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

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CA IPCC
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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) GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of Retail Petrol & Diesel Outlet Stations . Based on proposals submitted to different Regional Offices of BOCL, the final approval for one outlet each in Region X, Region Y, Region Z is awarded to GTI Ltd. A single agreement is entered into between two. The agreement lays down values for each of the three outlets i.e. `102 lacs, `150 lacs, `130 lacs for Region X, Region Y, Region Z respectively. Agreement also lays down completion time for each Region. Comment whether GTI Ltd. will treat it as single contract or three separate contracts with reference to AS-7? (b) Hema Ltd. purchased a machinery on 1.04.2008 for `15,00,000. The company charged straight line depreciation based on 15 years working life estimate and residual value `3,00,000. At the beginning of the 4th year, the company by way of systematic evaluation revalued the machinery upward by 20% of net book value as on date and also re-estimated the useful life as 7 years and scrap value as nil. The increase in net book value was credited directly to revaluation reserves. Deprecation (on SLM basis) later on was charged to Profit & Loss Account. At the beginning of 8th year the company decided to dispose off the machinery and estimated the realizable value to `2,00,000. You are required to ascertain the amount to be charged to Profit & Loss Account at the beginning of 8th year with reference to AS-10. (c) How you will deal with following in the financial statement of the Paridhi Electronics Ltd. as on 31.3.16 with reference to AS-13? (i) Paridhi Electronics Ltd. invested in the shares of another unlised company on 1st May 2012 at a cost of `3,00,000 with the intention of holding more than a year. The published accounts of unlisted company received in January, 2016 reveals that the company has incurred cash losses with decline market share and investment of Paridhi Electronics Ltd. may not fetch more than `45,000. (ii) Also Paridhi Electronics Ltd. has current investment (X Ltd. s shares) purchased for `5 lakhs, which the company want to reclassify as long term investment. The market value of these investments as on date of Balance Sheet was ` 2.5 lakhs. The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 (d) A manufacturing company has the following stages of production and sale in manufacturing Fine paper rolls: Date Activity 15.1.16 20.1.16 27.1.16 15.2.16 20.2.16 15.3.16 02.4.16 Raw Material Pulp (WIP 1) Rough & thick paper (WIP 2) Fine Paper Rolls Ready for sale Sale agreed and invoice raised Delivered and paid for Cost to Date Net Realizable (` ) Value (`) 1,00,000 80,000 1,20,000 1,20,000 1,50,000 1,80,000 1,80,000 3,50,000 1,80,000 3,50,000 2,00,000 3,50,000 2,00,000 3,50,000 Explain the stage on which you think revenue will be generated and state how much would be net profit for year ending 31.3.16 on this product according to AS-9. (4 x 5 = 20 Marks) Answer (a) As per AS 7 Construction Contracts , when a contract covers number of assets, the construction of each asset should be treated as a separate construction contract when: (a) separate proposals have been submitted for each asset; (b) each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and (c) the costs and revenues of each asset can be identified. In the given case, each outlet is submitted as a separate proposal to different Zonal Offices, which can be separately negotiated, and costs and revenues thereof can be separately identified. Hence, each asset will be treated as a single contract even if there is one single agreement for contracts. Therefore, three separate contract accounts must be recorded and maintained in the books of GTI Ltd. For each contract, principles of revenue and cost recognition must be applied separately and net income will be determined for each asset as per AS 7. (b) ` Depreciation charged for first three years [(15,00,000 - 3,00,000)/15] x 3 W.D.V. at beginning of 4th year (15,00,000 2,40,000) 2,40,000 12,60,000 Add: Upward revaluation Revalued Value (12,60,000 x 120%) 2,52,000 15,12,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 3 Revised useful life 7 years Depreciation from 4th Depreciation from 4th year onwards (15,12,000/ 7) to W.D.V. at beginning of Disposal value 7th 8th 2,16,000 year (2,16,000 x 4) 8,64,000 year (15,12,000 - 8,64,000) 6,48,000 2,00,000 Loss on disposal (6,48,000 2,00,000) 4,48,000 Loss to be charged against revaluation reserve as per AS 10 Amount to be charged to P & L Account at beginning of (4,48,000 - 2,52,000) 8th year 2,52,000 1,96,000 Note: Information regarding revaluation and re-estimation of the useful life has been given in the question. It has been given that at the beginning of the 4 th year, useful life was re-estimated as 7 years. In the above solution, this useful life has been considered as remaining useful life. Alternatively, it may also be assumed as the total useful life. In that case the remaining useful life will be considered as 4 years because 3 years have already passed. (c) (i) As per AS 13, Accounting for investments Investments 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. The standard also states that 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. On this basis, the facts of the given case clearly suggest that the provision for diminution should be made to reduce the carrying amount of shares to ` 45,000 in the financial statements for the year ended 31st March, 2016 and charge the difference of loss of ` 2,55,000 to Profit and Loss account. (ii) As per AS 13 Accounting for Investments , where investments are reclassified from current to long-term, transfers are made at the lower of cost or fair value at the date of transfer. In the given case, the market value of the investment (X Ltd. shares) is ` 2.50 lakhs, which is lower than its cost i.e. `5 lakhs. Therefore, the transfer to long term investments should be made at cost i.e. `2.50 lakhs. The loss of ` 2.50 lakhs should be charged to profit and loss account. (d) According to AS 9 Revenue Recognition , in a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 (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. Thus, sales will be recognized only when following two conditions are satisfied: (i) The sale value is fixed and determinable. (ii) Property of the goods is transferred to the customer. Both these conditions are satisfied only on 15.3.2016 when sales are agreed upon at a price and goods are allocated for delivery purpose through invoice. The amount of net profit ` 150,000 (3,50,000 2,00,000) would be recognized in the books for the year ending 31st March, 2016. Question 2 Proficient Infosoft Ltd. is in the hand of a Receiver for Debenture Holders who holds a charge on all asset except uncalled capital. The following statement shows the position as regards creditors as on 30th June, 2016: Liabilities ` 8,000 shares of ` 100 each - ` Property (cost is ` 3,80,800) estimated at ` 60 paid up First Debentures Second Debentures 3,60,000 7,80,000 Plant & Machinery Unsecured trade payables 5,40,000 estimated at 1,08,000 (Cost is ` 2,87,200) Cash in hand of the receiver 72,000 3,24,000 5,04,000 Uncalled capital 3,20,000 8,24,000 Deficiency 16,80,000 8,56,000 16,80,000 A holds the first debentures for ` 3,60,000 and second debentures for ` 3,60,000. He is also an unsecured trade payable for ` 1,08,000. B holds second debentures for ` 3,60,000 and is an unsecured trade payable for ` 72,000. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 5 The following scheme of reconstruction is proposed. (i) A is to cancel ` 2,52,000 of the total debt owing to him; to bring ` 36,000 in cash and to take first debentures (in cancellation of those already issued to him) for ` 6,12,000 in satisfaction of all his claims. (ii) B to accept `1,08,000 in cash in satisfaction of all claims by him. (iii) In full settlement of 60% of the claim, unsecured trade payable (other than A and B) agreed to accept three shares of `25 each, fully paid against their claim for each `100. The balance of 40% is to be postponed and to be payable at the end of three years from the date of Court s approval of the scheme. The nominal share capital is to be increased accordingly. (iv) Uncalled capital is to be called up in full and `75 per share cancelled, thus making the shares of ` 25 each. Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary journal entries. (16 Marks) Answer Journal Entries Particulars Debit (`) First debentures A/c Second debentures A/c Dr. Dr. 3,60,000 3,60,000 Unsecured trade payables A/c To A Dr. 1,08,000 Credit (`) 8,28,000 (Being A s total liability ascertained) A Dr. 2,52,000 To Capital reduction A/c 2,52,000 (Being cancellation of debt up to `2,52,000) Bank A/c Dr. 36,000 To A (Being cash received in course of settlement) A 36,000 Dr. 6,12,000 To First debentures A/c 6,12,000 (Being liability of A, discharged against first debentures) Second debentures A/c Dr. 3,60,000 Unsecured trade payables A/c Dr. 72,000 The Institute of Chartered Accountants of India 6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 To B 4,32,000 (Being B s liability ascertained) B Dr. 4,32,000 To Bank A/c To Capital reduction A/c 1,08,000 3,24,000 (Being B s liability discharged in satisfaction of all claims) Unsecured trade payables A/c Dr. 3,60,000 To Equity share capital A/c 1,62,000 To Loan (Unsecured) A/c 1,44,000 To Capital reduction A/c 54,000 (Being settlement of unsecured Trade payables) Share call A/c Dr. 3,20,000 To Share capital A/c (Being final call money due) Bank A/c 3,20,000 Dr. 3,20,000 To Share call A/c 3,20,000 (Being final call money received) Share capital A/c (Face value `100) Dr. 8,00,000 To Share capital (Face value `25) 2,00,000 To Capital reduction A/c 6,00,000 (Being share capital reduced to `25 each) Capital reduction A/c Dr. 11,68,000 To Profit and loss A/c (Being reconstruction surplus used to write off losses W.N. 2) Capital Reduction A/c 11,68,000 Dr. To Capital Reserve A/c (Being balance in capital reduction account transferred to capital reserve account) 62,000 62,000 Working Notes: 1. Settlement of claim of remaining unsecured Trade payables 60% of `3,60,000 Considering their claim for share of `100 each The Institute of Chartered Accountants of India ` 2,16,000 PAPER 1 : ACCOUNTING 7 2,16,000/100 =2,160 shares Less: Number of shares to be issued 2,160 x 3= 6,480 shares of `25 each (1,62,000) Transferred to Capital reduction A/c 54,000 2. Ascertainment of profit and loss account s debit balance at the time of reconstruction. ` Assets Fixed assets (3,80,800 + 2,87,200) ` 6,68,000 Cash Less: Capital & Liabilities: 3,24,000 Share capital 1st Debentures 4,80,000 3,60,000 2nd Debentures Unsecured trade payables 7,80,000 5,40,000 Profit and loss A/c (Debit balance) 9,92,000 (21,60,000) (11,68,000) Question 3 (a) On the basis of the following information prepare a Cash Flow Statement for the year ended 31st March, 2016 (Using direct method): (i) Total sales for the year were ` 398 crores out of which cash sales amounted to ` 262 crores. (ii) Receipts from credit customers during the year, totaled ` 134 crores. (iii) Purchases for the year amounted to ` 220 crores out of which credit purchase was 80%. Balance in creditors as on 1.4.2015 ` 84 crores 31.3.2016 ` 92 crores (iv) Suppliers of other consumables and services were paid ` 19 crores in cash. (v) Employees of the enterprises were paid 20 crores in cash. (vi) Fully paid preference share of the face value of `32 crores were redeemed. Equity shares of the face value of `20 crores were allotted as fully paid up at premium of 20%. The Institute of Chartered Accountants of India 8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 (vii) Debentures of ` 20 crores at a premium of 10% were redeemed. Debenture holders were issued equity shares in lieu of their debentures. (viii) `26 crores were paid by way of income tax. (ix) A new machinery costing ` 25 crores was purchased in part exchange of an old machinery. The book value of the old machinery was `13 crores. Through the negotiations, the vendor agreed to take over the old machinery at a higher value of `15 crores. The balance was paid in cash to the vendor. (x) Investment costing ` 18 cores were sold at a loss of `2 crores. (xi) Dividends totalling ` 15 crores (including dividend distribution tax of ` 2.7 crores) was also paid. (xii) Debenture interest amounting ` 2 crore was paid. (xiii) On 31st March 2015, Balance with Bank and Cash on hand totaled ` 2 crores. (8 Marks) (b) The following particulars are obtained from books of Prime Ltd. for the year ended 31 st March, 2016: ` Cash Sales Credit Purchases Collection from Debtors 50,000 Bills Receivable dishonoured 5,60,000 Return Inward 8,50,000 Payment to creditors ` 5,000 17,000 3,24,000 Bills Receivable drawn Discount Received 40,000 Discount allowed 5,000 Debtor s cheque returned dishonoured 6,000 15,000 Cash Purchases Bills Payable Paid 24,000 Credit Sales 13,000 Bills Receivable Collected 9,80,000 20,000 Recovery of Bad Debts Bills receivable discounted with Bank 3,000 Return Outward 16,000 Bills Receivable endorsed to Creditors 7,400 15,800 Interest charged on overdue customer s A/c 2,400 Overpayment refunded by Suppliers 1,200 Endorsed Bills Receivable dishonoured (noting charges ` 150) 11,000 Bad debts Opening Balances: Sundry Debtors 2,000 1,56,000 Bills payable accepted 32,000 Sundry Creditor 1,70,000 You are required to prepare the Total Debtors Account and Total Creditors Account. (8 Marks) The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 9 Answer (a) Cash flow statement (using direct method) for the year ended 31st March, 2016 (` in crores) (` in crores) Cash flow from operating activities Cash sales Cash collected from credit customers Less: Cash paid to suppliers for goods & services and to employees (Refer Working Note) 262 134 (251) Cash from operations 145 Less: Income tax paid (26) Net cash generated from operating activities Cash flow from investing activities Net Payment for purchase of Machine (25 15) Proceeds from sale of investments 119 (10) 16 Net cash used in investing activities Cash flow from financing activities Redemption of Preference shares Proceeds from issue of Equity shares Debenture interest paid Dividend Paid 6 (32) 24 (2) (15) Net cash used in financing activities (25) Net increase in cash and cash equivalents 100 Add: Cash and cash equivalents as on 1.04.2015 Cash and cash equivalents as on 31.3.2016 2 102 Working Note: Calculation of cash paid to suppliers of goods and services and to employees (` in crores) Opening Balance in creditors Account Add: Purchases (220x .8) 84 176 Total Less: Closing balance in Creditors Account 260 92 The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 Cash paid to suppliers of goods 168 Add: Cash purchases (220x .2) 44 Total cash paid for purchases to suppliers (a) 212 Add: Cash paid to suppliers of other consumables and services (b) Add: Payment to employees (c) Total cash paid to suppliers of goods & services and to employees [(a)+ (b) + (c)] (b) 19 20 251 In the books of Prime Ltd. Total Debtors Account ` To To Balance b/d Bank (Cheque dishonoured) To To B/R (Dishonoured) Interest To To Sales Sundry Creditors (endorsed bill dishonoured charges) with 1,56,000 By 15,000 By 5,000 By 2,400 By noting 9,80,000 By By ` Cash Discount Allowed B/R Returns Inward Bad Debts Balance c/d 11,150 11,69,550 8,50,000 6,000 40,000 17,000 2,000 2,54,550 11,69,550 Total Creditors Account ` To Cash To B/R (endorsed) To Discount received To Bills Payable To Return outward To Balance c/d ` 3,24,000 By Balance b/d 1,70,000 15,800 By Purchases 5,000 By Sundry Debtors A/c (endorsed 32,000 B/R dishonoured with noting charges) 7,400 By Cash (over refunded) payments 5,60,000 11,150 1,200 3,58,150 7,42,350 7,42,350 Note: Transactions relating to cash sales or purchases; honour of bills receivable or payable; recovery of bad debts and discount or endorsement of bill will not be entered in Total Debtors and Total Creditors Accounts. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 11 Question 4 The Accountant of Retreat & Refresh Club furnishes you the following Receipts and Payment Account for the year ending 31st March, 2016: Receipts ` Payments Opening Balance: Cash & Bank Subscription Sale of Old Magazines ` Honoraria to Secretary 19,200 33,520 Misc. expenses 42,840 Rates & Taxes 6,120 5,040 9,600 Ground man s wages 3,360 Entertainment Fees 17,080 Printing & Stationary 1,880 Bank Interest Bar Receipts 920 Payment for bar purchases 29,800 Repairs 23,080 1,280 Telephone expenses New car (less sale proceeds of old car ` 12,000) (Old car was sold on 1.4.2015) Closing Balance: Cash & Bank 9,560 50,400 13,840 1,33,760 1,33,760 Additional Information 1.4.2015 (`) 31.3.2016 (`) 4,800 3,920 360 120 1,16,000 - Depreciation on club premises provided so far Car at cost 75,200 48,760 - Depreciation on car provided so far 41,160 - Value of Bar stock 2,840 3,480 Amount unpaid for bar purchases 2,360 1,720 Subscription due (not received) Cheque issued, but not presented (payment of printing expenses) Club premises at cost Depreciation is to be provided @ 5% p.a. on written down value of the club premises and @ 15% p.a. on car for the whole year. You are required to prepare an Income & Expenditure A/c of Retreat & Refresh Club for the year ending 31st March, 2016 and Balance Sheet as on that date. (16 Marks) The Institute of Chartered Accountants of India 12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 Answer Income and Expenditure Account of Retreat & Refresh Club for the year ended 31st March, 2016 Expenditure Amount Income ` To Honoraria to secretary Amount ` 19,200 By Subscriptions (W.N.3) 41,960 To Misc. expenses 6,120 By Sale of old magazines 9,600 To Rates and taxes 5,040 By Entertainment fees To Groundman's wages 3,360 By Bank interest To Printing and stationary 1,880 By Bar receipts To Telephone expenses 9,560 By Profit on sale of car (W.N.5) 17,080 920 29,800 4,400 To Bar expenses Opening bar stock 2,840 Add. Purchases (W.N.2) 22,440 25,280 Less: Closing bar stock (3,480) 21,800 To Repairs 1,280 To Depreciation Club premises (W.N.4) 2,040 Car (W.N. 6) 9,360 11,400 To Excess of income over expenditure transferred to capital fund 24,120 1,03,760 1,03,760 Balance Sheet of Retreat & Refresh Club as on 31st March, 2016 Liabilities Amount Assets ` Capital fund (W.N. 1) Add: Excess of income over expenditure 87,200 24,120 ` Club Premises Car 1,11,320 Bar stock The Institute of Chartered Accountants of India Amount 38,760 53,040 3,480 PAPER 1 : ACCOUNTING Outstanding liabilities for bar purchases 13 Outstanding subscription 1,720 Cash and bank 1,13,040 3,920 13,840 1,13,040 Working Notes: 1. Balance Sheet of Retreat & Refresh Club as on 1stApril, 2015 Liabilities Amount Assets Amount ` Amount due for bar purchases Capital fund on 1.4.2015 (balancing figure) 2. Club premises 2,360 Less: Depreciation 87,200 Car Less: Depreciation Bar stock Outstanding subscription Cash at bank 89,560 ` 1,16,000 (75,200) 48,760 (41,160) 40,800 7,600 2,840 4,800 33,520 89,560 Calculation of bar purchases for the year ` 3. Bar payments as per receipts and payments account 23,080 Add: Amount due on 31st March, 2016 1,720 24,800 Less: Amount due on 1st April, 2015 (2,360) 22,440 Calculation of subscriptions accrued during the year ` Subscriptions received as per receipts and payments account Add: Outstanding on 31st March, 2016 Less: Outstanding on 1st April, 2015 42,840 3,920 46,760 (4,800) 41,960 The Institute of Chartered Accountants of India 14 4. INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 Depreciation on club premises and its written down value on 31st March, 2016 ` Written down value on 1st April, 2015 (1,16,000- 75,200) 40,800 Less: Depreciation for the year @ 5% p.a. (2,040) 38,760 5. Calculation of profit on sale of car ` Sale proceeds of old car 12,000 Less: Written down value of old car: Cost of car on 1st April, 2015 Less: Depreciation upto 6. 1st 48,760 April, 2015 (41,160) (7,600) 4,400 Depreciation on car and its written down value on 31st March, 2016 ` Cost of new car purchased (50,400 + 12,000) 62,400 Less: Depreciation for the year @ 15% p.a. Written down value on 31st March, 2016 (9,360) 53,040 Note: The opening and closing balance of cash and bank shown in the Receipts and Payments Account (given in the question), include the bank balance as per cash book. Therefore, no adjustment has been made in the above solution on account of cheques issued, but not presented for payment of printing. Question 5 (a) Srikumar bought 2 cars from Fair Value Motors Pvt. Ltd. on1.4.2012 on the following terms: Down payment 6,00,000 1st Installment at the end of first year 4,20,000 2nd year 4,90,000 3rd Installment at the end of 3rd year 5,50,000 Installment at the end of 2nd Interest is charged at 10% p.a. Srikumar provides depreciation @ 25% on the diminishing balances. On 31.3.2015 Srikumar failed to pay the 3rd installment upon which Fair Value Motors Pvt. Ltd. repossessed 1 car. Srikumar agreed to leave one car with Fair Value Motors The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 15 Pvt. Ltd. and adjusted the value of the car against the amount due. The car taken over was valued on the basis of 40% depreciation annually on written down basis. The balance amount remaining in the vendor s account after the above adjustment was paid by Srikumar after 3 months with interest @ 20% p.a. You are required to: (i) Calculate the cash price of the cars and the interest paid with each installment. (ii) Prepare Car Account and Fair Value Motors Pvt. Ltd. Account in the books of Srikumar assuming books are closed on March 31, every year. Figures may be rounded off to the nearest rupee. (8 Marks) (b) On 1st April, 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records were saved from which following particulars were ascertained: Stock at cost 1 Jan. 2015 1,47,000 Stock at cost 31 Dec. 2015 1,59,200 Purchases year ended 31 Dec. 2015 7,96,000 Sales year ended 31st Dec. 2015 9,74,000 Purchases 1.1.2016 to 31.3.2016 3,24,000 Sales 1.1.2016 to 31.3.2016 4,62,400 In valuing the stock for the Balance Sheet at 31st Dec. 2015 ` 4,600 had been written off on certain stock which was a poor selling line having the cost ` 13,800. A portion of these goods were sold in March, 2016 at a loss of ` 500 on original cost of ` 6,900. The remainder of this stock was now estimated to be worth its original cost. Subject to the above exception gross profit had reminded at a uniform rate throughout the year. The value of stock salvaged was ` 11,600. The policy was for ` 1,00,000 and was subject to average clause. (8 Marks) Work out the amount of the claim of loss by fire. Answer (a) (i) Calculation of Interest and Cash Price Outstanding balance at the end after the payment of installment Amount due at the time of installment [1] [2] [3] [4] = 2 +3 [5] = 4 x 10/110 3rd - 5,50,000 5,50,000 50,000 The Institute of Chartered Accountants of India Outstanding balance at the end before the payment of installment Interest No. of installments Outstanding balance at the beginning [6] = 4-5 5,00,000 16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000 1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000 Total cash price = `12,00,000+ 6,00,000 (down payment) = `18,00,000. (ii) In the books of Srikumar Cars Account Date Particulars Date ` Particulars ` 1.4.2012 To Fair Value 18,00,000 31.3.2013 By Depreciation A/c Motors A/c By Balance c/d 4,50,000 13,50,000 18,00,000 1.4.2013 To Balance b/d 18,00,000 13,50,000 31.3.2014 By Depreciation A/c 3,37,500 By Balance c/d 10,12,500 13,50,000 1.4.2014 To Balance b/d 13,50,000 10,12,500 31.3.2015 By Depreciation A/c 2,53,125 By Fair Value Motors A/c (Value of 1 Car taken over after depreciation for 3 years @ 40% p.a.) [9,00,000 - (3,60,000 + 2,16,000 + 1,29,600)] By Loss transferred Profit and Loss A/c surrender (Bal. fig.) By Balance c/d (10,12,500-2,53,125) 10,12,500 to on 1,94,400 1,85,288* 3,79,687* 10,12,500 * May be rounded off as 1,85, 287. In that case, the balance in Cars account will be 3,79,688. Fair Value Motors Pvt. Ltd. Date Particulars ` 1.4.12 To Bank (down payment) 31.3.13 To Bank Date Particulars 6,00,000 1.4.12 By Cars a/c (1st Installment) 4,20,000 31.3.13 By Interest a/c To Balance c/d ` 18,00,000 1,20,000 9,00,000 19,20,000 31.3.14 To Bank (2nd Installment) To Balance c/d The Institute of Chartered Accountants of India 19,20,000 4,90,000 1.4.13 By Balance b/d 5,00,000 31.3.14 By Interest a/c 9,00,000 90,000 9,90,000 9,90,000 PAPER 1 : ACCOUNTING 31.3.15 To Car A/c To Balance c/d 30.6.15 To Bank (Amount settled after 3 months) 17 1,94,400 1.4.14 By Balance b/d 5,00,000 3,55,600 31.3.15 By Interest a/c 50,000 5,50,000 5,50,000 3,73,380 1.4.15 By Balance b/d 3,55,600 30.6.15 By Interest a/c (@ 20% on bal.) 17,780 3 20 3,55,600 x 12 100 3,73,380 (b) 3,73,380 Trading Account for year 2015 (to determine the rate of gross profit) ` ` To Opening Stock 1,47,000 By Sales A/c To To Purchases Gross Profit 7,96,000 By Closing Stock : 1,94,800 As valued ` 9,74,000 1,59,200 Add: Amount written off to restore stock to full cost 4,600 11,37,800 1,63,800 11,37,800 The (normal) rate of gross profit to sales is = 1,94,800 100 = 20% 9,74,000 Memorandum Trading Account upto March 31, 2016 Normal Abnormal items items ` ` To Opening Stock (1,59,200 + 4,600-13,800) 1,50,000 To Purchases 3,24,000 Total ` Normal Abnormal Total items items ` ` ` 13,800* 1,63,800 By Sales By Loss 4,56,000 6,400 4,62,400 500 500 Stock (bal. fig.) 1,09,200 6,900 1,16,100 3,24,000 By Closing To Gross Profit The Institute of Chartered Accountants of India 18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 (20% on `4,56,000) 91,200 91,200 5,65,200 13,800 5,79,000 5,65,200 13,800 5,79,000 * at cost, book value is ` 9,200 Calculation of Insurance Claim ` Value of Stock on April,1, 2016 1,16,100 Less: Salvage (11,600) Loss of stock 1,04,500 Claim subject to average clause: = Amount of Policy Actual Loss of Stock Value of Stock 1,00,000 1,04,500 1,16,100 = ` 90,008.60 (or rounded off to 90,009) Question 6 A, B and C were partners sharing Profits and Losses in the ratio of 2 : 2 : 1. Their Balance Sheet as on 1.4.2015 stood as follows: Liabilities ` Assets Capital Accounts: A 5,00,000 B 4,00,000 C 3,00,000 Reserves Trade Payables Fixed Assets Inventory Trade Receivable 12,00,000 Cash and Bank ` 10,00,000 2,50,000 3,50,000 1,00,000 1,00,000 4,00,000 17,00,000 17,00,000 On 1st October, 2015, C died. His representatives agreed that: (i) Goodwill of the firm be valued at ` 5,00,000. Goodwill not to be shown off in books of Accounts. (ii) Fixed assets be written down by ` 1,00,000 and (iii) In lieu of profits, C should be paid at the rate of 25% p.a. on his capital as on 1.4.2015. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 19 Current year s (2014-2015) profits after charging depreciation of ` 95,000 (`50,000 related to the 1st half) was `4,05,000. Profit was evenly spread throughout the year. As on 31.3.2016, the following were the balance Inventory ` 2,30,000 Trade Receivable ` 1,90,000 Trade Payable ` 3,50,000 ` 43,770 Cash and Bank Balance The particulars regarding their drawings are given below: Upto 1-10-2015 41,250 A B C After 1-10-2015 50,000 41,250 17,500 50,000 - You are required: (i) Prepare the Balance Sheet of the firm as on 31.3.2016, assuming that final settlement to C s executors was made on 31.3.2016. (16 Marks) (ii) Prepare the Capital A/cs of the partners as on 1.10.2015 & 31.3.2016. Answer Balance Sheet as on 31st March, 2016 (i) Liabilities Capital Accounts A B Trade Payables ` 5,09,385 4,09,385 9,18,770 3,50,000 Assets Fixed Assets Less: Written down Less: Depreciation Trade Receivables Inventory Cash and Bank ` ` 10,00,000 (1,00,000) 9,00,000 (95,000) 8,05,000 1,90,000 2,30,000 43,770 12,68,770 12,68,770 Partners Capital Accounts as on 1-10-2015 (ii) A To Revaluation A/c (Loss of Fixed Assets) ` B C 40,000 40,000 20,000 By Balance b/d to be read as 2015-16 The Institute of Chartered Accountants of India A B C 5,00,000 4,00,000 3,00,000 20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 To Drawings 41,250 41,250 17,500 By Reserves To C 50,000 50,000 To Executor s A/c To Balance c/d - 40,000 - By A & B (goodwill adj.) - - 4,20,000 By Profit and Loss Appn. A/c (W.N.2) 4,90,000 3,90,000 81,250 40,000 20,000 - 1,00,000 81,250 37,500 - 6,21,250 5,21,250 4,57,500 6,21,250 5,21,250 4,57,500 Partners Capital Accounts as on 31-3-2016 Dr. A To Drawings 50,000 To Balance c/d 5,09,385 B 50,000 4,09,385 5,59,385 4,59,385 By Balance b/d By Profit & Loss Appn. A/c Cr. A B 4,90,000 3,90,000 69,385 69,385 5,59,385 4,59,385 Working Notes: 1. Calculation of profits ` (a) (b) (c) 2. Profit after Depreciation Add: Depreciation Profit before Depreciation Profit for the 1st half (evenly spread) Less: Depreciation with respect to 1st half Post Depreciation profit Profit for the 2nd half Less: Depreciation for the 2nd half 2nd half profit after Depreciation 4,05,000 95,000 5,00,000 2,50,000 (50,000) 2,00,000 2,50,000 (45,000) 2,05,000 Profit and Loss Appropriation A/c (for the first half) Dr. To To Interest on C Capital (3,00,000 25% for 6 months) A B ` 81,250 81,250 The Institute of Chartered Accountants of India ` 37,500 1,62,500 2,00,000 Cr. By Profit ` 2,00,000 2,00,000 PAPER 1 : ACCOUNTING 3. 21 Application of Section 37 of the Partnership Act Either (i) Interest of 4,20,000 6 6 = ` 12,600 100 12 Or (ii) Profit earned out of unsettled capital 4,20,000 2,05,000 = ` 66,230 ( 4,90,000 + 3,90,000 + 4,20,000) In the absence of specific agreement amongst partners on the above subject matter, the representatives of the deceased partner can receive at their option, interest at the rate of 6% p.a. or the share of profit earned for the amount due to the deceased partner. In the given case, it would be rational to assume that the representatives would opt for ` 66,230. 4. Profit and Loss Appropriation A/c for the second half Dr. Cr. ` To To Executors A/c A B 66,230 69,385 69,385 5. ` By Net Profit 1,38,770 2,05,000 2,05,000 2,05,500 Executors Account Dr. To Bank Cr. 4,86,230 4,86,230 By C s Capital A/c By Profit & Loss Appn. A/c 4,20,000 66,230 4,86,230 Question 7 Answer any four out of the following: (a) Recently a growing trend has developed for outsourcing the accounting function to a third party. What are the basis on which choice of such third party made? (b) A merchant trader having accepted the following several bills falling due on different dates, now desires to have these bills cancelled and to accept a new bill for the whole amount payable on the average due date: The Institute of Chartered Accountants of India 22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 Sl. No. Date of Bills Amount (`) 1st Usance of the bill 1 2 10th May, 2016 May, 2016 500 300 2 months 3 months 3 4 5th June, 2016 20th June, 2016 400 375 2 months 1 month 5 10th July, 2016 500 2 months You are required to find the said average due date. Any fraction of a day arising from the calculation to be considered as full day. (c) On 1st December, 2015, M/s Blue & Black purchased, 20,000 12% fully paid debentures of ` 100 each at ` 105 cum interest price, also paying brokerage @ 1% of cum interest amount of the purchase. On 1st March, 2016, the firm sold all these debentures at ` 110 cum-interest price, again paying brokerage @ 1% of cum interest amount. Prepare Investment Account in the books of M/s. Blue & Black for the period 1st December, 2015 to 1st March, 2016. Interest being payable half yearly on 30th September and 31st March of every accounting year. (d) X, Y, Z were partners in a firm sharing Profit & Loss in ratio of 2 : 1 : 1. The firm took a joint life policy on the lives of all the partners of assured value of ` 2,00,000. The firm also took separate life policies of partners as follows: Assured values X 1,50,000 Y 2,00,000 Z 3,00,000 The premium paid for separate life policies was debited to Profit & Loss A/c. Surrender value of all policies is 50%. You are required to calculate the share of life policies which X s executors will get in even of X s death? (e) What are the purposes for which Pre-incorporation Profit & Pre-incorporation Losses can be used for? (4 x 4 = 16 Marks) Answer (a) Recently a growing trend has developed for outsourcing the accounting function to a third party. The consideration for doing this is to save cost and to utilise the expertise of the outsourced party. The third party maintains the accounting software and the client data, does the processing and hands over the report from time to time. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 23 The choice of outsourcing vendor is made on the basis of the proposals received from these vendors. The proposals are evaluated and the decision is often taken based on the following criteria: 1. The type of services provided and whether the same matches with the requirements, 2. The reputation and background of the vendor, 3. The comparative costs of the various propositions, 4. The assurance of quality. (b) Calculation of the average due date Taking 4thJuly as the base date Sl. No. Date of bill Due Date of Maturity Amount No. of days ` from starting Product date (4thJuly) 1 1st May 2016 4th July 500 0 0 2 10th May 2016 13th August 300 40 12,000 3 5th June 2016 8th August 400 35 14,000 4 20th June 2016 23rd July 375 19 7,125 5 10th July 2016 13th September 500 71 35,500 Total 2,075 Average Due Date is 68,625 68,625 = 34 days after the assumed due date, 4th July, 2016. The 2,075 new bill should be for ` 2,075 payable on 7th August,2016. (c) In the books of M/s Blue & Black Investment Account for the period from 1st December 2015 to 1st March, 2016 (Scrip: 12% fully paid Debentures) Date Particulars Nominal Interest Value (`) Cost (`) Date Particulars Nominal Interest Value (`) 1.12.2015 To Bank A/c 20,00,000 40,000 20,81,000 1.03.2016 By Bank A/c (W.N.1) (W.N.2) The Institute of Chartered Accountants of India Cost (`) 20,00,000 1,00,000 20,78,000 24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016 1.3.2016 To Profit & loss A/c - 60,000 1.3.2016 By Profit & loss A/c 20,00,000 1,00,000 20,81,000 3,000 20,00,000 1,00,000 20,81,000 Working Notes: (i) Cost of 12% debentures purchased on 1.12.2015 Cost Value (20,000 `105) Add: Brokerage (1% of `21,00,000) Less: Interest (20,000 x 100 x12% x 2/12) Total ` = = = = (ii) Sale proceeds of 12% debentures sold on 1st March, 2016 (d) Sales Price (20,000 ` 110) Less: Brokerage (1% of ` 22,00,000) Less: Interest (20,000 x 100 x12% x 5/12) Total Joint life policy Individual Policies: = = = = 21,00,000 21,000 (40,000) 20,81,000 ` 22,00,000 (22,000) (1,00,000) 20,78,000 ` 2,00,000 X ` 1,50,000 (Assured Value) Y ` 1,00,000 (Surrender Value) Z `1,50,000 (Surrender Value) `6,00,000 Total amount of Life Policies = ` 6,00,000 Share of life policies which X s executors will get = ` 6,00,000 2 = ` 3,00,000 4 X s executor will get ` 3,00,000 in the event of X s death as share of life policies. Note: In the above answer, it has been assumed that the JLP was not appearing in the balance sheet of the partnership firm, hence total amount of JLP should be credited to partners capital accounts. Alternatively, it may be assumed that JLP was appearing in the balance sheet of the partnership firm at surrender value of ` 1,00,000 (50% value), in that case, `1,00,000 will be considered for JLP in place of ` 2,00,000 and Share of X will be computed as 5,00,000 x 2/4 = ` 2,50,000 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 25 (e) Purposes for which pre-incorporation profits and pre-incorporation losses can be used are as follows: Pre-incorporation Profits can be used for: writing off Goodwill on acquisition writing off Preliminary Expenses writing down over-valued assets issuing of bonus shares paying up partly paid shares. The Institute of Chartered Accountants of India Pre-incorporation Losses can be used for: setting off against Post-Incorporation Profit addition to Goodwill on acquisition writing off Capital Profit

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