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CA IPCC : Question Paper (with Answers) - ACCOUNTING May 2016

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PAPER 1 : ACCOUNTING Question No. 1 is compulsory. Answer any five questions from the remaining six questions. Wherever necessary, suitable assumptions should be made and disclosed by way of note forming part of the answer. Working Notes should form part of the answer. Question 1 (a) Uday Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The construction commenced during the financial year ending 31.03.2016 and is likely to be completed by the next financial year. The contract is for a fixed price of ` 12 crores with an escalation clause. The costs to complete the whole contract are estimated at ` 9.50 crores of rupees. You are given the following information for the year ended 31.03.2016: Cost incurred upto 31.03.2016 ` 4 crores .Cost estimated to complete the contract ` 6 crores Escalation in cost by 5% and accordingly the contract price is increased by 5%. You are required to ascertain the state of completion and state the revenue and profit to be recognized for the year as per AS-7. (b) M/s Active Builders Ltd. invested in the shares of another company on 31 st October, 2015 at a cost of ` 4,50,000. It also earlier purchased Gold of ` 5,00,000 and Silver of ` 2,25,000 on 31 st March, 2013. Market values as on 31 st March, 2016 of the above investments are as follows: Shares ` 3,75,000; Gold ` 7,50,000 and Silver ` 4,35,000 How will the above investments be shown in the books of account of M/s Active Builders Ltd. for the year ending 31 st March, 2016 as per the provision of AS-13? (c) Argon Ltd. purchased a shop on 1 st January, 2001 at a cost of ` 8,50,000. The useful life of the shop is estimated as 30 years with residual value of ` 25,000 and depreciation is provided on a straight line basis. The shop was revalued on 30th June, 2015 for ` 19,50,000 and the revaluation was incorporated in the accounts. Calculate: (i) The surplus on revaluation; (ii) Depreciation to be charged in the Profit and Loss account for the year ended on 31st December, 2015. (d) Z Limited ordered 13,000 kg. of chemicals at ` 90 per kg. The purchase price includes excise duty of ` 5 per kg, in respect of which full CENVAT credit is admissible. Further, The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 State VAT is leviable at ` 2.5 per kg on purchase price. Freight incurred amounted to ` 30,000. Normal transit loss is 4%. The company actually received 12,400 kg and consumed 10,000 kg. The company has received trade discount in the form of cash amounting to ` 1 per kg. The chemicals were delivered in containers. The containers were not reusable, hence sold for ` 500. The administrative expenses incurred to bring the chemicals were ` 10,000. Compute the value of inventory and allocate the material cost as per AS-2. (4 x 5 = 20 Marks) Answer (a) ` in crore Cost of construction of bridge incurred 31.3.16 4.00 Add: Estimated future cost 6.00 Total estimated cost of construction Contract Price (12 crore x 1.05) 10.00 12.60 crore Stage of completion Percentage of completion till date to total estimated cost of construction = (4/10) 100 = 40% Revenue and Profit to be recognized for the year ended 31 st March, 2016 as per AS 7 Proportion of total contract value recognized as revenue = Contract price x percentage of completion =` 12.60 crore x 40% =` 5.04 crore Profit for the year ended 31 st March, 2016 = ` 5.04 crore less ` 4 crore = 1.04 crore (b) As per AS 13 Accounting for Investments , if the shares are purchased with an intention to hold for short-term period then investment will be shown at the realizable value. If equity shares are acquired with an intention to hold for long term period then it will continue to be shown at cost in the Balance Sheet of the company. However, provision for diminution shall be made to recognize a decline, if other than temporary, in the value of the investments. In the given case, shares purchased on 31 st October, 2015, will be valued at ` 3,75,000 as on 31st March, 2016. Gold and silver are generally purchased with an intention to hold it for long term period until and unless given otherwise. Hence, the investment in gold and silver (purchased on 31st March, 2013) shall continue to be shown at cost as on 31 st March, 2016 i.e., ` 5,00,000 and ` 2,25,000 respectively, though their realizable values have been increased. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3 Thus the shares, gold and silver will be shown at ` 3,75,000, ` 5,00,000 and ` 2,25,000 respectively and hence, total investment will be valued at ` 11,00,000 in the books of account of M/s Active Builders for the year ending 31st March, 2016 as per provisions of AS 13. (c) As per AS 6 Depreciation Accounting , where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. Surplus on revaluation Depreciation provided upto 30th June, 2015 ` 27,500 [(` 8,50,000 ` 25,000)/30] p.a.] Total depreciation ` 3,98,750 (` 27,500 p.a. for 14.5 years) W.D. V of shop on 30 th June, 2015 (a) ` 4,51,250 [` 8,50,000 less ` 3,98,750] Revalued value (b) ` 19,50,000 Surplus ` 14,98,750 [(b) less (a)] Depreciation to be charged in the profit and loss account for the year ended 31st Dec., 2015 Depreciation for Jan. to June 15 (before revaluation) ` 13,750 (` 27,500 /2) Remaining useful life 15.5 years Depreciation for July to Dec. 15(after revaluation) ` 62,097 [` 19,25,000 (19,50,000 less 25,000) / 15.5 x 1/2] Total Depreciation for the year ended 31 st Dec., 2015 ` 75,847[` 13,750 + ` 62,097] Note: Depreciation for the year ended 31 st Dec., 2015 has been computed on the basis of assumption that there is no change in residual value and the remaining useful life after revaluation of the shop (d) Cost of inventory and allocation of material cost ` Purchase price (13,000 Kg. x ` 89) Less: CENVAT Credit (13,000 Kg. x ` 5) 11,57,000 (65,000) Add: Freight Allocated Administrative expenses 10,92,000 30,000 10,000 A. Total material cost 11,32,000 The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 B. Number of units to be normally received = 96% of 13,000 Kg. Kg. 12,480 C. Normal cost per Kg. (A/B) 90.705 Allocation of material cost Kg. Materials consumed Cost of inventory (12,400- 10,000) 10,000 2,400 Abnormal loss Total material cost `/Kg. ` 90.705(approx.) 9,07,050 2,17,692 80 7,258* 12,480 11,32,000 *The difference due to rounding off of normal cost per Kg has been adjusted. Thus the inventory will be valued at ` 2,17,692. Note: 1. The Company has received trade discount in the form of cash. This discount has been treated as trade discount in the given answer. 2. Abnormal losses are recognized as separate expenses. 3. Containers are used for delivery of the chemicals and are not reusable. Cost of these containers is treated as selling and distribution expense. The sale value of these containers will be credited to Profit and Loss Account and shall not be considered for the purpose of valuation of inventory. Alternatively, the sales value of container amount of ` 500 may be deducted, while computing material cost. In that case the material cost will be computed as ` 11,31,500 (11,32,000-500) instead of ` 11,32,000. Accordingly the allocation of material cost will get changed. 4. State VAT has not been included in the cost of materials in the above answer as VAT is generally credited in the later course of time. Question 2 Given below are the Balance Sheet of two companies as on 31st December, 2015. A Limited Liabilities ` Assets ` Share Capital: Patent 1,00,000 Issued and fully paid up Building 5,40,000 50,000 8% Cumulative Plant and Machinery Preference Shares of ` 10 each The Institute of Chartered Accountants of India 5,00,000 Furniture 15,10,000 75,000 PAPER 1 : ACCOUNTING 1,50,000 Equity shares of ` 10 each 15,00,000 5 Investment 1,55,000 3,58,000 General Reserve 7,65,000 Stock Profit and Loss account 1,25,000 Sundry Debtors 72,000 60,000 Cash and Bank 1,40,000 Sundry Creditors 29,50,000 29,50,000 B Limited Liabilities ` Assets Share Capital: Issued and fully paid 50,000 Shares of ` 10 each Profit and Loss Account Sundry Creditors Goodwill Motor Car 5,00,000 Furniture 45,000 Stock 31,000 5,76,000 Sundry Debtors Cash and Bank ` 62,000 1,26,000 58,000 2,40,000 70,000 20,000 5,76,000 It has been agreed that both these companies should be wound up and a new company AB Ltd. should be formed to acquire the assets of both the companies on the following terms and conditions: (i) AB Ltd. is to have an authorized capital of ` 36,00,000 divided into 60,000, 8% cumulative preference shares of ` 10 each and 3,00,000 equity shares of ` 10 each. (ii) AB Ltd. to purchase the whole of the assets of A Ltd. (except cash and Bank balances) for ` 28,25,000 to be settled as to ` 5,75,000 in cash and as to the balance by issue of 1,80,000 equity shares, credited as fully paid, to be treated as valued at ` 12.50 each. (iii) AB Ltd. is to purchase the whole of the assets of B Ltd. (except cash and bank balances) for ` 4,91,000 to be settled as to ` 16,000 in cash and as to the balance by issue of 38,000 equity shares, credited as fully paid, to be treated as valued at ` 12.50 each. (iv) A Ltd. and B Ltd. both are to be wound up, the two liquidators distributing the shares in AB Ltd. in kind among the equity shareholders of the respective companies. (v) The liquidator of A Ltd. is to pay the preference shareholders ` 12 in cash for every share held in full satisfaction of their claims. The Institute of Chartered Accountants of India 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 (vi) AB Ltd. is to make a public issue of 60,000, 5% cumulative preference shares at a premium of 10% and 30,000 equity shares at the issue price of ` 12.50 per share, all amount payable in full on application. It is estimated that the cost of liquidation (including the liquidators' remuneration) will be ` 10,000 in case of A Ltd. and ` 5,000 in case of B Ltd. and that the preliminary expenses of AB Ltd. will amount to ` 24,000 exclusive of the underwriting commission of ` 38,900 payable on the public issue. You are required to prepare the initial Balance Sheet of AB Ltd. on the basis that all assets other than goodwill are taken over at the book value. (16 Marks) Answer Balance Sheet of AB Ltd. Particulars Notes ` Equity and Liabilities 1 Shareholders' funds a Share capital b Reserves and Surplus 2 Current liabilities a 1 30,80,000 2 6,17,100 Other liabilities 38,900 Total 37,36,000 Assets 1 Non-current assets a Fixed assets Tangible assets 3 23,09,000 Intangible assets 4 1,12,000 b Non-current investments 2 Current assets 1,55,000 a b Inventories (3,58,000 + 2,40,000) Trade receivables (72,000 +70,000) 5,98,000 1,42,000 c Cash and cash equivalents 4,20,000 Total To be read as 8% The Institute of Chartered Accountants of India 37,36,000 PAPER 1 : ACCOUNTING 7 Notes to accounts ` 1 Share Capital Authorized share capital 3,00,000 equity shares of ` 10 each 30,00,000 6,00,000 60,000, 8% cumulative Preference Shares of `10 each Equity share capital 2,48,000 equity shares of ` 10 each (Of the above shares, 2,18,000 shares have been issued for consideration other than cash) 36,00,000 24,80,000 Preference share capital 6,00,000 60,000, 8% cumulative Preference Shares of `10 each Total 30,80,000 2 Reserves and Surplus Debit balance of Profit and Loss Account Underwriting commission 38,900 Preliminary expenses 24,000 Securities Premium A/c (2,48,000 equity shares x 2.50) (60,000 Preference shares x ` 1 ) (62,900) 6,20,000 60,000 6,80,000 6,17,100 3 Tangible assets Building 5,40,000 Motor car 1,26,000 Plant & machinery Furniture 4 15,10,000 1,33,000 23,09,000 Intangible assets Goodwill (W.N. 4) (15,000 +62,000-65,000) Patents The Institute of Chartered Accountants of India 12,000 1,00,000 1,12,000 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Working Notes: 1. Mode of discharge of Purchase Consideration of A Ltd. ` Cash payment 5,75,000 22,50,000 Equity shares (1,80,000 Shares x ` 12.5) Total Purchase consideration 2. 28,25,000 Mode of discharge of Purchase Consideration of B Ltd. ` Cash payment Equity shares (38,000 shares x ` 12.5) Total Purchase consideration 3. 16,000 4,75,000 4,91,000 Cash at bank balance in the initial balance sheet of AB Ltd. Cash and Bank Account ` ` To Issue of preference shares By Payment to A ltd. 6,60,000 To (60,000 x 11) Equity shares By Payment to B ltd. By Preliminary expenses (30,000 x 12.50) 3,75,000 By Balance c/d 10,35,000 4. 5,75,000 16,000 24,000 4,20,000 10,35,000 Calculation of goodwill/ capital reserve of A Ltd. & B Ltd. Particulars A Ltd. Business Purchase A/c 28,25,000 Less: Goodwill Patent A/c 1,00,000 Building A/c 5,40,000 Plant & Mach. A/c 15,10,000 Motor car A/c Furniture A/c 75,000 Investment A/c 1,55,000 Stocks A/c 3,58,000 Debtors A/c 72,000 (28,10,000) Goodwill / Capital reserve (Bal. fig.) 15,000 Net goodwill (15,000 +62,000 -65,000) = 12,000 The Institute of Chartered Accountants of India B Ltd. 4,91,000 62,000 1,26,000 58,000 2,40,000 70,000 (5,56,000) (65,000) PAPER 1 : ACCOUNTING 9 Note: 1. As per the information given in the question, only the assets of A Ltd. and B Ltd. are taken over by AB Ltd. Thus the creditors are considered to be paid by the liquidators of the respective companies and hence being not taken over by AB Ltd. 2. As per the information given in the second last para of the question, it is stated that the preliminary expenses of AB Ltd. will amount to ` 24,000 exclusive of the underwriting commission of ` 38,900 payable on the public issue. It has been assumed that ` 24,000 has been paid and underwriting commission is still payable in the balance sheet of the amalgamated company. Alternatively, any other reasonable assumption about this may be considered. 3. Preliminary expenses and underwriting commission have been written off as per the provisions of Accounting standards. Question 3 (a) The following is the Balance Sheet of Manish and Suresh as on 1st April, 2015: Liabilities Capital: Manish ` Assets 1,50,000 Building Machinery ` 1,00,000 65,000 Suresh Creditors for goods 75,000 Stock 30,000 Debtors 40,000 50,000 Creditors for expenses 25,000 Bank 25,000 2,80,000 2,80,000 They give you the following additional information: (i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months. (ii) Stock level is maintained uniformly in value throughout all over the year. (iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current year. (iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase by 25% in volume. (v) Rate of gross profit remains the same. (vi) Business Expenditures are ` 50,000 for the year. All expenditures are paid off in cash. (vii) Closing stock is to be valued on LIFO Basis. The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Prepare Trading, Profit and Loss Account, Trade Debtors A/c and Trade Creditors A/c for the year ending 31.03.2016. (b) Following information has been given for Bharat Sports Club, Delhi for the year ending 31.12.2014 and 31.12.2015. 31.12.2014 31.12.2015 Building (subject to 10% depreciation for the current year) Furniture (subject to 10% depreciation for the current year) 60,000 - ? 20,000 Stock of Sports Materials 5,000 2,000 Prepaid Insurance 3,000 6,000 12,000 6,000 8,000 4,000 - 6,000 2,000 6,000 2,00,000 3,000 2,00,000 Accrued Interest on above Cash Balance 1,000 4,000 64,000 Bank Balance Bank Overdraft 2,000 - 2,000 Outstanding Subscription Advance Subscription Outstanding Locker Rent Advance Locker Rent received Outstanding Rent for Godown 12% General Fund Investments Additional Information: (i) Entrance fees received ` 20,000, Life membership fees received ` 20,000 during the year. (ii) Surplus from Income and Expenditure Account ` 60,000. (iii) It is the policy of the club to treat 60% of entrance fees and 40% of life membership fees as revenue nature. (iv) The furniture was purchased on 01.01.2015. Prepare Opening and Closing Balance Sheet of Bharat Sports Club as on 31st December, 2014 and 31 st December, 2015 respectively. (8 + 8 = 16 Marks) Answer (a) Trading and Profit and Loss account (for the year ending 31st March, 2016) Particulars To Opening Stock The Institute of Chartered Accountants of India ` Particulars 40,000 By Sales ` 4,31,250 PAPER 1 : ACCOUNTING To Purchases (Working Note) To Gross Profit c/d (20% on sales) To Business Expenses To Depreciation on : To 3,45,000 By 6,500 Building 5,000 Closing Stock 40,000 86,250 4,71,250 50,000 By Machinery 11 Gross Profit b/d 4,71,250 86,250 11,500 Net profit 24,750 86,250 86,250 Trade Debtors Account Particulars To Balance b/d To Sales Particulars ` 50,000 By 4,31,250 By Bank (bal.fig.) Balance c/d (1/6 of 4,31,250) 4,81,250 ` 4,09,375 71,875 4,81,250 Trade Creditors Account Particulars ` To Bank (Balancing figure) To Balance c/d/ (1/8 of ` 3,45,000) 3,31,875 By 43,125 By Particulars Balancing b/d Purchases 3,75,000 ` 30,000 3,45,000 3,75,000 Working Note: ` (i) Calculation of Rate of Gross Profit earned during previous year A Sales during previous year (` 50,000 x 12/2) 3,00,000 B Purchases (` 30,000 x 12/1.5) 2,40,000 C Cost of Goods Sold (` 40,000 + ` 2,40,000 ` 40,000) 2,40,000 D Gross Profit (A-C) E Rate of Gross Profit 60,000 ` 60,000 ` 3,00,000 x 100 (ii) Calculation of sales and Purchases during current year A Cost of goods sold during previous year The Institute of Chartered Accountants of India 20% ` 2,40,000 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 B Add: Increases in volume @ 25 % 60,000 3,00,000 C Add: Increase in cost @ 15% 45,000 D Cost of Goods Sold during Current Year E Add: Gross profit @ 25% on cost (20% on sales) F Sales for current year [D+E] 3,45,000 86,250 4,31,250 Note: It has been considered that all sales and purchases are on credit basis only and there are no cash purchases and sales. (b) Balance Sheet of Bharat sports club as at 31 st December, 2014 Liabilities ` Assets Outstanding Rent Advance Subscription Capital Fund (balancing Figure ) ` 6,000 Building 6,000 Stock of Sports materials 60,000 5,000 2,71,000 Prepaid Insurance Outstanding subscription 3,000 12,000 12% General Fund Investments 2,00,000 Cash Balance 1,000 Bank Balance 2,000 2,83,000 2,83,000 Balance Sheet of Bharat Sports club as at 31st December, 2015 Liabilities ` Assets Outstanding Rent 3,000 Building Advance Subscription 4,000 Book Value Advance Locker Rent 2,000 Less: Depreciation Bank Overdraft 2,000 Furniture Cost Capital Fund: Opening Balance Add: Entrance Fees Less: Depreciation 2,71,000 8,000 [20,000 x 40%] Add: Life Membership fee 12,000 60,000 6,000 54,000 20,000 2,000 18,000 2,000 Prepaid Insurance 6,000 Outstanding Subscription 8,000 Outstanding Locker Rent 6,000 3,51,000 Fund Investments Accrued Interest on 12% The Institute of Chartered Accountants of India 60,000 Stock of sports materials 12% General [` 20,000 x 60%] Add: Surplus ` 2,00,000 PAPER 1 : ACCOUNTING 13 General Fund Investments 4,000 Cash Balance 64,000 3,62,000 3,62,000 Question 4 (a) Girish Transport Ltd. purchased from NCR Motors 3 electric rickshaws costing ` 60,000 . each on the hire purchase system on 1.1.2013. Payment was to be made `' 30,000 down and the remainder in 3 equal installments payable on 31.12.2013, 31.12.2014 and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes off depreciation @ 20% p.a. on the reducing balance. It paid the installment due at the end of 1st year i.e. 31.12.2013 but could not pay next on 31.12.2014. NCR Motors agreed to leave one e-rickshaw with the purchaser on 31.12.2014 adjusting the value of the other two e-rickshaws against the amount due on 31.12.2014. The e-rickshaws were valued on the basis of 30% depreciation annually on WDV basis. . Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the year 2013, 2014, and 2015. (b) A Ltd. purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of ` 2,00,000 @ ` 108. On 1st July, 2015 A Ltd. purchased another ` 1,00,000 debenture @ ` 112 cum interest. On 1st October, 2015 ` 80,000 debenture was sold @ ` 105. On 1st December, 2015, C Ltd. give option for conversion of 8% convertible debentures into equity share of ` 10 each. A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the end of year 2015 is ` 110 and ` 15 respectively. Interest on debenture is payable each year on 31st March, and 30th September. The accounting year of A Ltd. is calendar year. Prepare investment account in the books of A Ltd. on average cost basis. (8 + 8 = 16 Marks) Answer (a) Ledger Accounts in the books of Girish Transport Ltd. E-Rickshaws Account Year 1.1.13 ` To NCR Motors A/c 1,80,000 Year 31.12.13 ` By Depreciation A/c By Balance c/d 1,80,000 1.1.14 To Balance b/d 1,44,000 The Institute of Chartered Accountants of India 36,000 1,44,000 1,80,000 31.12.14 By Depreciation 28,800 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 By NCR Motors (value of 2 ERickshaw after depreciation for 2 years @ 30%) 58,800 By P & L A/c (bal.fig.) 18,000 By Balance c/d (one E-Rickshaw less depreciation for 2 years) @ 20% 38,400 1,44,000 1.1.15 To Balance b/d 38,400 1,44,000 31.12.15 By Deprecation A/c By Balance c/d 38,400 7,680 30,720 38,400 NCR Motors Account Year ` 1.1.13 To Bank A/c 30,000 31.12.13 To Bank A/c 65,000 To Balance c/d Year 1.1.13 ` By E-Rickshaws A/c By Interest @ 10% on ` 1,50,000 To E-Rickshaws A/c 58,800 To Balance c/d 51,200 1,95,000 1.1.14 By Balance b/d By Interest @ 10% on ` 1,00,000 1,10,000 31.12.15 To Balance c/d 15,000 1,00,000 1,95,000 31.12.14 1,80,000 56,320 10,000 1,10,000 1.1.15 By Balance b/d By Interest @ 10% on ` 51,200 56,320 1,00,000 51,200 5,120 56,320 Note: In the absence of any information regarding payment of the balance amount of ` 56,320 by Girish Transport Ltd. to NCR Motors Ltd., it has been assumed in the above solution that the balance payment amounting ` 56,320 had not been made till 31st Dec. 2015. The Institute of Chartered Accountants of India (b) To Bank A/c To Bank A/c (W.N.1) To P & L A/c 1.4.15 1.7.15 31.12.15 [Interest] Particulars Date 3,00,000 - 1,00,000 2,00,000 Nominal value ` 16,033 14,033 2,000 - Interest ` 3,26,000 By Bank A/c (Accrued interest) (` 55,000 x .08x 2/12) By Equity shares in C Ltd. (W.N. 3 and 4) By Balance c/d (W.N.5) 1.12.15 31.12..15 (loss) 1.12.15 P&L A/c (W.N.1) By By Bank A/c [`3,00,000 x 8% x (6/12] By Bank A/c Particulars 1.10.15 - 1.10.15 1,10,000 2,16,000 30.09.15 Cost ` Date [Interest Payable on 31 st March and 30 th September] Scrip : 8% Convertible Debentures in C Ltd. The Institute of Chartered Accountants of India 3,00,000 1,65,000 55,000 80,000 - Nominal Value (`) Investment Account for the year ending on 31 st December, 2015 16,033 3,300 733 12,000 Interest (` 3,26,000 1,79,300 59,767 2,933 84,000 - Cost (` PAPER 1 : ACCOUNTING 15 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 SCRIP: Equity Shares in C LTD. Date Particulars 1.12.15 To 8 % debentures Cost ( `) Date Particulars 59,767 31.12.15 By balance c/d Cost (`) 59,767 Working Notes: (i) Cost of Debenture purchased on 1 st July = `1,12,000 `2,000 (Interest) = `1,10,000 (ii) Cost of Debentures sold on 1 st Oct. = (`2,16,000 + `1,10,000) x 80,000/3,00,000 (iii) Loss on sale of Debentures = ` 86,933 `84,000 Nominal value of debentures converted into equity shares = ` 86,933 = `2,933 =` 55,000 [(` 3,00,000 80,000) x.25] Interest received before the conversion of debentures Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733 (iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x 55,000/3,00,000 = ` 59,767 (v) Cost of closing balance of Debentures = (` 2,16,000 + `1,10,000) x 1,65,000 / 3,00,000 = ` 1,79,300 (vii) Closing balance of Debentures has been valued at cost being lower than the market value i.e. ` 1,81,500 (` 1,65,000 @ ` 110) (viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the market value ` 75,000 (` 15 x5,000) Note: It is assumed that interest on debentures, which are converted into cash, has been received at the time of conversion. Question 5 (a) A firm has decided to take out a loss of profit policy for the year 2016 and given the following information for the last accounting year 2015. Variable manufacturing expenses ` 14,20,000, Standing charges ` 1,50,000, Net Profits ` 80,000, Non-operating income ` 2,500, Sales ` 18,00,000. Compute the sum to be insured in each of the following alternative cases showing the anticipation for the year 2016: The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING (i) 17 If sales will increase by 15%. (ii) If sales will increase by 15% and only 50% of the present standing charges are to be insured. (iii) If sales and variable expenses will increase by 15% and standing charges will increase by 10%. (iv) If sales will increase by 15% and variable expenses will decrease by 5%. (v) If sales will increase by 10% and standing charges will increase by 15%. (vi) If the turnover and standing charges will increase by 15% and variable expenses will decrease by 10% but only 50% of the present standing charges are to be insured. (b) Rahim has a current account with partnership firm. It has debit balance of ` 2,40,000 as on 1.04.2015. He has further deposited the following amounts: Date Amount (`) 14/04/2015 1,20,000 30/04/2015 3,00,000 18/05/2015 1,23,000 He withdrew the following amounts: Date t . Amount ( ` ) 29/04/2015 97,000 09/05/2015 1,71,000 Show Rahim s A/c in the ledger of the firm. Interest is to be calculated at 10% on debit balance and 8% on credit balance. You are required to prepare current account as on 31st May, 2015 by means of product of balance method. (8 + 8 = 16 Marks) Answer (a) Statement showing computation of sum insured under various cases Sales Less: exp Variable Gross profit Add: increase in Insured standing charges (i) (ii) (iii) (iv) (v) (vi) 20,70,000 20,70,000 20,70,000 20,70,000 19,80,000 20,70,000 16,33,000 16,33,000 18,77,950 15,51,350 15,62,000 14,69,700 4,37,000 4,37,000 1,92,050 5,18,650 4,18,000 6,00,300 - - 15,000 - 22,500 11,250* The Institute of Chartered Accountants of India 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Less: uninsured standing charges Sum insurable - (75,000) - - - (75,000) 4,37,000 3,62,000 2,07,050 5,18,650 4,40,500 5,36,550 Note: 1. The above solution is based on the assumption that increase in sale is due to increase in volume of sales. Alternatively, it may be assumed that this increase is because of rise in selling price. In that case, there will be no proportionate increase in variable expenses and the answer will get changed accordingly. 2. *In case (vi), it is given in the question that 50% of the present standing charges are to be insured. It is assumed in the above answer that 50% of the increased standing charges are insured. 3. In case (iii), 15% increase in variable expenses has been calculated after considering proportionate increase in variable expenses due to increase in turnover. (b) Rahim s Current Account with Partnership firm (as on 31.5.15) Date Particulars Dr Cr (` ) 1.4.15 To Bal b/d 2,40,000 14.4.15 By Cash A/c 1,20,000 29.4.15 To Self 97,000 30.4.15 By Cash A/c 9.5.15 To Self (`) 3,00,000 1,71,000 18.5.15 By Cash A/c 1,23,000 31.5.15 To Interest A/c 1,361 31.5.15 By Bal. c/d Balance Dr. or (`) Cr. Days Dr Product (` ) 2,40,000 Dr. 13* 31,20,000 1,20,000 Dr. 15 18,00,000 2,17,000 Dr. 1 83,000 Cr. 9 88,000 Dr. 9 35,000 Cr. 14* Cr Product (` ) 2,17,000 7,47,000 7,92,000 4,90,000 Dr. 33,639 5,43,000 5,43,000 59,29,000 12,37,000 Interest Calculation: On ` 59,29,000x 10% x 1/365 = ` 1,624 On ` 12,37,000 x 8% x 1/365 = (` 271) Net interest to be debited (`1,353) = Note: *In the given answer, starting/transaction date has been considered and the date of next transaction has been ignored for the purpose of calculation of number of days. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 19 Question 6 Ajay, Vijay and Sanjay are partners sharing Profit & Loss in the ratio of 2:3:1. The Balance Sheet of the firm as on 31.03.2015 is as follows: Liabilities ` Assets Capital A/c: Furniture & Fixture ` 30,000 Vijay s Capital 85,000 Office equipment 20,000 Sanjay s Capital 68,000 Motor Car 60,000 General Reserve A/c 30,000 Stock 40,000 Sundry Creditors 25,000 Sundry Debtors 20,000 Cash at Bank 18,000 Ajay s Capital 20,000 2,08,000 2,08,000 Kamal is admitted as a new. partner with effect from 1 st April, 2015 by receiving 1/4 share in the profit & loss of the firm. The profit or loss sharing .ratios between other partners remain same as before. It was agreed that Kamal would bring. some private furniture worth ` 3,000 and private stock worth ` 5,000 and balance in cash towards his capital. The following adjustments are to be made prior to Kamal admission: 1. Goodwill of the firm is to be valued at 2 years purchase of the average profit of last 3 years. The profits for the last 3 years were ` 35,900, ` 38,200 and ` 31,500. However on checking of the past records it was noticed that on 01.04.11 a new furniture costing, ` 8,000 was purchased but wrongly debited to revenue and also in year 2012-13, a purchase invoice for ` 4,000 has been omitted in the book. The firm charged depreciation on furniture @ 10% on original cost. Your calculation of goodwill is to be made on the basis of correct profits. It is agreed among existing partners that Sanjay s interest in the goodwill of the firm is only up to value of ` 42,000. 2. Motor Car is taken over by Vijay at ` 70,000. 3. Office equipment is revalued at ` 25,000. 4. Expenses incurred but not paid of ` 6,500 are provided for. 5. Value of the stock is to be reduced by 5%. 6. Kamal is to bring proportionate capital. Capital of Vijay, Ajay and Sanjay are also to be adjusted in profit sharing ratio. The Institute of Chartered Accountants of India 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Assuming the above mentioned adjustments are duly carried out, show the revaluation account, partner's capital accounts and the Balance Sheet of the firm after Kamal s admission. (16 Marks) Answer Revaluation Account ` ` To Stock 2,000 By Motor car To Expenses 6,500 By Office equipment To Purchases Omitted 4,000 To Capital A/c Ajay Vijay Sanjay 10,000 5,000 833 1,250 417 2,500 15,000 The Institute of Chartered Accountants of India 15,000 The Institute of Chartered Accountants of India 17,395 To Goodwill 58,847 39,232 40,540 To balance c/d (WN 4) Total 58,847 - - - 1,308 To balance b/d 69,130 43,036 26,094 1,39,130 69,130 70,000 - Vijay To Bank (bal. fig.) 17,395 Total - 36,087 Total To Balance c/d 16,087 - 20,000 Ajay To Balance c/d To Motor Car To Balance b/d Particulars Particulars By Goodwill By Revaluation A/c By Furniture By Reserve By bal b/d 17,395 - 17,395 By bal c/d By assets By Balance b/d At the time of admission - - - Before admission Kamal 75,967 19,616 56,351 - 48,627 39,232 - 9,395 By Bank (bal. fig.) By bal b/d Adjustments to make Capital proportionate 81,217 75,967 5,250 81,217 81,127 - - Sanjay - - Ajay 40,540 40,540 - 17,395 1,308 16,087 36,087 23,654 833 1,600 10,000 Partners Capital Accounts - 58,847 15,811 43,036 69,130 - 69,130 1,39,130 35,480 1,250 2,400 15,000 85,000 Vijay - 75,967 - 75,967 81,217 - 81,127 81,217 7,000 417 800 5,000 68,000 Sanjay 48,627 48,627 - 17,395 9,395 8,000 - - - - Kamal PAPER 1 : ACCOUNTING 21 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Balance Sheet of the Firm (after Kamal s admission) Equity & Liabilities ` Assets Capital Account: ` Furniture& fixture 37,800 Ajay 39,232 Vijay 58,847 Office equipment 25,000 Sanjay Kamal 19,616 Stock (38,000 +5,000) 39,232 Debtors 43,000 20,000 Creditors (25,000 +4,000) 29,000 Cash at Bank (W. N. 5) 66,627 Outstanding Expenses (30,000 +3,000+4,800) 6,500 1,92,427 1,92,427 Working Notes: 1. Computation of New Profit sharing ratio Since Kamal s Share= 1/4 th, Balance 3/4 th to be shared by Ajay, Vijay and Sanjay in the ratio 2:3:1 New Ratio Ajay Vijay Sanjay Kamal Total 2 3 2 6 4 8 3 3 3 6 4 8 1 3 1 6 4 8 1 2 4 8 2:3:1:2 2. Computation of Goodwill Year Profit Less: Depreciation Purchase invoice omitted 12-13 35,900 (800) (4,000) 31,100 Average Profit Goodwill at 2 years purchase 3. (i) 13-14 38,200 (800) _ 37,400 99,200/3 ` 33,067 2 14-15 31,500 (800) _ 30,700 Total 99,200 ` 33,067 ` 66,134 Distribution of Goodwill to be credited to Ajay, Vijay and Sanjay Particulars First ` 42,000 to be distributed among all the Partners in the ratio of 2:3:1 Balance - ` 24,134 to be distributed between Ajay and Vijay in the ratio 2:3 Total The Institute of Chartered Accountants of India Ajay Vijay Sanjay Total 14,000 21,000 7,000 42,000 9,654 14,480 - 24,134 23,654 35,480 7,000 66,134 PAPER 1 : ACCOUNTING 23 (ii) Writing off of Goodwill Particulars First ` 42,000 to be debited among all the Partners in the ratio of 2:3:1:2 Balance- ` 24,134 to be distributed between Ajay,Vijay and kamal in the ratio 2:3:2 Total Ajay Vijay Sanjay Kamal Total 10,500 15,750 5,250 10,500 42,000 6,895 10,344 - 6,895 24,134 17,395 26,094 5,250 17,395 66,134 4. Computation of proportionate Capital of Partners ` Combined Capital of Ajay, Vijay, Sanjay (Existing partners) as per balance derived in partners Capital Account = ` 43,036+ ` 75,967 1,308= 1,17,695 1,17,695 Share of Ajay, Vijay and Sanjay in the new firm after deducting Kamal s 1/4th share 3/4th 1,56,927 Total Capital of the Firm after Kamal s admission = ` 1,17,695 3/4th Apportionment of Capital in New Profit Sharing Ratio i.e. Proportionate Capital of partners Partners Ratio Proportionate Capital of partners (1,56,927) 5. Ajay Vijay Sanjay Kamal 2 3 1 2 39,232 58,847 19,616 39,232 Cash at Bank = Given ` 18,000 +40,540+ 15,811+ 48,627 56,351 = ` 66,627 Note: 1. In the above solution, adjustment of furniture for ` 4,800 has been routed through Partners capital accounts. Alternatively, it may also be routed through Revaluation A/c. 2. Since goodwill is not a purchased goodwill, it has been written off in the above solution, in accordance with the AS 10. 3. As per the requirement given in the question, it is agreed among existing partners that Sanjay s interest in the goodwill of the firm is only upto the value of ` 42,000. It has been assumed in the above solution that Sanjay is credited at the time of raising of goodwill as well as debited only to the extent of ` 42,000 at the time of writing off of goodwill. The Institute of Chartered Accountants of India 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Question 7 Answer any four from the following: (a) Anjana Ltd. is absorbed by Sanjana Ltd.; the consideration being the takeover of liabilities, the payment of cost of absorption not exceeding ` 10,000 (actual cost ` 9,000) the payment of the 9% debentures of ` 50,000 at a premium of 20% in 8% debentures issued at a premium of 25% at face value and the payment of ` 15 per share in cash and allotment of three 11% preference share of ` 10 each at a discount of 10% and four equity share of ` 10 each. at a premium of 20% fully paid for every five shares in Anjana Ltd. The number of share of the vendor company are 1,50,000 of ` 10 each fully paid. Calculate purchase consideration as per Accounting Standard 14. (b) What are the disadvantages of a spreadsheet as an accounting tool ? (c) X owes Y the following sums of money due on the dates started : ` 400 due on 5th January, 2016 ` 200 due on 20th January; 2016 ` 800 due on 4th February, 2016 ` 100 due on 26th February, 2016 ` 50 due on 10th March, 2016 Calculate such a date when payment may be made by X in one installment resulting in no loss of interest to either party. Assume base date as 5th January, 2016. (d) Classify the following activities as per AS 3 Cash Flow Statement: (i) Interest paid by financial enterprise (ii) Dividend paid (iii) Tax deducted at source on interest received from subsidiary company (iv) Deposit with Bank for a term of two years (v) Insurance claim received towards loss of machinery by fire (vi) Bad debts written off Which activity does the purchase of business falls under and whether netting off of aggregate cash flows from disposal and acquisition of business units is possible ? (e) From the following information available from the books of a trader from 01/01/2015 to 31/03/2015, you are required to draw up the Debtors Ledger Adjustment Account in the General Ledger : i. Total sales amounted to ` 2,00,000 including the sale of machine for ` 6,800 (book value ` 12,000). The total cash sales were 85% Iess than the total credit sales. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 25 ii. Cash collections from debtors amounted to 70% of the aggregate of the opening debtors and credit sales for the period. Debtors were allowed a cash discount of ` 20,000. iii. Bills receivable drawn during the three months totalled ` 45,000 of which bills amounting to ` 20,000 were endorsed in favour of suppliers. Out of the endorsed bills, one bill for ` 6,000 was dishonoured for non-payment as the party became insolvent, his estate realized nothing. iv. Cheque received from debtors ` 15,000 were dishonoured, a sum of ` 3,500 was irrecoverable, Bad debts written off in the earlier year's realized ` 15,000. v. Sundry debtors as on 01/01/2015 stood at ` 1,50,000. (4 4 = 16 Marks) Answer (a) As per AS 14 on Accounting for Amalgamations, the term consideration has been defined as the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company The payment made by transferee company to discharge the Debenture holders and outside liabilities and cost of winding up of transferor company shall not be considered as part of purchase consideration Computation of Purchase Consideration ` Cash payment [`15 x 1,50,000] 11% Preference Shares of ` 10 each @ 10% discount [(1,50,000 x 3/5) x ` 9] 22,50,000 8,10,000 Equity shares of ` 10 each @ 20% premium [(1,50,000 x 4/5) x ` 12] 14,40,000 Total Purchase consideration 45,00,000 For every 5 shares Anjana Ltd. will receive (i) 4 equity shares @ ` 12 per share and (ii) 3 11% Preference Shares shares @ ` 9 per share. (b) Disadvantages of a spreadsheet as an accounting tool are as follows: 1. Spreadsheet has data limitations. Depending upon the package, it can accept data only up to a specified limit. 2. Simultaneous access on a network may not be possible. Many of the modern softwares allow locking of the table when updation is taking place. This is not possible in a spread sheet. The Institute of Chartered Accountants of India 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 3. Double entry is not automatically completed in Spread Sheet. Formulas or other means have to be adopted to complete the double entry. 4. Reports are not automatically formatted and generated but have to be user controlled. Each time a report has to be printed, settings have to be checked and data range has to be set. In many accounting softwares this is automatically taken care of by the program. (c) Calculation of the average due date Taking 5th January as the base date Due date 2016 5th January, 2016 20th January, 2016 4th February, 2016 26th February, 2016 10th March, 2016 Amount ` No. of days from the base date i.e. 5th January, 2016 400 200 800 100 50 1,550 Average due date=Base date+ Days equal to = 5th January, 2016+ 0 15 30 52 65 Product ` 0 3,000 24,000 5,200 3,250 35,450 Total of products Total amount 35,450 1,550 = 5th January, 2016 + 22.8 days = 5th January, 2016 + 23 days =28th January, 2016 If the payment is made by X in one installment on 28 th January, 2016, no loss of interest would arise to any of the parties. (d) (i) Interest paid by financial enterprise Cash flows from operating activities (ii) Dividend paid Cash flows from financing activities (iii) TDS on interest received from subsidiary company Cash flows from investing activities (iv) Deposit with bank for a term of two years The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 27 Cash flows from investing activities (v) Insurance claim received against loss of fixed asset by fire Extraordinary item to be shown as a separate heading under Cash flow from investing activities (vi) Bad debts written off It is a non-cash item which is adjusted from net profit/loss under indirect method, to arrive at net cash flow from operating activity. Purchase of business falls under Investing Activities as per AS 3 Cash Flow Statement . The aggregate cash flows arising from acquisitions and from disposals of other business units should be presented separately and classified as investing activities. Thus netting of aggregate cash flows from disposal and acquisition of business units is not possible. (e) In General Ledger Debtors Ledger Adjustment Account 2015 Jan. 1 To Balance b/d Jan. 1 to To General ledger Mar.31 adjustment account: Sales [(100/115) x (2,00,000-6,800)] Creditors-bill receivable dishonoured Bank-cheques dishonoured ` 2015 ` 1,50,000 Jan. 1 By General ledger to adjustment Mar.31 account: 1,68,000 Collection-cash and bank[70 % of (1,50,000+ 1,68,000)] Discount 6,000 Bills receivable 15,000 March _______ 31 3,39,000 Bad debts (6,000+3,500) By Balance c/d 2,22,600 20,000 45,000 9,500 41,900 3,39,000 Note: If credit sales is ` 100, cash sales will be ` 15. Total credit sales shall be 100/115 of ` 1,93,200, i.e., ` 1,68,000. The Institute of Chartered Accountants of India

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