisted company received in May, 2009 showed that the company has incurred cash losses with decline market share and the long-term investment may not fetch more than Rs. 20,000. How you will deal with it in the financial statement of investing company for the year ended 31.3.2009? The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 (vii) In the absence of a partnership deed, what will be your decision in disputes amongst partners regarding the following matters: (a) Profit sharing ratio; (b) Interest rate, at which interest is to be allowed to a partner, on loan given to the firm by a partner. (viii) According to Accounting Standard 9, when revenue from sales should be recognised? (ix) In January, 2010 a firm took an insurance policy for Rs. 60 lakhs to insure goods in its godown against fire subject to average clause. On 7th March, 2010 a fire broke out destroying goods costing Rs. 44 lakhs. Stock in the godwon was estimated at Rs.80 lakhs. Compute the amount of insurance claim. (x) On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-puchase basis. The total hire-puchase price was Rs. 4,60,000 with down payment of Rs. 1,60,000. Balance amount was to be paid in three annual instalments of Rs. 1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was Rs. 4,00,000. How will Arya Bros. account for interest over three accounting years assuming books of accounts are closed on 31st March every year. (10 x 2 = 20 Marks) Answer (i) Calculation of Goodwill C brings capital for 1/6th share in profit = Rs.25,000 Therefore, total capital of the firm = Rs.25,000 6 = Rs.1,50,000 Capital of old partners should be = Rs.1,50,000 Rs.25,000 = Rs.1,25,000 Actual combined capital of old partners = Rs.60,000 + Rs.40,000 = Rs.1,00,000 So, the goodwill of the firm = Rs.1,25,000- Rs.1,00,000=Rs.25,000 (ii) Calculation of cash price of the asset Number of instalments Closing balance Amount of instalment Total Interest 5/105 Opening balance 4 0 10,000 10,000 476 9,524 3 9,524 10,000 19,524 930 18,594 2 18,594 10,000 28,594 1,362 27,232 1 27,232 10,000 37,232 1,773 35,459 Cash price of the asset = Down payment + Rs.35,459 = Rs.10,000 + Rs.35,459 = Rs.45,459 2 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING (iii) Journal Entry Date Particulars Jan., 2009 Investment A/c Amount (Cr.) Rs. 31st Amount (Dr.) Rs. Dr. Interest A/c (Rs. 1,00,000 6 1 ) 100 12 94,500 Dr. 500 To Bank A/c 95,000 (Being purchase of 1,000, 6% Government bonds of Rs.100 each at Rs.95 each cum interest) (iv) Calculation of average due date taking 20th January as the base date Due Date Amount Rs. No. of days from 20th January Product 20th January 5,000 0 0 3rd March 8,000 42 3,36,000 5th April 6,000 75 4,50,000 30th April 11,000 100 11,00,000 30,000 Average due date = 20th January + = 20th January + 18,86,000 Total Product Total Amount 18,86,000 30,000 = 20th January, 2009 + 63 days (approx) = 24th March, 2009 (v) Annual depreciation charged by the company up to 2008-09 = = Cost price of the machine - Scrap value Useful life of the machine Rs.5,00,000 Rs.50,000 = Rs.45,000 10 WDV of machine at the end of 2008-09 by Straight Line Method (SLM) = Rs.5,00,000 (Rs.45,000 3) = Rs.3,65,000 3 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Depreciation by Reducing Balance Method (RBM) Cost / WDV at the beginning of the year Depreciation WDV at the end of the year Rs. Rs. Rs. 2006-07 5,00,000 5,00,000 20% 1,00,000 4,00,000 2007-08 4,00,000 4,00,000 20% 80,000 3,20,000 2008-09 3,20,000 3,20,000 20% 64,000 2,56,000 2,44,000 2009-10 2,56,000 2,56,000 20% 51,200 2,04,800 Depreciation to be charged in 2009 2010 Rs. Book value of the machine as per SLM as on 2008-09 Less: Book value of the machine as per RBM as on 2008-09 3,65,000 (2,56,000) 1,09,000 Add: Depreciation for the year 2009-10 as per RBM Total depreciation debited to Profit and Loss account in the year 2009-10 51,200 1,60,200 (vi) As per para 32 of AS 13 Accounting for Investments , investment classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. As per para 17 of the standard, indicators of the value of an investment are obtained by reference to its market value, the investee s assets and results and the expected cash flows from the investment. The facts of given case clearly suggest that there is decline in the market share of the company and the investment will not fetch more than Rs.20,000. Therefore, the provision of Rs.1,80,000 should be made to reduce the carrying amount of long term investment to Rs.20,000 in the financial statements for the year ended 31st March, 2009. (vii) In the absence of a partnership deed: (a) The partners will share profits/losses equally; and (b) Interest @ 6% per annum is to be paid on the loan advanced to the firm by a partner. 4 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING (viii) As per para 11 of AS 9 Revenue Recognition , revenue from sales should be recognised only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. These requirements can be given as follows: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. (ix) Amount of insurance claim = Amount of loss due to fire = Rs.44 lakhs Amount of insurance policy Totalstock in the godown Rs.60lakhs = Rs.33 lakhs Rs.80lakhs (x) Total interest on hire purchase transactions= Rs.4,60,000 Rs.4,00,000 = Rs.60,000 As balance payment is made in three equal instalments, so interest is to be allocated in the ratio of 3:2:1 3 Therefore, interest for Ist year = Rs.60,000 = Rs.30,000 6 2 IInd year = Rs.60,000 = Rs.20,000 6 IIIrd year = Rs.60,000 1 = Rs.10,000 6 Question 2 The books of account of Ruk Ruk Maan of Mumbai showed the following figures: 31.3.2008 Rs. 31.3.2009 Rs. Furniture & fixtures 2,60,000 2,34,000 Stock Debtors 2,45,000 1,25,000 3,20,000 ? Cash in hand & bank Creditors 1,10,000 1,35,000 ? 1,90,000 Bills payable Outstanding salaries 70,000 19,000 80,000 20,000 5 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 An analysis of the cash book revealed the following: Rs. Cash sales 16,20,000 Collection from debtors 10,58,000 Discount allowed to debtors 20,000 Cash purchases 6,15,000 Payment to creditors 9,73,000 Discount received from creditors 32,000 Payment for bills payable 4,30,000 Drawings for domestic expenses 1,20,000 Salaries paid 2,36,000 Rent paid 1,32,000 Sundry trade expenses 81,000 Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Ruk Ruk Maan maintains a steady gross profit rate of 25% on sales. You are required to prepare Trading and Profit and Loss account for the year ended 31st March, 2009 and Balance Sheet as on that date. (16 Marks) Answer In the books of Ruk Ruk Maan Trading & Profit & Loss Account for the year ended 31st March, 2009 Particulars Amount Particulars Rs. To Opening stock To Rs. Purchases: Cash Credit (W.N. 2) To Gross profit c/d Amount 2,45,000 By Sales: Cash Credit (W.N.3) 6,15,000 15,00,000 By 16,20,000 11,00,000 Closing stock 3,20,000 6,80,000 30,40,000 30,40,000 To Salaries (W.N.5) 2,37,000 By Gross profit b/d To Rent 1,32,000 By Discount received To Sundry trade expenses 81,000 To Discount allowed 20,000 6 The Institute of Chartered Accountants of India 6,80,000 32,000 PAPER 1 : ACCOUNTING To Depreciation on furniture & fixtures To Net profit 26,000 2,16,000 7,12,000 7,12,000 Balance Sheet as at 31st March, 2009 Liabilities Amount Amount Rs. Rs. Capital Fixed assets Opening balance (W.N.7) 5,16,000 Furniture & fixtures Add: Net profit 2,16,000 Current assets: 7,32,000 Stock 3,20,000 1,20,000 6,12,000 Debtors (W.N.4) 1,47,000 Less: Drawings Cash & bank (W.N.6) Current liabilities & provisions: Creditors 2,34,000 2,01,000 1,90,000 Bills payable 80,000 Outstanding salaries 20,000 9,02,000 9,02,000 Working Notes: 1. Bills Payable Account Rs. To Cash/Bank Rs. 4,30,000 By Balance b/d 80,000 By Trade creditors (Bal. fig.) To Balance c/d 5,10,000 2. 70,000 4,40,000 5,10,000 Creditors Account Rs. To Cash/Bank To Bills payable (W.N.1) To Discount received To Balance c/d Rs. 9,73,000 By A/c Balance b/d 4,40,000 By Credit purchases (Bal. fig.) 1,35,000 15,00,000 32,000 1,90,000 16,35,000 7 The Institute of Chartered Accountants of India 16,35,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 3. Calculation of credit sales Rs. Opening stock 2,45,000 Purchases Add: Cash purchases 6,15,000 Credit purchases 15,00,000 21,15,000 23,60,000 Closing Stock Less: 3,20,000 Cost of goods sold 20,40,000 Gross profit ratio on sales 25% 100 Total sales Rs.20,40,000 75 Cash sales Less: 4. 27,20,000 Credit sales 16,20,000 11,00,000 Debtors Account Rs. To Balance b/d To Credit sales (W.N.3) Rs. 1,25,000 By 11,00,000 By By Cash/Bank Discount allowed Balance c/d (Bal. fig.) 12,25,000 5. 10,58,000 20,000 1,47,000 12,25,000 Salaries Rs. Salaries paid during the year Add: 2,36,000 Outstanding salaries as on 31.3.2009 20,000 2,56,000 Less: Outstanding salaries as on 31.03.2008 19,000 2,37,000 6. Cash / Bank Account Rs. To Balance b/d 1,10,000 By To Cash sales To Debtors Rs. Cash purchases 6,15,000 16,20,000 By Creditors 9,73,000 10,58,000 By Bills payable 4,30,000 8 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING By Drawings 1,20,000 By Salaries 2,36,000 By Rent 1,32,000 By Sundry trade expenses By Balance c/d 81,000 2,01,000 27,88,000 7. 27,88,000 Balance Sheet as at 31st March, 2008 Rs. Creditors Rs. 1,35,000 Furniture & fixtures 2,60,000 Bills payable 70,000 Stock 2,45,000 Outstanding salaries 19,000 Debtors 1,25,000 Capital (Bal. fig.) 5,16,000 Cash & bank 1,10,000 7,40,000 7,40,000 Question 3 The Balance Sheet of Reckless Ltd. as on 31st March, 2008 is as follows: Rs. Assets: Freehold premises 2,20,000 Machinery 1,77,000 Furniture & fittings 90,800 Stock 3,87,400 Sundry debtors 80,000 Less : Provision for doubtful debts 4,000 76,000 Cash in hand 2,300 Cash at bank 1,56,500 Bills receivable 15,000 11,25,000 Liabilities: 60,000 Equity shares of Rs. 10 each 6,00,000 Pre-incorporation profit 21,000 Contingency reserve 1,35,000 9 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Profit and loss appropriation account 1,26,000 Acceptances 20,000 Creditors 1,13,000 Provision for income-tax 1,10,000 11,25,000 Careful Ltd. decided to take over Reckless Ltd. from 31st March, 2008 with the following assets at value noted against them : Rs. Bills receivable 15,000 Freehold premises 4,00,000 Furniture and fittings Machinery 80,000 1,60,000 Stock 3,45,000 of the consideration was satisfied by the allotment of fully paid preference shares of Rs. 100 each at par which carried 13% dividend on cumulative basis. The balance was paid in the form of Careful Ltd. s equity shares of Rs. 10 each, Rs. 8 paid up. Sundry Debtors realised Rs. 79,500. Acceptances were settled for Rs. 19,000. Income-tax authorities fixed the taxation liability at Rs. 1,11,600. Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to Rs. 4,000. You are required to : (i) Calculate the number of equity shares and preference shares to be allotted by Careful Ltd. in discharge of consideration. (ii) Prepare the important ledger accounts in the books of Reckless Ltd.; and (iii) Pass journal entries in the books of Careful Ltd. with narration. (16 Marks) Answer (i) Calculation of the number of equity shares and preference shares to be allotted by Careful Ltd. in discharge of purchase consideration Calculation of purchase consideration: Agreed value of assets taken over: Bills receivable Freehold premises Furniture & fittings Machinery Stock 10 The Institute of Chartered Accountants of India Rs. 15,000 4,00,000 80,000 1,60,000 3,45,000 10,00,000 PAPER 1 : ACCOUNTING Discharge of purchase consideration: 1. Amount paid by allotment of 13% preference shares = Rs.10,00,000 1 4 = Rs.2,50,000 Number of 13% preference shares of Rs.100 each Rs.2,50,000 = 2,500 preference shares Rs.100 = 2. Amount paid by allotment of equity shares = Rs.10,00,000 Rs.2,50,000 = Rs.7,50,000 Paid up value of one equity share = Rs.8 each Hence, the number of equity shares allotted = Rs.7,50,000 = 93,750equity shares Rs.8 (ii) Ledger accounts in the books of Reckless Ltd. Realisation Account Rs. Rs. To Freehold premises 2,20,000 By Creditors To Machinery 1,77,000 By Acceptances To Furniture & fittings To Stock 90,800 By Provision for tax 3,87,400 By Provision for doubtful debts To Sundry debtors 80,000 By Careful Ltd. To Bills receivable 1,13,000 20,000 1,10,000 4,000 15,000 By Cash/Bank: To Cash/ Bank: Acceptances Sundry debtors 10,00,000 79,500 19,000 Provision for tax 1,11,600 Creditors 1,03,700 To Cash/Bank: Liquidation expenses To Profit 4,000 1,18,000 13,26,500 13,26,500 11 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Cash and Bank Account Rs. To By 1,56,500 Cash in hand To Balance b/d Cash at bank Rs. 2,300 Realisation A/c (Debtors) Realisation A/c Acceptances 19,000 Provision for tax 79,500 By Realisation A/c (Expenses) By 1,11,600 Realisation A/c [Creditors (bal fig.)] 4,000 1,03,700 2,38,300 2,38,300 Equity Shareholders Account Rs. To 13% Cumulative preference shares in Careful Ltd. To Equity shares Careful Ltd. Rs. 2,50,000 By Equity share capital 6,00,000 By Contingency reserve 1,35,000 By Profit & loss Appropriation A/c 1,26,000 By 7,50,000 Pre-incorporation profit By in 21,000 Realisation A/c 1,18,000 10,00,000 10,00,000 Careful Ltd. Account Rs. To Realisation A/c Rs. 10,00,000 By By 13% Cumulative preference shares in Careful Ltd. 2,50,000 Equity shares in Careful Ltd. 7,50,000 10,00,000 (iii) 10,00,000 Journal Entries in the books of Careful Ltd. Rs. Business purchase Account Dr. To Liquidator of Reckless Ltd. Account (Being amount payable to liquidator of Reckless Ltd. for assets taken over) 12 The Institute of Chartered Accountants of India Rs. 10,00,000 10,00,000 PAPER 1 : ACCOUNTING Bills receivable Account Dr. 15,000 Freehold premises Account Dr. 4,00,000 Furniture & fittings Account Dr. 80,000 Machinery Account Dr. 1,60,000 Stock Account Dr. 3,45,000 To Business purchase Account 10,00,000 (Being assets taken over from Reckless Ltd.) Liquidator of Reckless Ltd. Dr. 10,00,000 To 13% Cumulative preference share capital Account 2,50,000 To Equity share capital Account 7,50,000 (Being allotment of 13% cumulative preference shares of Rs.100 each fully paid up and equity shares of Rs.10 each, Rs.8 paid up) Question 4 (a) Easilife Ltd. has a hire-purchase department which fixes hire-purchase price by adding 40% to the cost of the goods. The following additional information is provided to you : Rs. On 1st April, 2009 : Goods out on hire-purchase (at hire-purchase price) Instalments due 2,10,000 14,000 Transactions during the year : Hire-purchase price of goods sold 9,80,000 Instalments received 8,12,000 Value of goods repossessed due to defaults (hire-purchase instalments unpaid Rs. 5,600) 7,800 On 31st March, 2010: Goods out on hire-purchase (at hire-purchase price) 3,78,000 You are required to prepare Hire-purchase Trading Account, ascertaining the profit made by the department during the year ended 31st March, 2010. (b) Gaama Investment Company holds 1,000, 15% debentures of Rs. 100 each in Beta Industries Ltd. as on April 1, 2009 at a cost of Rs. 1,05,000. Interest is payable on June, 30 and December, 31 each year. 13 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 On May 1, 2009, 500 debentures are purchased cum-interest at Rs. 53,500. On November 1, 2009, 600 debentures are sold ex-interest at Rs. 57,300. On November 30, 2009, 400 debentures are purchased ex-interest at Rs, 38,400. On December 31, 2009, 400 debentures are sold cum-interest for Rs. 55,000. Prepare the investment account showing value of holdings on March 31, 2010 at cost, using FIFO method. (10+6 =16 Marks) Answer (a) Easilife Ltd. Hire Purchase Trading Account Rs. To Opening Balances: Rs. By Hire purchase stock 2,10,000 By Instalments due 14,000 By To Goods sold purchase A/c To Closing hire purchase stock reserve A/c (W.N.3) 1,08,000 To Profit and loss A/c 2,34,200 on hire 9,80,000 Opening hire purchase stock reserve A/c (W.N.1) Bank A/c received) (Instalments Goods repossessed A/c By Goods sold on hire purchase A/c (Loading) (W.N.2) By 60,000 8,12,000 7,800 Closing Balances: (Transfer of profit) Hire purchase stock Instalments due (W.N.4) 15,46,200 2,80,000 3,78,000 8,400 15,46,200 Working Notes: Rs. 1. Opening hire purchase stock reserve = Rs.2,10,000 2. Loading on goods sold = Rs.9,80,000 3. Closing hire purchase stock reserve = Rs.3,78,000 4. 40 140 60,000 Closing instalments due: 2,80,000 40 140 Opening hire purchase stock Opening instalments due 40 140 1,08,000 2,10,000 14,000 14 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING Goods sent on hire purchase 9,80,000 12,04,000 Instalments received Less: 8,12,000 Unpaid instalments on repossessed goods Closing hire purchase stock 5,600 3,78,000 (11,95,600) 8,400 (b) In the books of Gaama Investments Ltd. Investment Account (15% Debentures in Beta Industries Ltd.) Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Value Rs. 1.04.09 To Balance 1.05.09 To Bank Rs. 1.11.09 50,000 2,500 40,000 2,500 1.11.09 31.12.09 To Profit & Loss A/c A/c 60,000 3,000 (W.N.11) 57,300 5,700 A/c (W.N. 6 & 7) 10,000 - 18,625 - By Profit & Loss A/c 31.12.09 By Bank (W.N.12) Rs. - 11,250 (W.N.4) 38,400 A/c 31.03.10 To Profit & Loss A/c By Bank 51,000 Rs. A/c (W.N.3) 3,750 1,05,000 A/c (W.N.5) Rs. 30.06.09 By Bank 1,00,000 (W.N.2) 30.11.09 To Bank Rs. b/d (W.N.1) Cost Value 31.12.09 By Bank 40,000 3,000 52,000 - 6,750 - 90,000 3,375 89,400 A/c (W.N.8) 31.03.10 By Bank (W.N.9 & 10) 1,90,000 27,375 2,04,400 A/c 1,90,000 27,375 2,04,400 Working Notes: 1. Accrued interest as on 1.4.09 = Rs.1,00,000 2. Accrued interest = Rs.50,000 15 3 = Rs.3,750 100 12 15 4 = Rs.2,500 100 12 Cost of investment for purchase on 1.5.09 = Rs.53,500 Rs.2,500 = Rs.51,000 3. Interest received = Rs.1,50,000 4. Accrued interest = Rs.60,000 15 6 = Rs.11,250 100 12 15 4 = Rs.3,000 100 12 15 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 5. Accrued interest = Rs.40,000 15 5 = Rs.2,500 100 12 6. Accrued interest = Rs.40,000 15 6 = Rs.3,000 100 12 7. Sale price of investment on 31.12.09 = Rs.55,000 Rs.3,000 = Rs.52,000 8. Accrued interest = Rs.90,000 15 6 = Rs.6,750 100 12 9. Accrued interest = Rs.90,000 15 3 = Rs.3,375 100 12 10. Cost of investment as on 31.3.10= Rs.51,000 + Rs.38,400 = Rs.89,400 11. Loss on debentures sold on 1.11.2009: Sales price of debentures Rs.57,300 Less: Cost of investment sold = Rs.1,05,000 600 = 1,000 Loss on sale 12. (Rs.63,000) (Rs. 5,700) Profit on debentures sold on 31.12.2009: Sales price of debentures Rs.52,000 Less: Cost of investment sold = Rs.1,05,000 400 = 1,000 Profit on sale (Rs.42,000) Rs. 10,000 Question 5 (a) On the basis of the following informations, prepare Income and Expenditure Account for the year ended 31st March, 2010 : Receipts and Payments Account for the year ended 31st March, 2010 Receipts Rs. Payments To Cash in hand (opening) 1,300 By Salaries To Cash at bank (opening) 3,850 By Rent To Subscriptions To Interest on 8% Government bonds To Bank interest 4,94,700 By Printing & stationery 4,000 By Conveyance 160 By Scooter purchased 16 The Institute of Chartered Accountants of India Rs. 2,58,000 71,500 3,870 10,600 50,000 PAPER 1 : ACCOUNTING By 8% Government bonds 1,00,000 By Cash in hand (closing) 840 By Cash at bank (closing) 9,200 5,04,010 (i) 5,04,010 Salaries paid includes Rs. 6,000 paid in advance for April, 2010. Monthly salaries paid were Rs. 21,000. (ii) Outstanding rent on 31st March, 2009 and 31st March, 2010 amounted to Rs. 5,500 and Rs. 6,000 respectively. (iii) Stock of printing and stationery material on 31st March, 2009 was Rs. 340; it was Rs. 365 on 31st March, 2010. (iv) Scooter was purchased on 1st October, 2009. Depreciation @ 20% per annum is to be provided on it. (v) Investments were made on 1st April, 2009. (vi) Subscriptions due but not received on 31st March, 2009 and 31st March, 2010 totalled Rs. 14,000 and Rs. 12,800 respectively. On 31st March, 2010, subscriptions amounting to Rs. 700 had been received in advance for April, 2010. (b) The following particulars relate to Bee Ltd., for the year ended 31st March, 2010 : (i) Furniture of book value of Rs. 15,500 was disposed off for Rs. 12,000. (ii) Machinery costing Rs. 3,10,000 was purchased and Rs. 20,000 were spent on its erection. (iii) Fully paid 8% preference shares of the face value of Rs. 10,00,000 were redeemed at a premium of 3%. In this connection 60,000 equity shares of Rs. 10 each were issued at a premium of Rs. 2 per share. The entire money being received with applications. (iv) Dividend was paid as follows: On 8% preference shares Rs. 40,000 On equity shares for the year 2009-10 Rs. 1,10,000 (v) Total sales were Rs. 32,00,000 out of which cash sales were Rs. 11,50,000. (vi) Total purchases were Rs. 8,00,000 including cash purchase of Rs. 60,000. (vii) Total expenses were Rs. 12,40,000 charged to Profit and Loss A/c. (viii) Taxes paid including dividend distribution tax of Rs.22,500 were Rs.3,30,000. (ix) Cash and cash equivalents as on 31st March, 2010 were Rs. 1,25,000. 17 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 You are requested to prepare Cash Flow Statement as per AS 3 for the year ended 31st March, 2010 after taking into consideration the following also: On 31st March, 2009 (Rs.) On 31st March, 2010 (Rs.) 1,50,000 1,47,000 Sundry creditors 78,000 83,000 Unpaid expenses 63,000 55,000 Sundry debtors (8+8=16 Marks) Answer Income and Expenditure Account for the year ended 31st March, 2010 (a) Expenditure To Salaries (W.N.1) To Rent (W.N.2) To Printing and stationery (W.N.3) To Conveyance To Depreciation on Scooter (W.N.4) Rs. Income 2,52,000 By Subscription (W.N.6) 72,000 By Interest on 8% Government bonds (W.N.5) 3,845 By Bank interest Rs. 4,92,800 8,000 160 10,600 5,000 To Surplus i.e. excess of income 1,57,515 over expenditure 5,00,960 5,00,960 Working Notes: 1. 2. 3. Salaries paid Less: Salary paid in advance for April, 2010 Salaries for the year Rent paid Add: Outstanding rent as on 31.3.2010 Less: Outstanding rent as on 31.3.2009 Rent for the year 2009-2010 Printing and stationery Add: Stock as on 31.3.2009 Less: Stock as on 31.3.2010 Printing and stationery consumed during the year 2009-2010 18 The Institute of Chartered Accountants of India Rs. 2,58,000 6,000 2,52,000 71,500 6,000 77,500 5,500 72,000 3,870 340 4,210 365 3,845 PAPER 1 : ACCOUNTING 4. 5. 20 6 = Rs.5,000 100 12 Interest on Government bonds received Depreciation on scooter = Rs.50,000 4,000 Interest due but not received as on 31.3.2010 Add: 4,000 Interest income for the year 2009-2010 6. 8,000 Subscription received 4,94,700 Accrued subscription as on 31.3.2010 Add: 12,800 5,07,500 Accrued subscription as on 31.3.2009 Unearned subscription for April, 2010 Less: 14,000 700 (14,700) Income for the year 2009-2010 (b) 4,92,800 Cash Flow Statement for the year ended 31st March, 2010 Rs. I. Cash flow from operating activities Cash receipts from customers (W.N.1) 32,03,000 Less: Cash paid to suppliers and payment for expenses (W.N.3) (20,43,000) Cash generated from operations 11,60,000 Income tax paid (Rs.3,30,000 Rs.22,500) (3,07,500) 8,52,500 Net cash from operating activities II. Cash flows from investing activities Sale of furniture 12,000 Purchase of machinery (3,30,000) (3,18,000) Net cash used in investing activities III. Rs. Cash flow from financing activities Proceeds from issue of equity shares 7,20,000 Redemption of 8% preference shares (10,30,000) Dividend paid (Rs.40,000 + Rs.1,10,000) (1,50,000) Dividend distribution tax paid (22,500) (4,82,500) Net cash used in financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents as on Cash and cash equivalents as on 31st 31st 52,000 March, 2009 (Bal. fig.) March, 2010 19 The Institute of Chartered Accountants of India 73,000 1,25,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Working Notes: 1. Cash receipt from customers: Credit sales = Total sales Rs.32,00,000 Cash sales Rs.11,50,000 = Rs.20,50,000 Total Debtors Account Rs. Rs. To Balance b/d 1,50,000 By Cash/Bank (Bal. fig.) To Credit sales 20,50,000 By Balance c/d 22,00,000 20,53,000 1,47,000 22,00,000 Total sale receipts = Rs.20,53,000 + Rs.11,50,000 = Rs.32,03,000 2. Cash payment to suppliers: Credit Purchases = Total purchases Rs.8,00,000 Cash purchases Rs.60,000 = Rs.7,40,000 Total Creditors Account Rs. To Cash/Bank (Bal. fig.) To Balance c/d 7,35,000 By 83,000 By Rs. Balance b/d Credit purchases 8,18,000 78,000 7,40,000 8,18,000 Total payments to suppliers = Rs.7,35,000 + Rs.60,000 = Rs.7,95,000 3. Cash paid to suppliers and payment for expenses Rs. Outstanding expenses as on 31.3.2009 Add: Expenses charged to profit and loss account 63,000 12,40,000 13,03,000 Less: Outstanding expenses as on 31.3.2010 Payment on account of expenses 55,000 12,48,000 Total of payment to suppliers and payment for expenses = Rs.7,95,000 + Rs.12,48,000 = Rs. 20,43,000 Question 6 Answer the following: (a) Weak Ltd. acquired the fixed assets of Rs. 100 lakhs on which it received the grant of Rs. 10 lakhs. What will be the cost of the fixed assets as per AS 12 and how it will be disclosed in the financial statements? 20 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING (b) During the current year 2009-10 M/s L & C Ltd. made the following expenditure relating to its plant and machinery: Rs. General repairs 4,00,000 Repairing of electric motors 1,00,000 Partial replacement of parts of machinery 50,000 Substantial improvements to the electrical wiring system which will increase efficiency of the plant and machinery 10,00,000 What amount should be capitalised according to AS 10? (c) What are the advantages of pre-packaged accounting software? (d) Raw materials inventory of a company includes certain material purchased at Rs. 100 per kg. The price of the material is on decline and replacement cost of the inventory at the year end is Rs. 75 per kg. It is possible to convert the material into finished product at conversion cost of Rs. 125. Decide whether to make the product or not to make the product, if selling price is (i) Rs. 175 and (ii) Rs. 225. Also find out the value of inventory in each case. (4 x 4 = 16 Marks) Answer (a) Paragraphs 8 and 14 of AS 12 Accounting for Government Grants deal with the presentation of government grants related to specific fixed assets. It prescribes two different methods for recognition of a government grant. In the first method, Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Hence in the given case, fixed assets should be presented at Rs.90 lakhs (Rs.100 lakhs less Rs.10 lakhs) in the balance sheet of Weak Ltd. Under the second method, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. In this case, fixed assets will be shown at Rs.100 lakhs in the balance sheet of Weak Ltd. and the corresponding grant amounting Rs.10 lakhs will be treated as deferred income to be recognized over useful life of the fixed asset. (b) As per para 12.1 of AS 10 Accounting for Fixed Assets , expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity. Hence, in the given case, repairs amounting Rs.5 lakhs and partial replacement of parts of machinery worth Rs.50,000 should be charged to profit & loss account. Rs.10 lakhs 21 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 incurred for substantial improvement to the electrical wiring system which will increase efficiency should be capitalized. (c) Advantages of Pre-Packaged Accounting Software: 1. Easy to install: The CD or floppy disk is to be inserted and the setup file should be run to complete the installation. Certain old DOS based accounting softwares require some settings to be added in the system configuration file and the system batch file. These instructions are generally provided in the user manuals. 2. Relatively inexpensive: These packages are sold at very cheap prices nowadays. 3. Easy to use: Mostly menu driven with help options. Further the user manual provides most of the solutions to problems that the user may face while using the software. 4. Backup procedure is simple: Housekeeping section provides a menu for backup. The backup can be taken on floppy disk or CD or hard disk. 4. Flexibility: There is certain flexibility in formatting of report as provided by some of the softwares. This allows the user to make the invoice, challan, GRNs look the way they want. 6. Very effective for small and medium size businesses: Most of their functional areas are covered by these standardised packages. (d) As per para 24 of AS 2 Valuation of Inventories , materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. (i) When selling price is Rs.175 Incremental Profit = Rs.175 Rs.125 = Rs.50 Current price of the material = Rs.75 Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. Rs.75 because the selling price of the finished product is less than Rs.225 (100+125) per kg. (ii) When selling price is Rs.225 Incremental Profit = Rs.225 Rs.125 = Rs.100 Current price of the raw material = Rs.75. Therefore, it is better to make the product. Raw material inventory would be valued at Rs.100 per kg because the selling price of the finished product is not less than Rs.225. 22 The Institute of Chartered Accountants of India

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