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

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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 by the candidates. Working Notes should form part of the answer. Question 1 (a) Calculate the value of raw materials and closing stock based on the following information: Raw material X Closing balance 500 units ` per unit Cost price including excise duty 200 Excise duty (Cenvat credit is receivable on the excise duty paid) 10 Freight inward 20 Unloading charges 10 Replacement cost 150 Finished goods Y Closing Balance 1200 units ` per unit Material consumed 220 Direct labour 60 Direct overhead 40 Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20,000 units. Calculate the value of the closing stock, when (i) Net Realizable Value of the Finished Goods Y is ` 400. (ii) Net Realizable Value of the Finished Goods Y is ` 300. (5 Marks) (b) On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a useful life of 10 years. The residual value was estimated at 10% of the original cost. At the end of the 3rd year, an attachment was made to the machine at a cost of ` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10 years and zero terminal value. During the same time the original machine was revalued upwards by ` 90,000 and remaining useful life was reassessed at 9 years and residual value was reassessed at NIL. The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Find depreciation for the year, if (i) attachment retains its separate identity. (ii) attachment becomes integral part of the machine (5 Marks) (c) Ascertain the value at which various items of Fixed Assets are to be shown in the Financial Statements of Velvet Ltd. and amount to be debited to the Profit and Loss Account in the context of the relevant Accounting Standard. Narrations for the adjustments made should form part of the answer: (i) Goodwill was valued at ` 1,20,000 by independent valuers and no consideration was paid. The Company has not yet recorded the same. (ii) Balance of Office Equipment as on 01.04.2013 is ` 1,20,000. On.1.04.2013, out of the above office equipment having book value ` 20,000 has been retired from use and held for disposal. The net realizable value of the same is ` 2,000. Rate of depreciation is 15% p.a. on WDV basis. (iii) Book Value of Plant and Machinery as on 01.04.2013 was ` 7,20,000. On 01.08.2013 an item of machinery was purchased in exchange for 500 equity shares of face value ` 10. The Fair Market value of the equity shares on 01.08.2013 was ` 120. Rate of depreciation is 10% p.a. on WDV basis. (5 Marks) (d) M/s Highway .Constructions undertook the construction of a highway on 01.04.2013. The contract was to be completed in 2 years. The contract price was estimated at ` 150 crores. Up to 31.03.2014 the company incurred ` 120 crores on the construction. The engineers involved in the project estimated that a further ` 45 crores would be incurred for completing the work. What amount should be charged to revenue for the year 2013-14 as per the provisions of Accounting Standard 7 "Construction Contracts"? Show the extract of the Profit & Loss A/c in the books of M/s. Highway Constructions. (5 Marks) Answer (a) Working Notes: Raw Material X Cost Price Less: Cenvat Credit Add: Freight Inward Unloading charges Cost Finished goods Y Materials consumed The Institute of Chartered Accountants of India ` 200 (10) 190 20 10 220 ` 220 PAPER 1 : ACCOUNTING 3 Direct Labour Direct overhead Fixed overheads (` 2,00,000/20,000 units) Cost 60 40 10 330 Situation (i) When Net Realisable Value of the Finished Goods Y is ` 400 NRV is greater than the cost of Finished Goods Y i.e. ` 330 Hence, Raw Material and Finished Goods are to be valued at cost Value of Closing Stock: Qty Raw Material X Finished Goods Y Rate Amount (`) 500 220 1,10,000 1,200 330 3,96,000 Total Cost of Closing Stock 5,06,000 Situation (ii) When Net Realisable Value of the Finished Goods Y is ` 300 NRV is less than the cost of Finished Goods Y i.e. ` 330 Hence, Raw Material is to be valued at replacement cost and Finished Goods are to be valued at NRV since NRV is less than the cost Value of Closing Stock: Qty Raw Material X Finished Goods Y Rate Amount (`) 500 150 75,000 1,200 300 3,60,000 Total Cost of Closing Stock 4,35,000 Note: It has been considered that Raw Material X is used for the production of Finished Goods Y. (b) 1. Depreciation of Original Machine ` Original cost of Machine as on 01.04.2010 4,00,000 Less: Residual Value 10% (40,000) Depreciable Value 3,60,000 Useful life The Institute of Chartered Accountants of India 10 Years 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Depreciation per year 36,000 Depreciation for 3 Years 1,08,000 Written down value at the end of 3rd year (as on 31.03.2013) (4,00,000 1,08,000) 2,92,000 Add: Revaluation 90,000 Total Book Value after revaluation 3,82,000 Reassessed remaining useful life 9 Years Depreciation per year from 2013-14 2. 42,444 Depreciation of Attachment ` Original cost of Attachment as on 01.04.2013 Useful life 1,80,000 10 Years Depreciation per year from 2013-14 18,000 Depreciation for the year 2013-14 (i) If Attachment retains its separate identity: Depreciation of Original Machine Depreciation of Attachment ` 18,000 Total Depreciation for 2013-14 (ii) ` 42,444 ` 60,444 If Attachment becomes integral part of the Machine: Total value of Machine as on 01.04.2013 Original Machine at revalued cost (W.N.1) ` 3,82,000 Cost of attachment ` 1,80,000 ` 5,62,000 Useful life Depreciation for 2013-14 9 Years ` 62,444 Note: 1. Since, upward revaluation of the machine and reassessment of remaining useful life had been made at the end of the 3rd year, it is implied that depreciation for the 3rd year has been charged on the basis of old calculation & remaining useful life of 9 years is to be calculated from the beginning of the 4th year onwards. 2. Depreciation for the 4th year i.e. 2013-14 has been given in the solution. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 5 (c) Statement showing treatment and value of various items of Fixed Assets Amount Amount Narration (`) Debited to P& L in 2013-14 Item of Fixed Assets (i) Goodwill Book value as on 1.4.2013 Balance as (See Note 1) (ii) Book Value as on 31.3.2014 to be shown in the Financial Statements on 0 31.3.2014 0 Office Equipment Balance as on 1.4.2013 Less: Retired from use (Book value on 1.4.2013) 1,20,000 20,000 1,00,000 Less: Depreciation for 2013-14 @ 15% WDV 15,000 Balance as on 31.3.2014 85,000 15,000 Depreciation 85,000 Office Equipment (Retired from use) Book Value as on 1.4.2013 Less: Book Value as on 31.3.2014 (at NRV)(See Note 2) Loss on retirement charged to P&L 20,000 18,000 (iii) Plant and Machinery Book Value as on 1.4.2013 Add: Machine purchased on 01.08.2013 (See Note 3) 7,20,000 60,000 7,80,000 Less: Depreciation Original machine for The Institute of Chartered Accountants of India 2,000 2,000 18,000 Loss on retirement of asset 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 whole year 72,000 New machine for 8 months 4,000 Balance as on 31.3.2014 76,000 76,000 Depreciation 7,04,000 7,04,000 1,09,000 7,91,000 Note: 1. As per para 16 of AS 10 Accounting for Fixed Assets goodwill is to be recorded only when some consideration in money or money s worth has been paid for it. Since the goodwill is self generated and no money or money s worth has been paid for the same, therefore, it is not to be recorded in the books. 2. Office equipment having book value of ` 20,000 as on 1.4.2013 has been retired from use. It has been recorded at Net Realisable Value (NRV) as the NRV is lower than the book value and shown separately in the financial statements. This is in consonance with the provisions stated in para 14 of AS 10. 3. As per para 11 of the standard, the new machine has been recorded at the Fair Market Value of the securities issued as it is more clearly evident. (d) Statement showing the amount to be charged to Revenue as per AS 7 ` in crores Cost of construction incurred upto 31.03.2014 Add: 120 Estimated future cost 45 Total estimated cost of construction 165 Degree of completion (120/165 x 100) 72.73% Revenue recognized (72.73% of 150) 109 (approx) Total foreseeable loss (165 150) Less: 15 Loss for the current year (120 109) 11 Loss to be provided for 4 Profit and Loss Account (Extract) To To Construction Costs Provision for loss ` in crores 120 4 124 By Contract Price By Net loss ` in crores 109 15 124 Question 2 (a) The Articles of Association of Samson Ltd. provide the following: (i) That 25 % of the net profit of each year shall be transferred to reserve fund. The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING (ii) 7 That an amount equal to 10% of equity dividend shall be set aside for staff bonus. (iii) That the balance available for distribution shall be applied: (1) in paying 15% on cumulative preference shares. (2) in paying 20% dividend on equity shares. (3) one-third of the balance available as additional dividend on preference shares and two-third as additional equity dividend. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 14% on preference shares after making provision (i), (ii) and (iii) mentioned above. The company has issued 12,000, 15% cumulative participating preference shares of ` 100 each fully paid and 75,000 equity shares of ` 100 each fully paid up. The profit for the year 2013-2014, was ` 10,00,000 and balance brought from previous year ` 1,50,000. Provide ` 37,500 for depreciation and ` 1,20,000 for taxation before making other appropriations. (8 Marks) Show net balance of Profit and Loss Account after making above adjustments. (b) Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April, 2013. During the year 2013-14, the total sales were ` 24,00,000 of which ` 4,80,000 were for the first six months. The Gross profit of the company ` 3,90,800. The expenses debited to the Profit & Loss Account included: (i) Director's fees ` 30,000 (ii) Bad debts ` 7,200 (iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month) (iv) Salaries and General Expenses ` 1,28,000 (v) Preliminary Expenses written off ` 10,000 (vi) Donation to a political party given by the company ` 10,000. Prepare a statement showing pre-incorporation and post-incorporation profit for the year (8 Marks) ended 31st March, 2014. Answer (a) Statement of Profit and Loss for the year ended 31st March, 2014 Particulars a b Amount ` Profit Expenses: Depreciation and amortization 10,00,000 (37,500) PS: Read ` 100 as ` 10. The Institute of Chartered Accountants of India 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Total expenses Profit before tax (a-b) Provision for tax Profit (Loss) for the period c d e (37,500) 9,62,500 (1,20,000) 8,42,500 Notes to Accounts Profit (Loss) for the period 8,42,500 Balance of Profit and Loss account brought forward 1,50,000 Total 9,92,500 Appropriations (made in Notes to Accounts) Transfers to Reserves (2,10,625) Proposed preference dividend (1,80,000 + 84,023) (2,64,023) Proposed equity dividend (1,50,000 + 1,68,047) (3,18,047) Bonus to employees (15,000 + 16,805) (31,805) Total 8,24,500 Balance carried to Balance sheet (9,92,500 8,24,500) 1,68,000 Working Note: Balance of amount available for Preference and Equity shareholders and Bonus for Employees Credit Side 9,92,500 Less: Dr. side (2,10,625 + 1,80,000 + 1,50,000 + 15,000 + 1,68,000 (i.e.12,000x100x14/100= 1,68,000) (7,23,625) 2,68,875 Suppose remaining balance will be = x 1 1 Preference shareholders will get share from remaining balance = x = x 3 3 2 2 Equity shareholders will get share from remaining balance = x = x 3 3 Bonus to Employees = Now, 2 3 x+ 1 3 x+ 2 30 2 10 2 x = x 3 100 30 x = 2,68,875 32 x = 80,66,250 , than x = 2,52,070 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 9 Share of Preference Shareholders ` 2,52,070 x 1/3 = `84,023 Share of Equity Shareholders ` 2,52,070 x 2/3= `1,68,047 Bonus to employees ` 2,52,070 x 2/30 = `16,805 Note: Corporate dividend tax on dividend distributed has been ignored. (b) Statement showing the calculation of Profits for the pre-incorporation and postincorporation periods For the year ended 31st March, 2014 Particulars Gross Profit Less: Directors fee Bad debts Advertising Salaries & general expenses Total Basis of PrePostAmount Allocation incorporation incorporation 3,90,800 Sales 39,080 30,000 Post 3,51,720 30,000 7,200 Sales 720 6,480 24,000 Time 6,000 18,000 1,28,000 Time 32,000 96,000 Preliminary expenses 10,000 Post 10,000 Donation to Political Party 10,000 Post 10,000 Net Profit Pre-incorporation profit transfer to Capital Reserve 1,81,600 1,81,240 360 Working Notes: 1. Sales ratio Particulars Sales for period up to 30.06.2013 (4,80,000 * 3/6) Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 2,40,000) Thus, Sales Ratio = 1 : 9 2. Time ratio 1st April, 2013 to 30 June, 2013: 1st July, 2013 to 31st March, 2014 = 3 months: 9 months = 1: 3 Thus, Time Ratio is 1: 3 The Institute of Chartered Accountants of India ` 2,40,000 21,60,000 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Question 3 Following are the incomplete information of Moonlight Traders: The following balances are available as on 31.03.2013 and 31.03.2014. Balances 31.03.2013 31.03.2014 ` Land and Building Plant and Machinery Office equipment Debtors Creditors for purchases Creditors for office expenses Stock Long term loan from SBI @ 12%. Bank Provision for tax (rate 30%) Other Information ` 5,00,000 2,20,000 1,05,000 ? 95,000 20,000 ? 1,25,000 25,000 35,000 5,00,000 3,30,000 85,000 2,25,000 ? 15,000 65,000 1,00,000 ? 30,000 ` Collection from debtors 9,25,000 Payment to creditors for purchases 5,25,000 Payment of office expenses 42,000 Salary paid 32,000 Selling expenses 15,000 Cash sales 2,50,000 Credit sales (80% of total sales) Credit purchases 5,40,000 Cash purchases (40% of total purchases) GP Margin at cost plus 25% Discount Allowed 5,500 Discount Received 4,500 Bad debts (2% of closing debtors) Depreciation to be provided as follows Land and Building 5% Plant and Machinery 10% Office Equipment 15% The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 11 Other adjustments: (i) On 01.10.13 they sold machine having Book Value ` 40,000 (as on 31.03.2013) at a loss of ` 15,000. New machine was purchased on 01.01.2014. (ii) Office equipment was sold at its book value on 01.04.2013. (iii) Loan was partly repaid on 31.03.14 together with interest for the year. Prepare Trading P & L A/c and Balance Sheet as on 31.03.2014. (16 Marks) Answer In the Books of Moonlight Traders Trading Account for the year ended 31.03.2014 Particulars Particulars ` ` To Opening Stock A/c (Bal. fig.) 1,65,000 By Sales (W.N.1) 12,50,000 To Purchases (W.N.2) 9,00,000 By Closing Stock 65,000 To Gross profit (12,50,000 x 25/125) 2,50,000 13,15,000 13,15,000 Profit and Loss Account for the year ended 31.03.2014 To To To To To To To To To To Particulars Discount Salaries Expenses Office expenses (W.N.3) Selling expenses Interest on loan (12% on ` 1,25,000) Bad debts (2% of ` 2,25,000) Loss on sale of Machinery Depreciation: Land & Building 25,000 Plant & Machinery(W.N 4b) 23,750 Office Equipment (W.N. 5) 12,750 Tax Provision (69,000 x 30%) Net profit after tax ` 5,500 32,000 37,000 15,000 15,000 4,500 15,000 61,500 20,700 48,300 2,54,500 Particulars By Gross profit By Discount ` 2,50,000 4,500 2,54,500 Alternatively, the entire provision for tax as on 31.3.2013 of ` 35,000 has been assumed to be paid during the year. In that case Working Note 10 will not be required and profit and loss account will show ` 30,000 as provision for 31.3.2014 instead of ` 20,700. The Institute of Chartered Accountants of India 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Balance sheet as on 31.3.2014 ` ` Assets Liabilities ` 8,95,500 Land and Building (5,00,000 25,000) 4,75,000 48,300 9,43,800 Plant and Machinery (W.N.4a) (3,30,000-21,750) 3,08,250 Creditors for Purchases (W.N. 8) 1,05,500 Office Equipment (85,000-12,750) Debtors less Bad debts (W.N. 7) 72,250 2,20,500 Outstanding expenses Loan from SBI 15,000 Stock 1,00,000 Bank Balance (W.N. 9) Capital (W.N. 6) Add: Net Profit Tax Provision 65,000 53,300 30,000 11,94,300 11,94,300 Working Notes: 1. Calculation of Total Sales ` Cash Sales 2,50,000 Credit Sales (80% of total sales) Cash Sales (20% of total sales) Thus total Sales (2,50,000*100/20) Credit Sales (12,50,000*80/100) 2. 12,50,000 10,00,000 Calculation of Total Purchases ` Credit Purchases 5,40,000 Cash Purchases (40% of total purchases) Credit Purchases (60% of total purchases) Thus total Purchases (5,40,000 x 100/60) 9,00,000 Cash Purchases (9,00,000 x 40/100) 3,60,000 3. Office Expenses Account ` To To Bank A/c Balance c/d 42,000 15,000 57,000 The Institute of Chartered Accountants of India ` By By Balance b/d Profit & loss A/c 20,000 37,000 57,000 PAPER 1 : ACCOUNTING 4. (a) 13 Plant and Machinery Account ` To To Opening balance Bank (Purchases) 2,20,000 1,50,000 3,70,000 ` By Bank (Sale) By Closing Balance 40,000 3,30,000 3,70,000 (b) Calculation of Depreciation on Plant & Machinery ` Depreciation on 1,80,000 x 10% (for full year) 18,000 1,50,000* x 10% x 3/12 (for 3 months) 3,750 40,000 x 10% x 6/12 (for 6 months) 2,000 23,750 * [3,30,000 - (2,20,000 40,000)] (c) Sale of Machinery Account Amount (`) To Plant & Machinery Amount (`) 40,000 By Depreciation 2,000 By Profit and Loss A/c 15,000 By Bank (bal.fig.) (Sale) 23,000 40,000 5. 40,000 Calculation of Depreciation on Office Equipments ` Opening Balance 1,05,000 Less: Closing Balance 85,000 Sale of Office Equipments 20,000 Balance of Office Equipments after sale on 01.04.2013 85,000 Depreciation @15% 12,750 6. Opening Balance Sheet as on 31.03.2013 ` ` Creditors 95,000 Land & Building 5,00,000 Creditor for Exp. 20,000 Plant & Machinery 2,20,000 1,25,000 Office Equipment 1,05,000 35,000 Debtors (W.N. 7) 1,55,500 Loan Provision for Tax The Institute of Chartered Accountants of India 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Capital (Bal. fig.) 8,95,500 Stock (from Trading A/c) Bank 25,000 11,70,500 7. 1,65,000 11,70,500 Sundry Debtors A/c ` To Balance b/d (bal. fig.) To Sales ` 1,55,500 By Bank 10,00,000 By Discount 5,500 By Bad debts 4,500 By Bal. c/d 11,55,500 8. 9,25,000 2,20,500 11,55,500 Sundry Creditors A/c ` To Bank To Discount To Balance c/d (bal. fig.) ` 5,25,000 By Balance b/d 4,500 By Purchases 95,000 5,40,000 1,05,500 6,35,000 9. 6,35,000 Bank Account ` ` To Balance b/d 25,000 By Creditors To Debtors 9,25,000 By Office Expenses 42,000 To Cash Sales 2,50,000 By Salary Expense 32,000 To Sale of Machinery (W.N. 4c) 23,000 By Selling Expenses 15,000 To Sale of equipment 20,000 By Purchases (cash) 3,60,000 By Purchase of Machinery 5,25,000 1,50,000 By Bank Loan & Interest (W.N. 11) By Tax (W.N. 10) The Institute of Chartered Accountants of India 25,700 By Balance c/d (bal. fig.) 12,43,000 40,000 53,300 12,43,000 PAPER 1 : ACCOUNTING 10. 15 Provision for Tax Account ` ` To Bank (bal. fig.) 25,700 By Balance b/d 35,000 To Balance c/d 30,000 By Profit and Loss A/c 20,700 55,700 55,700 11. Repayment of Bank Loan and interest ` Interest 1,25,000 x 12% Loan (1,25,000 1,00,000) 15,000 25,000 40,000 Note: The above solution has been worked out on the basis of the following assumptions:(i) Tax profits are the same as accounting profits. (ii) The figure of ` 2,25,000, being the closing balance of Sundry Debtors as given in the question is before providing for bad debts. Accordingly, the closing balance has been reduced by the amount of bad debts. Question 4 The summarized Balance Sheet of Srishti Ltd. as on 31st March, 2014 was as follows: Liabilities Equity Shares of ` 10 fully paid Export Profit Reserves General Reserves Profit and loss Account 9% Debentures Trade Creditors Amount (`) 30,00,000 8,50,000 50,000 5,50,000 5,00,000 1,00,000 50,50,000 Assets Goodwill Tangible Fixed Assets Stock Debtors Cash & Bank Preliminary Expenses Amount (`) 5,00,000 30,00,000 10,40,000 1,80,000 2,80,000 50,000 50,50,000 ANU Ltd. agreed to absorb the business of SRISHTI Ltd. with effect from 1st April, 2014. (a) The purchase consideration settled by ANU Ltd. as agreed: (i) 4,50,000 equity Shares of ` 10 each issued by ANU Ltd. by valuing its share @ ` 15 per share. (ii) Cash payment equivalent to ` 2.50 for every share in SRISHTI Ltd. The Institute of Chartered Accountants of India 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (b) The issue of such an amount of fully paid 8% Debentures in ANU Ltd. at 96% as is sufficient to discharge 9% Debentures in SRISHTI Ltd. at a premium of 20%. (c) ANU Ltd. will take over the Tangible Fixed Assets at 100% more than the book value, Stock at ` 7,10,000 and Debtors at their face value subject to a provision of 5% for doubtful Debts. (d) The actual cost of liquidation of SRISHTI Ltd. was ` 75,000. Liquidation cost of SRISHTI Ltd. is to be reimbursed by ANU Ltd. to the extent of ` 50,000. (e) Statutory Reserves are to be maintained for 1 more year. You are required to: (i) Close the books of SRISHTI Ltd. by preparing Realisation Account, ANU Ltd. Account, Shareholders Account and Debenture Account, and (ii) Pass Journal Entries in the books of ANU Ltd. regarding acquisition of business. (16 Marks) Answer (i) Purchase consideration computation Cash payment for (3,00,000 x ` 2.5) Equity Shares (4,50,000 x ` 15) ` 7,50,000 67,50,000 75,00,000 In the books of Srishti Ltd. Realisation Account ` To Goodwill 5,00,000 By ` 9% Debentures 5,00,000 1,00,000 To Tangible Fixed Assets 30,00,000 By Creditors To Stock 10,40,000 By By Anu Ltd. To Debtors 1,80,000 To Cash & Bank A/c (2,80,000- 25,000) 75,00,000 2,55,000 To Cash & Bank A/c (Realization expenses) (Purchase consideration) 25,000 To Profit on realization transfer to shareholders 31,00,000 81,00,000 The Institute of Chartered Accountants of India 81,00,000 PAPER 1 : ACCOUNTING 17 Equity Shareholders A/c ` To Preliminary expenses To Equity Shares in Anu Ltd. To Cash & Bank A/c ` 50,000 By Equity Share Capital 30,00,000 67,50,000 By Export Profit Reserves 8,50,000 7,50,000 By General Reserves 50,000 By P & L A/c 5,50,000 By Realization A/c 31,00,000 75,50,000 75,50,000 9% Debentures Account ` To Realization A/c 5,00,000 ` By Balance b/d 5,00,000 Anu Ltd. ` To Realization A/c 75,00,000 ` By Share Capital By Bank A/c 67,50,000 7,50,000 75,00,000 75,00,000 (ii) Journal Entries in the books of Anu Ltd. ` 1 Dr. Dr 60,00,000 Stock Dr 7,10,000 Debtors Dr 1,80,000 Cash & Bank A/c Dr 2,55,000 Goodwill A/c (Bal. fig.) 2 Business Purchase A/c To Liquidator of Srishti Ltd (Being business of Srishti Ltd. taken over) Tangible Fixed Assets Dr ` 75,00,000 10,64,000 75,00,000 To Provision for doubtful debts 9,000 To Liability for 9 % Debentures 6,00,000 To Creditors 1,00,000 To Business Purchase account (Being assets and liabilities taken over) The Institute of Chartered Accountants of India 75,00,000 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 3 Amalgamation Adjustment A/c To Export Profit Reserves (Being statutory Reserves taken over) Goodwill 4 Dr. 8,50,000 8,50,000 Dr. 50,000 To Bank A/c 50,000 (Liquidation expenses reimbursed)) 5 Liquidator of Shristi Ltd. Dr. 75,00,000 To Equity Share Capital 45,00,000 To Securities Premium 22,50,000 To Bank A/c 7,50,000 (Being purchase consideration discharged) 6 Liability for 9% Debentures ( 5,00,000 x 120/100) Discount on issue of debentures Dr. 6,00,000 25,000 To 8% Debentures (6,00,000 x 100/96) 6,25,000 (Being liability of debenture holders discharged) Question 5 (a) Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from Ganesh Enterprises. The terms were as follows: Particulars Hire Purchase Price Amount (`) 1,80,000 Down Payment 30,000 1st installment payable after 1 year 50,000 2nd installment after 2 years 50,000 3rd installment after 3 years 30,000 4th installment after 4 years 20,000 Cash price of van ` 1,50,000 and depreciation is charged at 10% WDV. You are required to: (i) Calculate Total Interest and Interest included in each installment (ii) Prepare Van A/c., Ganesh Enterprises A/c. in the books of Happy Valley Florists Ltd. up to 31.03.2014. (8 Marks) (b) Smart Investments made the following investments in the year 2013-14: 12% State Government Bonds having face value ` 100 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING Date 19 Particulars 01.04.2013 Opening Balance (1200 bonds) book value of ` 126,000 02.05.2013 Purchased 2,000 bonds @ ` 100 cum interest 30.09.2013 Sold 1,500 bonds at ` 105 ex interest Interest on the bonds is received on 30th June and 31st Dec. each year. Equity Shares of X Ltd. 15.04.2013 Purchased 5,000 equity shares @ ` 200 on cum right basis Brokerage of 1% was paid in addition (Face Value of shares ` 10) 03.06.2013 The company announced a bonus issue of 2 shares for every 5 shares held. 16.08.2013 The company made a rights issue of 1 share for every 7 shares held at ` 250 per share. The entire money was payable by 31.08.2013. 22.8.2013 Rights to the extent of 20% was sold @ ` 60. The remaining rights were subscribed. 02.09.2013 Dividend @ 15% for the year ended 31.03.2013 was received on 16.09.2013 15.12.2013 Sold 3,000 shares @ ` 300. Brokerage of 1% was incurred extra. 15.01.2014 Received interim dividend @ 10% for the year 2013-14 31.03.2014 The shares were quoted in the stock exchange @ ` 220 Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is followed. (8 Marks) Answer (a) Calculation of total Interest and Interest included in each installment Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000 Total Interest = 1,80,000 1,50,000 = 30,000 The Institute of Chartered Accountants of India 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Calculation of Ratio of HPP in beginning of each year Outstanding HPP at beginning Installment Paid Outstanding balance at end 1 1,50,000 50,000 1,00,000 2 1,00,000 50,000 50,000 3 50,000 30,000 20,000 4 20,000 20,000 - Year 1. Ratio of outstanding HPP at beginning for each year = 15:10:5: 2 Total Interest is of ` 30,000 I st Year II nd year III rd year IV th year = 30,000 = 30,000 15 10 32 = 30,000 = 30,000 = 14,062 32 = 9,375 5 32 2 32 = 4,688 = 1,875 Ledger Accounts in the books of Happy Valley Florist Ltd. Van Account Date 1.4.2010 Particulars To Ganesh Enterprises ` Date 1,50,000 31.03.2011 Particulars By Depreciation A/c By Balance c/d 1,50,000 1.4.2011 To Balance b/d 1,35,000 31.03..2012 By Depreciation A/c 1,35,000 To Balance b/d 1,21,500 31.03.2013 The Institute of Chartered Accountants of India 1,35,000 13,500 1,21,500 1,35,000 By Depreciation A/c By Balance c/d 1,21,500 15,000 1,50,000 By Balance c/d 1.4.2012 ` 12,150 1,09,350 1,21,500 PAPER 1 : ACCOUNTING 1.4.2013 To Balance b/d 1,09,350 31.03.2014 21 By Depreciation A/c 10,935 By Balance c/d 98,415 1,09,350 1,09,350 Ganesh Enterprises Account Date 1.4.2010 Particulars ` Date To Bank A/c Particulars 30,000 1.4.10 50,000 31.03.11 31.03.2011 To Bank A/c To Balance c/d By Van A/c By Interest c/d 1,50,000 14,062 84,062 1,64,062 31.03.2012 To Bank A/c To Balance c/d 1,64,062 50,000 1.4.11 By Balance b/d 84,062 43,437 31.03.12 By Interest A/c 9,375 93,437 31.3.2013 ` 93,437 To Bank A/c 30,000 1.4.12 By Balance b/d 43,437 To Balance c/d 18,125 31.3.13 By Interest A/c 4,688 48,125 31.3.2014 To Bank A/c 48,125 20,000 1.4.13 31.3.14 20,000 The Institute of Chartered Accountants of India By Balance b/d 18,125 By Interest A/c 1,875 20,000 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (b) In the books of Smart Investments 12% Govt. Bonds for the year ended 31st March, 2014 Date Particulars Nos. Income Amount Date Particulars 1.4.13 To Opening balance b/d 1,200 3,600 1,26,000 30.6.13 By Bank A/c (Interest) (3,200 x 100 x 12% x 6/12) 2.5.13 To Bank A/c 2,000 8,000 1,92,000 30.9.13 By Bank A/c 31.3.14 To P & L A/c (Interest) 27,400 To P & L A/c (Profit on Sale) 31.12.13 By Bank A/c (Interest) (1,700 x 100 x 12% x 6/12) 8,437.50 31.3.14 By Bal. c/d Nos. Income Amount - 19,200 - 1,500 4,500 1,57,500 - 10,200 - 5,100 1,68,937.50 3,200 3,200 39,000 3,26,437.50 1,700 39,000 3,26,437.50 Investments in Equity shares of X Ltd. for year ended 31.3.2014 Date Particulars Nos. 15.4.13 To Bank A/c 5,000 3.6.13 2,000 Income To Bonus Issue 31.8.13 To Bank A/c Amount Date Particulars By Bank (Sale of Rights) - - 12,000 - 16.9.13 By Bank (Dividend) - - 7,500 3,000 - 8,91,000 2,00,000 15.12.13 By Bank (Sale) 4,33,115 15.1.14 By Bank (interim dividend) 31.3.14 The Institute of Chartered Accountants of India Amount 22.8.13 4,800 7800 Income 10,10,000 800 31.3.14 To P & L A/c Nos. By Bal. c/d 4,800 16,43,115 4,800 4,800 7,32,615 7800 4,800 16,43,115 PAPER 1 : ACCOUNTING 23 Working Notes: 1. Profit on sale of bonds on 30.9.13 = Sales proceeds Average cost Sales proceeds = ` 1,57,500 Average cost Profit 2. = ` [(1,26,000+1,92,000) 1,500/3,200] = 1,49,062.50 = Valuation of bonds on 31st March, 2014 Cost 3. 1,57,500 ` 1,49,062.50=` 8,437.50 = ` 3,18,000/3,200 x1,700 = 1,68,937.50 Cost of equity shares purchased on 15/4/2013 = Cost + Brokerage = (5,000 ` 200) + 1% of (5,000 ` 200) = ` 10,10,000 4. Sale proceeds of equity shares on 15/12/2013 = Sale price Brokerage = (3,000 ` 300) 1% of (3,000 ` 300) = ` 8,91,000. 5. Profit on sale of shares on 15/12/2013 = Sales proceeds Average cost Sales proceeds = ` 8,91,000 Average cost = ` [(10,10,000+2,00,000-12,000-7,500) 3,000/7,800] = ` [11,90,500 3,000/7,800] = 4,57,885 = ` 8,91,000 ` 4,57,885=` 4,33,115. Profit 6. Valuation of equity shares on 31st March, 2014 Cost =` [11,90,500 4,800/7,800] = ` 7,32,615 Market Value = 4,800 shares ` 220 =` 10,56,000 Closing stock of equity shares has been valued at ` 7,32,615 i.e. cost being lower than the market value. Note: 1. It is presumed that no dividend is received on bonus shares as bonus shares are declared on 3.6.2013 and dividend pertains to the year ended 31.03.2013. 2. The amount of dividend for the period, for which shares were not held by the investor, has been treated as capital receipt. The Institute of Chartered Accountants of India 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Question 6 The Balance Sheet of Amit, Bhushan and Charan, who share profits and losses as 3 : 2 : 1 respectively, as on 01.04.2013 is as follows: Liabilities Assets Amount Amount (`) (`) Capital Accounts: Amit 1,80,000 Machinery 1,50,000 Bhushan 1,60,000 Furniture 1,50,000 Charan 1,40,000 Debtors 80,000 Current Accounts: Bhushan 16,000 Less: 4,000 76,000 Provision for doubtful Debts Creditors 1,20,000 Stock 2,10,000 Cash 20,000 - Current Account: Charan 10,000 6,16,000 6,16,000 1 Dev is admitted as a partner on the above date for th share in the profit and loss. Following 5 are agreed upon: (1) The profit and loss sharing ratio among the old partners will be equal. (2) Dev brings in ` 1,50,000 as capital but is unable to bring the required amount of premium for goodwill. (3) The goodwill of the firm is valued at ` 60,000. (4) Assets and liabilities are to be valued as follows: Machinery ` 2,06,000 : Furniture ` 1,28,000 : Provision for doubtful debts @ 10% on debtors. (5) Necessary adjustments regarding goodwill and Profit / loss on revaluation are to made through the Partner's Current Accounts. (6) It is decided that the revalued figures of assets and liabilities will not appear in the Balance Sheet of the new firm. (7) Capital Accounts of the old partners in the new firm should be proportionate to the new profit and loss sharing ratio, taking Dev's Capital as base. The existing partners will not bring cash for further capital. The necessary adjustments are to be made through the partner s Current Account. Prepare Partner's Capital & Current Account, and the Balance Sheet of the new firm after admission. (16 Marks) The Institute of Chartered Accountants of India 25 PAPER 1 : ACCOUNTING Answer 6 In the books of Firm Partners Capital Accounts To Balance c/d (Working Note 1) Amit 2,00,000 2,00,000 Bhushan 2,00,000 Charan 2,00,000 2,00,000 2,00,000 Dev 1,50,000 By Balance b/d By Bank A/c By Partners Current A/cs (bal. fig) 1,50,000 Amit 1,80,000 20,000 Bhushan 1,60,000 40,000 Charan 1,40,000 60,000 Dev 2,00,000 2,00,000 2,00,000 1,50,000 Amit 15,000 Bhushan 16,000 10,000 Charan 5,000 Dev - 14,000 4,000 - - - 18,000 79,000 18,000 29,000 48,000 84,000 18,000 1,50,000 Partners Current Accounts To Balance b/d To Memorandum Revaluation A/c To Amit and Bhushan (Goodwill adjustment) To Partners Capital A/cs To Balance c/d Amit 8,000 Bhushan 8,000 Charan 10,000 8,000 - - 6,000 20,000 40,000 60,000 Dev - By Balance b/d 6,000 By Memorandum Revaluation 12,000 By Dev and Charan (Goodwill adjustment) - By Balance c/d 1,000 29,000 48,000 84,000 18,000 The Institute of Chartered Accountants of India 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 Balance Sheet of new firm After Dev s Admission Liabilities Capital Accounts: A/cs Amit 2,00,000 Bhushan 2,00,000 Charan 2,00,000 Dev 1,50,000 Current Account: Amit Creditors ` 7,50,000 1,000 1,20,000 Assets Machinery Furniture Stock Debtors 80,000 Less: Provision for doubtful debts 4,000 Cash Current Accounts: Bhushan 18,000 Charan 79,000 Dev 18,000 ` 1,50,000 1,50,000 2,10,000 76,000 1,70,000 1,15,000 8,71,000 8,71,000 Working Notes: 1. Dev. joins the business for 1/5th share and brings ` 1,50,000 as capital. Thus, total capital of new firm will be ` 7,50,000 (1,50,000 5). Total capital of Amit, Bhushan & Charan will be ` 6,00,000 (7,50,000 1,50,000) which will be shared by them equally i.e. 2,00,000 each. 2. Calculation of New profit sharing ratio Amit 4 1 5 3 4 15 Bhushan 4 1 5 3 4 15 Charan 4 1 5 3 4 15 Dev 1 5 3 15 Dev 1 5 4:4:4:3 3. Adjustment of Goodwill Sacrificing/gaining ratios of old partners Amit Bhushan Charan 4 3 15 6 4 2 15 6 4 1 15 6 24 45 90 24 30 90 24 15 90 The Institute of Chartered Accountants of India PAPER 1 : ACCOUNTING 21 Sacrifice 90 6 Sacrifice 90 27 9 Gain 90 18 90 Gain Entry for adjustment for goodwill of ` 60,000 Charan Dev To Amit To Bhushan Dr. Dr. 6,000 12,000 14,000 4,000 (Being goodwill adjusted in partners sacrificing/gaining ratios) 4. Memorandum Revaluation A/c Amount To Furniture To Provision for doubtful debts Amount ` 22,000 By Machinery 4,000 ` 56,000 To Partners Current A/cs: Amit 15,000 Bhushan 10,000 Charan 5,000 30,000 56,000 To Machinery 56,000 56,000 By Furniture 22,000 By Provision for doubtful debts 4,000 By Partners Current A/cs: Amit Bhushan 8,000 Charan 8,000 Dev 56,000 8,000 6,000 30,000 56,000 Question 7 Answer any four out of the following: (a) From the following extract of Receipts and Payments Account and the additional information, you are required to calculate the Income from Subscription for the year ending March 31, 2014 and show them in the Income & Expenditure Account, and the Balance Sheet of a Club. The Institute of Chartered Accountants of India 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 An extract of Receipts and Payments Account for the year ended 31st March, 2014 Receipts To Subscription 2012-13 2013-14 2014-15 ` 4,000 20,000 5,000 Payments ` 29,000 Information: (i) (ii) (iii) Subscription outstanding on 31.03.2013 Subscription outstanding on 31.03.2014 Subscription received in advance on 31.03.2013 for 2013-14 ` 5,000 ` 4,000 ` 5,000 (4 Marks) (b) Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has sought your advice on the treatment of the same for preparing Cash Flow Statement. (i) Loans and Advances given to the following and interest earned on them: (1) to suppliers (2) to employees (3) to its subsidiaries companies (ii) Investment made in subsidiary Smart Ltd. and dividend received (iii) Dividend paid for the year (iv) TDS on interest income earned on investments made (v) TDS on interest earned on advance given to suppliers (vi) Insurance claim received against loss of fixed asset by fire Discuss in the context of AS 3 Cash Flow Statement (4 Marks) (c) Define Average Due Date. List out the various instances when Average Due Date can be used. (4 Marks) (d) What are depreciable assets as per Accounting Standard-6? Explain why AS 6 does not apply to Land. (4 Marks) (e) Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014: Particulars 4,500 Equity Shares of `100 each Capital Reserve (including `40,000 being profit on sale of Plant) The Institute of Chartered Accountants of India Amount 4,50,000 90,000 PAPER 1 : ACCOUNTING 29 Securities Premium 40,000 Capital Redemption Reserve 30,000 General Reserve 1,05,000 Profit and Loss Account (Cr. Balance) 65,000 The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3 shares held. Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the books Saral Ltd. (4 Marks) Answer Income and Expenditure A/c for the year ending 31st March, 2014 (a) By subscription: Received Add: Outstanding 31.3.2014 (4,000 1,000) (See Note) Add: Received in advance last year for 2013-14 ` 20,000 3,000 5,000 ` 28,000 Balance Sheet as on 31st March, 2014 (Extract) Liabilities Subscription received in advance for year 2014-15 ` Assets 5,000 Subscription o/s: 2012-13 2013-14 ` 1,000 3,000 ` 4,000 Note: Subscription outstanding on 31.03.2014 as given in the question is ` 4,000. It has been considered that last year outstanding ` 1,000 has also been included in this amount. (b) (i) Loans and advances given and interest earned (1) to suppliers (2) to employees Operating Cash flow (3) to its subsidiary companies (ii) Operating Cash flow Investing Cash flow Investment made in subsidiary company and dividend received Investing Cash flow (iii) Dividend paid for the year Financing Cash Outflow (iv) TDS on interest income earned on investments made Investing Cash Outflow The Institute of Chartered Accountants of India 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014 (v) TDS on interest earned on advance given to suppliers Operating Cash Outflow (vi) Insurance claim received of amount loss of fixed asset by fire Extraordinary item to be shown under a separate heading as Cash inflow from Operating activities . (c) In business enterprises, a large number of receipts and payments by and from a single party may occur at different points of time. To simplify the calculation of interest involved for such transactions, the idea of average due date has been developed. Average Due Date is a break-even date on which the net amount payable can be settled without causing loss of interest either to the borrower or the lender. Few instances where average due date can be used: (i) Calculation of interest on drawings made by the proprietors or partners of a business firm at several points of time. (ii) Settlement of accounts between a principal and an agent. (iii) Settlement of contra accounts, that is, A and B sell goods to each other on different dates. Note: Any other instance where average due date is being used, may be given. (d) As per AS 6 Depreciation Accounting , depreciable assets are the assets which (i) are expected to be used during more than one accounting period; and (ii) have a limited useful life; and (iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business. AS 6 does not apply to land as land is considered to have unlimited useful life. Therefore, it is not appropriate to charge depreciation on land. (e) Capital Redemption Reserve A/c Dr. 30,000 Securities Premium A/c Dr. 40,000 Capital Reserve (Realized in cash) Dr General Reserve A/c Dr. 40,000 40,000 To Bonus to Shareholders 1,50,000 (Being issue of bonus shares by utilization of various Reserves, as per resolution dated .) Bonus to Shareholders A/c To Equity Share Capital (Being capitalization of Profit) The Institute of Chartered Accountants of India Dr. 1,50,000 1,50,000

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