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CA IPCC : Question Paper (with Answers) - ACCOUNTING Nov 2009

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Tilak Vidyalaya Higher Secondary School (TVHSS), Kallidaikurichi
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PAPER 1 : ACCOUNTING All questions are compulsory. Wherever necessary, suitable assumption(s) should be made by the candidates. Working notes should form part of the answer. Question 1 (i) On 1st April, 2008, Chhotu started business with an initial Capital of Rs.70,000. On 1 st October, 2008, he introduced additional capital of Rs.40,000. On 7 th of every month, he withdraws Rs.5,000 for household expenses. On 31 st March, 2009 his Assets and Liabilities were Rs.2,00,000 and Rs.70,000 respectively. Ascertain the profit earned by Chhotu during the year ended 31 st March, 2009. (ii) Year to year results of a company were not found comparable on the basis of gross profit margin. List out the probable reasons. (iii) MY Ltd. had acquired 200 equity shares of YZ Ltd. at Rs.105 per share on 01.01.2009 and paid Rs.200 towards brokerage, stamp duty and STT. On 31 st March, 2009, shares of YZ Ltd. were traded at Rs.110 per share. At what value investment is to be shown in the Balance Sheet of MY Ltd. as at 31 st March, 2009. (iv) On 1st April, 2008, X, Y and Z enter into partnership introducing capital of Rs.80,000, Rs.50,000 and Rs.50,000 respectively. They agree to share Profits and Losses equally. At the end of the accounting year on 31 st March, 2009, X claims that he be paid interest on his additional Capital of Rs.30,000 @ 10% per annum, while Z demands salary of Rs.600 per month for the extra hours devoted by him daily at the shop. The partnership deed is silent on these matters. Decide the matters with reasons. (v) What are the basic characteristics of a Private Ltd. Company? (vi) Sumo Ltd. has a profit of Rs.25 lakhs before charging depreciation for financial year 2008-09. Depreciation in the books was Rs.11 lakhs and depreciation chargeable under Section 205 comes to Rs.17 lakhs. Compute divisible profit for the year. (vii) From the following data, find out value of inventory as on 30.04.2009 using (a) LIFO method, and (b) FIFO method: (1) 01.04.2009 Purchased 10 units @ Rs.70 per unit (2) 06.04.2009 Sold 6 units @ Rs.90 per unit (3) 09.04.2009 Purchased 20 units @ Rs.75 per unit (4) 18.04.2009 Sold 14 units @ Rs.100 per unit INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 (viii) Explain contract costs as per Accounting Standard-7 related to Construction Contracts . (ix) Omshanti Club has 500 members with annual fee of Rs.1,000 per member. At the end of the accounting year, accountant noticed that 40 members have not paid annual fee and 70 members had paid fee in advance. Help the accountant to compute cash receipts of annual fee for the year. (x) The Companies Act, 1956 limits the payment of managerial remuneration. What is the maximum managerial remuneration, which can be paid in case of a company consistently earning profits and has more than one managerial person? (10 x 2 = 20 Marks) Answer (i) Rs. Capital as on 31.3.2009 (Rs.2,00,000 Rs.70,000) Add: Drawings (Rs.5,000 12 months) 1,30,000 60,000 1,90,000 Less: Additional capital introduced as on 1.10.2008 (40,000) 1,50,000 Less: Capital on 01.04.2008 (70,000) Profit for the year ended as on 31.3.2009 (ii) The probable reasons could be the change in the accounting policy viz. 80,000 (a) Change in method of recognition of sales revenue from cash basis to accrual basis or vice versa; or (b) Change in valuation of closing inventory by adopting different methods year to year such as LIFO to FIFO to weighted average or vice versa. (iii) Rs. Purchase price of Equity shares of YZ Ltd.(200 shares x Rs.105 per share) Add: Brokerage, stamp duty and STT 21,000 200 Cost of investment 21,200 If the investment is a long term investment than it will be shown at cost. Therefore value of investment will be Rs. 21,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e. Rs.21,200) or net realizable value (i.e. Rs.200 x 110 = Rs.22,000). Therefore value of investment will be Rs. 21,200. (iv) When the partnership deed is silent on the matter of interest on capitals and salary to partners, then no partner is entitled to claim interest on capital and salary. Therefore, claim of X and Z is not tenable. However, inclusion of specific provision regarding the said issues in partnership deed can make them entitled for interest on capital and salary. 2 PAPER 1 : ACCOUNTING (v) According to Section 3 (1) (iii), a private company means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles: (a) Restricts the rights of members to transfer its shares. (b) Limits the number of its member to 50 excluding: (i) persons who are in employment of the company; and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased. For this purpose joint holders of shares will be counted as single members. (c) Prohibits any invitation to the public to subscribe to any shares in, or debentures of, the company. (d) Prohibits any invitation or acceptance of deposits from persons other than its member, directors, and relatives. (vi) Computation of divisible profit (Rs. in lakhs) Profit for the year 2008-2009 25.00 Less: Depreciation chargeable under Section 205 (17.00) Divisible profit for the year 8.00 (vii) (a) Statement showing valuation of closing inventory by LIFO method Date Receipts Issue Balance Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount 1.4.09 10 70 700 20 75 18.4.09 420 1500 14 75 Value of closing inventory as per LIFO method: 4 units x Rs.70 = Rs.280 6 units x Rs.75 = Rs.450 Rs.730 3 1,050 4 70 280 4 70 700 70 280 75 1500 4 70 280 6 9.4.09 6 70 20 6.4.09 10 75 450 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 (b) Statement showing valuation of closing inventory by FIFO method Date Receipts Issue Balance Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount 1.4.09 10 70 700 9.4.09 20 75 70 420 1500 18.4.09 4 70 10 75 Value of closing inventory as per FIFO method: 280 700 4 70 280 4 6 70 70 280 20 6.4.09 10 75 1500 10 75 750 750 10 Units x Rs.75 = Rs.750 (viii) As per para 15 of AS 7 Construction Contracts (revised 2002) , contract cost should comprise: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract. (ix) Computation of cash receipts of annual fee for the year Rs. Total fee receivable during the year (500 members Rs.1,000) = 5,00,000 Less: Fee not received (40 members Rs.1,000) = (40,000) 4,60,000 Add: Fee received in advance (70 members Rs.1,000) = 70,000 Cash received during the year towards annual fee = 5,30,000 (x) Section 198 of the Companies Act, 1956 prescribes the overall maximum managerial remuneration payable and also managerial remuneration in case of absence or inadequacy of profits. In the given case, the company is earning profits consistently and has more than one managerial person; therefore, the maximum limit is 10% of net profit. Question 2 The following are the Balance Sheets of M Ltd. and N Ltd. as at 31 st March, 2009: (Rs. in lakhs) Liabilities M Ltd. N Ltd. Fully paid equity shares of Rs.10 each 3,600 900 4 PAPER 1 : ACCOUNTING 10% preference shares of Rs.10 each, fully paid up 1,200 - Capital Reserve General Reserve 600 2,100 - 780 - 300 2,421 870 369 93 11,571 1,662 Plant and Machinery 4,215 468 Furniture and Fixtures Motor Vehicles 2,400 - 183 51 Stock Sundry Debtors 2,370 1,044 444 237 Cash at Bank 1,542 240 Preliminary Expenses - 33 Discount on Issue of Debentures - 6 11,571 1,662 Profit and Loss Account 8% Redeemable debentures of Rs.1,000 each Trade Creditors Provisions Assets A new Company MN Ltd. was incorporated with an authorised capital of Rs.15,000 lakhs divided into shares of Rs.10 each. For the purpose of amalgamation in the nature of merger, M Ltd. and N Ltd. were merged into MN Ltd. on the following terms: (i) Purchase consideration for M Ltd. s business is to be discharged by issue of 120 lakhs fully paid 11% preference shares and 720 lakhs fully paid equity shares of MN Ltd. to the preference and equity shareholders of M Ltd. in full satisfaction of their claims. (ii) To discharge purchase consideration for N Ltd. s business, MN Ltd. to allot 90 lakhs fully paid up equity shares to shareholders of N Ltd. in full satisfaction of their claims. (iii) Expenses on the liquidation of M Ltd. and N Ltd. amounting to Rs.6 lakhs are to be borne by MN Ltd. (iv) 8% redeemable debentures of N Ltd. to be converted into 8.5% redeemable debentures of MN Ltd. (v) Expenses on incorporation of MN Ltd. were Rs.15 lakhs. You are requested to: (a) Pass necessary Journal Entries in the books of MN Ltd. to record above transactions, and (b) Prepare Balance Sheet of MN Ltd. after merger. 5 (16 Marks) INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 Answer In the books of MN Ltd. Journal Entries Business Purchase Account To Liquidator of M Ltd. To Liquidator of N Ltd. (Being consideration payable to liquidators of the two companies taken over) Plant and Machinery Account (4,215+468) Furniture and Fixtures Account (2,400+183) Motor Vehicles Account Stock Account (2,370+444) Sundry Debtors Account (1,044+237) Cash at Bank Account (1,542+240) Preliminary Expenses Account Discount on issue of Debentures Account Profit and Loss Account (Refer W.N.) To 8% Redeemable Debentures of N Ltd. Account To Trade Creditors Account (2,421+369) To Provisions Account (870+93) To Business Purchase Account (Being incorporation of all the assets and liabilities and the excess of consideration over the share capital being adjusted against reserves and surplus) Liquidator of M Ltd. Account Liquidator of N Ltd. Account To Equity Share Capital Account (7,200+900) To 11% Preference Share Capital Account (Being allotment of fully paid shares in discharge of purchase consideration) Profit and Loss Account To Bank Account (Being payment of liquidation expenses of M Ltd. and N Ltd.) 6 Dr. (Rs. in lakhs) Dr. Cr. 9,300 8,400 900 Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. 4,683 2,583 51 2,814 1,281 1,782 33 6 120 300 2,790 963 9,300 Dr. Dr. 8,400 900 8,100 1,200 Dr. 6 6 PAPER 1 : ACCOUNTING Preliminary Expenses Account Dr. To Bank Account (Being expenses on incorporation of MN Ltd.) 8% Redeemable Debentures of N Ltd. Account Dr. To 8.5% Redeemable Debentures Account (Being conversion of 8% Debentures of N Ltd. into 8.5% Debentures) 15 15 300 300 Balance Sheet of MN Ltd. Liabilities Rs. in lakhs Authorised Share Capital: 15 crore shares of Rs.10 each Assets Rs. in lakhs Fixed Assets: 15,000 4,683 Furniture and Fixtures Issued, subscribed and paid up: Plant and Machinery 2,583 8,100 120 lakhs 11% Preference shares of Rs.10 each, fully paid Motor Vehicles 1,200 810 lakhs Equity shares of Rs.10 each, fully paid 51 Current Assets, Loans and Advances: (A) Current Assets Stock Sundry Debtors (All the above mentioned shares have been issued for consideration other than cash) Secured Loans: 2,814 1,281 Cash at Bank (1,782 6 15) 8.5% Redeemable Debentures 300 (B) Loans and Advances 1,761 Nil Current Liabilities and Provisions: Miscellaneous Expenditure: (A) Current Liabilities Preliminary Expenses (33+15) Trade Creditors 2,790 (B) Provisions 963 Discount on Debentures Profit and (120+6) Issue Loss 13,353 of Account 48 6 126 13,353 Working Note: Profit and Loss Account (Rs. in lakhs) Total consideration = Rs.(8,400 + 900) lakhs 9,300 Less: Share Capital of Companies taken over [Rs.(3,600+1,200+900) lakhs] 5,700 3,600 7 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 Amount to be adjusted: Capital Reserve 600 General Reserve 2,100 Profit & Loss A/c 780 Debit balance of Profit & Loss Account 3,480 120 Question 3 E, F and G were partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31 st March, 2009 Balance Sheet of the firm stood as follows: Liabilities Rs. Assets Rs. Capital A/cs Buildings 55,000 E 50,000 Furniture 25,000 F 40,000 Stock 42,000 G 28,000 1,18,000 Debtors Creditors Outstanding Expenses 33,500 Cash at Bank 20,000 11,200 1,700 1,53,200 1,53,200 On 31st March, 2009, E decided to retire and F and G decided to continue as equal partners. Other terms of retirement were as follows: (i) Building be appreciated by 20%. (ii) Furniture be depreciated by 10%. (iii) A provision of 5% be created for bad debts on debtors. (iv) Goodwill be valued at two years purchase of profit for the latest accounting year. The firm s Profit for the year ended 31 st March, 2009 was Rs.25,000. No goodwill account is to be raised in the books of accounts. (v) Fresh capital be introduced by F and G to the extent of Rs.10,000 and Rs.35,000 respectively. (vi) Out of sum payable to retiring partner E, a sum of Rs.45,000 be paid immediately and the balance be transferred to his loan account bearing interest @ 12% per annum. The loan is to be paid off by 31 st March, 2011. One month after E s retirement, F and G agreed to admit E s son H as a partner with one-forth share in Profits/Losses. E agreed that the balance in his loan account be converted into H s Capital. E also agreed to forgo one month s interest on his loan. 8 PAPER 1 : ACCOUNTING It was also agreed that H will bring in, his share of goodwill through book adjustment, valued at the price on the date of E s retirement. No goodwill account is to be raised in the books. You are requested to pass necessary Journal Entries to give effect to the above transactions and prepare Partners Capital Accounts. (16 Marks) Answer Dr. Rs. 1. Building Account Dr. Cr. Rs. 11,000 To Revaluation Account (Being building appreciated) 2. 11,000 Revaluation Account Dr. 3,500 To Furniture Account To Provision for Doubtful Debts Account 2,500 1,000 (Being furniture depreciated by 10% and Provision for doubtful debts created @ 5% on Debtors) 3. Revaluation Account Dr. 7,500 To E s Capital Account 3,750 To F s Capital Account To G s Capital Account 2,250 1,500 (Being profit on revaluation transferred to capital accounts of partners) 4. F s Capital Account Dr. 10,000 G s Capital Account To E s Capital Account Dr. 15,000 25,000 (Being adjustment for E s share of goodwill) 5. Bank Account To F s Capital Account Dr. 45,000 10,000 To G s Capital Account (Being fresh capital introduced by F and G) 6. E s Capital Account 35,000 Dr. 78,750 To Bank Account 45,000 To E s Loan Account 33,750 (Being settlement of E s capital on his retirement) 9 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 7. E s Loan Account Dr. 33,750 To H s Capital Account 33,750 (Transfer of E s Loan Account to H s Capital Account) 8. H s Capital Account Dr. 12,500 To F s Capital Account 6,250 To G s Capital Account 6,250 (Being adjustment entry passed for H s share of goodwill) Partners Capital Accounts E F G H E F G H Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. To E (Goodwill) To Bank 10,000 15,000 By Balance b/d 45,000 By Revaluation A/c To E s Loan A/c 33,750 To Balance c/d 50,000 40,000 28,000 3,750 By F (Goodwill) 1,500 10,000 By G (Goodwill) 42,250 49,500 2,250 15,000 By Bank (fresh capital) 78,750 52,250 64,500 10,000 35,000 78,750 52,250 64,500 To F (Goodwill) 6,250 By Balance b/d To G (Goodwill) 6,250 By E s Loan A/c To Balance c/d 42,250 49,500 48,500 55,750 21,250 By H (goodwill) 33,750 6,250 48,500 55,750 33,750 6,250 48,500 55,750 33,750 Working Notes: 1. Calculation of gaining ratio Partners New ratio E F Old ratio Gain 5 10 1 2 Sacrifice 5 10 3 10 1 3 2 = 2 10 10 G 1 2 2 10 Hence, ratio of gain between F and G = 2:3 10 1 2 3 = 2 10 10 PAPER 1 : ACCOUNTING 2. Value of total goodwill of the firm = Rs.25,000 2 = Rs.50,000 E s share = Rs.50,000 5 Rs. 25,000 10 2 F will bear = Rs.25,000 =Rs.10,000 5 3 G will bear = Rs.25,000 =Rs.15,000 5 3. H s share of goodwill = Rs.50,000 1 = Rs.12,500 4 F and G share equal profits. Therefore, their sacrificing ratio will also be equal Hence, each of them will be credited with Rs.6,250 Question 4 (a) A fire broke out in the godown of a business house on 8 th July, 2009. Goods costing Rs.2,03,000 in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from the main godown were valued at Rs.1,97,000. The following particulars were available from the books of accounts: Stock on the last Balance Sheet date at 31st March, 2009 was Rs.15,72,000. Purchases for the period from 1st April, 2009 to 8th July, 2009 were Rs.37,10,000 and sales during the same period amounted to Rs.52,60,000. The average gross profit margin was 30% on sales. The business house has a fire insurance policy for Rs.10,00,000 in respect of its entire stock. Assist the Accountant of the business house in computing the amount of claim of loss by fire. (b) A trader allows his customers, credit for one week only beyond which he charges interest @ 12% per annum. Anil, a customer buys goods as follows: Date of Sale/Purchase Amount (Rs.) January 2, 2009 6,000 January 28, 2009 5,500 February 17, 2009 7,000 March 3, 2009 4,700 st Anil settles his account on 31 March, 2009. Calculate the amount of interest payable by Anil using average due date method. (8 + 8 =16 Marks) 11 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 Answer (a) Calculation of amount of claim Rs. Value of stock as on 8 th July, 2009 (Refer W.N.) Rs. 16,00,000 Less: Value of stock remaining unaffected by fire 2,03,000 Agreed value of damaged goods 1,97,000 Loss of stock 4,00,000 12,00,000 Applying average clause: = Amount of policy Loss of stock Stock on the date of fire = Amount of claim Rs.10,00,000 12,00,000 Rs.16,00,000 = Rs. 7,50,000 Working Note: Memorandum Trading Account for the period from 1 st April, 2009 to 8 th July, 2009 Rs. Rs. To Opening Stock 15,72,000 By Sales 52,60,000 To Purchases 37,10,000 By Closing Stock (Bal.Fig.) 16,00,000 To Gross Profit (30% of sales) 15,78,000 68,60,000 68,60,000 (b) Let us assume 9 th January, 2009 to be the base date: Date of Sale Due date of payment Amount (Rs.) No. of days from 9th January, 2009 Product Jan. 2 Jan. 9 6,000 0 0 Jan. 28 Feb. 4 5,500 26 1,43,000 Feb. 17 Feb. 24 7,000 46 3,22,000 March 3 March 10 4,700 60 2,82,000 23,200 Average Due date = Base date + Sum of Pr oduct Sum of amount 12 7,47,000 PAPER 1 : ACCOUNTING = 9th January, 2009 + 7,47,000 23,200 = 9th January 2009 + 32 days i.e. 32 days from 9th January, 2009 = 10th February, 2009 Thus, average due date = 10th February, 2009 No. of days from 10 th February, 2009 to 31st March, 2009 = 49 days. Interest payable by Anil on Rs.23,200 for 49 days @ 12% per annum = Rs.23,200 49 12 Rs.373.74 365 100 Question 5 (a) The Income and Expenditure Account of City Sports Club for the year ended 31 st March, 2009 was as follows: Expenditure Amount (Rs.) Income Amount (Rs.) To Salaries 1,20,000 By Subscriptions 1,60,000 To Printing and Stationery To Rent 12,000 By Contribution dinner Annual 20,000 To Repairs 10,000 By Profit on Annual Sports meet 20,000 To Sundry Expenses To Annual Dinner Expenses To Interest to Bank 6,000 To Depreciation on Sports equipment 6,000 To Excess of Income over Expenditure 6,000 By Entrance Fees 10,000 for 8,000 30,000 12,000 2,10,000 The above account had been prepared after the following adjustments: 2,10,000 Rs. Subscriptions outstanding on 31.03.2008 12,000 Subscriptions received in advance on 31.03.2008 9,000 Subscriptions received in advance on 31.03.2009 5,400 Subscriptions outstanding on 31.03.2009 15,000 13 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 Salaries outstanding at the beginning and at the end of the financial year were Rs.8,000 and Rs.10,000 respectively. Sundry expenses included prepaid insurance expenses of Rs.1,200. The Club owned a freehold ground valued Rs.2,00,000. The Club has sports equipment on 01.04.2008 valued at Rs.52,000. At the end of the year, after depreciation, the sports equipment amounted to Rs.54,000. The Club raised a loan of Rs.40,000 from a bank on 01.01.2008, which was unpaid till 31.03.2009. On 31.03.2009, cash in hand was Rs.32,000. Prepare Receipts and Payments account of the Club for the year ended 31 st March, 2009 and Balance Sheet as on that date. (b) Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales were Rs.36,00,000. The sales per month in the first half year were half of what they were in the later half year. The net profit of the company, Rs.2,00,000 was worked out after charging the following expenses: (i) Depreciation Rs.1,08,000, (ii) Audit fees Rs.15,000, (iii) Directors fees Rs.50,000, (iv) Preliminary expenses Rs.12,000, (v) Office expenses Rs.78,000, (vi) Selling expenses Rs.72,000 and (vii) Interest to vendors upto August 31, 2008 Rs.5,000. Please ascertain pre-incorporation and post-incorporation profit for the year ended 31 st March, 2009. (10 + 6 = 16 Marks) Answer (a) City Sports Club Receipt and Payments Account for the year ended 31 st March, 2009 Receipts To Balance b/d (Bal. Fig.) To Amount (Rs.) Subscription: for 2007-2008 for 2008-2009 (W.N.3) for 2009-2010 To Entrance Fees 27,800 Payments Amount (Rs.) 1,36,000 5,400 10,000 14 8,000 for 2008-2009 12,000 By Salaries: for 2007-2008 1,10,000 By Printing and Stationery 6,000 By Rent 12,000 By Repairs 10,000 By Sundry Expenses (8,000 + 1,200) 9,200 PAPER 1 : ACCOUNTING To Contribution for Annual Dinner To Profit on Annual Sports Meet 20,000 By Annual Dinner Expenses 30,000 20,000 By Interest to Bank 6,000 By Sports Equipment (W.N.2) By Balance c/d 8,000 32,000 2,31,200 2,31,200 Balance Sheet as at 31st March, 2009 Liabilities Capital Fund (W.N.1) Add: Excess of income over expenditure Amount (Rs.) Amount (Rs.) 2,34,800 12,000 Assets Freehold Ground Sports Equipment Add: Additions during the year 2,46,800 (Bal. Fig.) Bank Loan 40,000 Less: Depreciation Outstanding Salaries 10,000 Subscription in Arrear 5,400 Subscription in Advance Prepaid Insurance Cash in hand 3,02,200 Working Notes: Amount (Rs.) Amount (Rs.) 2,00,000 52,000 8,000 60,000 (6,000) 54,000 15,000 1,200 32,000 3,02,200 (1) Opening Balance of Capital Fund: Balance Sheet as at 31 st March, 2008 Rs. Capital Fund (Bal. Fig.) Bank Loan 2,34,800 40,000 Rs. Freehold Ground 2,00,000 Sports Equipment 52,000 Outstanding Salaries 8,000 Subscription in Arrear 12,000 Subscription in Advance 9,000 Cash in hand 27,800 2,91,800 It is assumed that the profit on annual sports meet has been realized in cash. 15 2,91,800 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 (2) Sports Equipment Account Rs. To Balance b/d To Bank Account Rs. 52,000 By 8,000 By Depreciation Account Balance c/d 6,000 54,000 60,000 (3) Subscription received during 2008-09 60,000 Rs. Rs. Subscription for 2008-09 1,60,000 Less:Subscription outstanding as on 31.3.09 15,000 Less:Subscription received in advance as on 31.3.08 9,000 24,000 1,36,000 (b) Statement showing pre and post incorporation profit for the year ended 31 st March, 2009 Particulars Total Amount Basis of PreAllocation incorporation PostIncorporation Rs. Rs, Rs. Gross Profit 5,40,000 2:7 1,20,000 4,20,000 Less: Depreciation 1,08,000 1:2 36,000 72,000 Audit Fees 15,000 1:2 5,000 10,000 Director s Fees 50,000 Post - 50,000 Preliminary Expenses 12,000 Post - 12,000 Office Expenses 78,000 1:2 26,000 52,000 Selling Expenses 72,000 2:7 16,000 56,000 Interest to vendors 5,000 Actual 4,000 1,000 33,000 1,67,000 Net Profit (Rs.33,000 being pre-incorporation profit is transferred to capital reserve Account) Working Notes: 1. 2,00,000 Sales ratio The sales per month in the first half year were half of what they were in the later half year. If in the later half year, sales per month is Re.1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e. from 1 st April, 2008 to 31st July, 2008) will be 4 .50 = Rs.2 and for the last eight months (i.e. 16 PAPER 1 : ACCOUNTING from 1st August, 2008 to 31st March, 2009) will be (2 .50 + 6 1) = Rs.7. Thus sales ratio is 2:7. 2. Time ratio 1st April, 2008 to 31 st July, 2008 : 1st August, 2008 to 31st March, 2009 = 4 months : 8 months = 1:2 Thus, time ratio is 1:2. 3. Gross profit Gross profit = Net profit + All expenses = Rs.2,00,000 + Rs.( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000) = Rs.2,00,000 +Rs.3,40,000 = Rs.5,40,000. Question 6 Answer any four of the following: (i) Market is full of ready-made accounting softwares. What factors will you consider to choose one of them for your enterprise? (ii) As per Accounting Standard-14, what are the conditions which must be satisfied for an amalgamation in the nature of merger? (iii) What do you mean by Customised Accounting Software? (iv) Rose Ltd. had made an investment of Rs.500 lakhs in the equity shares of Nose Ltd. on 10.01.2009. The realisable value of such investment on 31.03.2009 became Rs.200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How will you recognize this reduction in Financial statements for the year 2008-09. (v) A company provided Rs.10,00,000 for dividend payment. Is the Corporate Dividend Tax payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15% plus surcharge of 10% and disclose as it would appear in profit and loss account of the company. (vi) SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on 01.04.2008 and paid Rs.50,000 towards goodwill. On 01.04.2009, SAD enterprises decided to admit W as partner and the goodwill was valued at Rs.1,00,000 for the purpose. Please explain with reasons, at what price goodwill can be shown in the books of account. (4 4 = 16 Marks) 17 INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 Answer (i) While choosing the accounting software, the following points should be considered: 1. Fulfilment of business requirements: Some packages have few functionalities more than the others. The purchaser may try to match his requirement with the available solutions. 2. Completeness of reports: Some packages might provide extra reports or the reports match the requirement more than the others. 3. Ease of use: Some packages could be very detailed and cumbersome compare to the others. 4. Cost: The budgetary constraints could be an important deciding factor. A package having more features cannot be opted because of the prohibitive costs. 5. Reputation of the vendor: Vendor support is essential for any software. A stable vendor with reputation and good track records will always be preferred. 6. Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be preferred to a vendor unwilling to give updates. (ii) According to AS 14 Accounting for Amalgamations , Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions: (i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. (ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. (iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. 18 PAPER 1 : ACCOUNTING (iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. (iii) A customised accounting software is one where the software is developed on the basis of requirement specifications provided by the organisation. The choice of customised accounting software could be because of the typical nature of the business or else the functionality desired to be computerised is not available in any of the pre-packaged accounting software. An organisation desiring to have an integrated software package covering most of the functional area may have the financial module as part of the entire customised system. (iv) Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline as per Accounting Standard 13 Accounting for Investments . As per provisions of the standard, if the investments were acquired for long term and decline is temporary in nature, reduction in value will not be recognized and investments would be carried at cost. If the decline is of permanent nature, it will be charged to profit and loss account. If the investments are current investments, then the reduction should be recognized and charged to Profit and Loss Account as the current investments are carried at cost or fair value, whichever is less. (v) Yes, Corporate Dividend Tax (CDT) is payable by the company which has provided for the payment of dividend. CDT is payable even if no income tax is payable. This is payable by a domestic company on distribution of profits to its shareholders. In the given case, Corporate Dividend Tax would be worked out to Rs.1,65,000 [i.e. (Rs.10,00,000 x 15%) x 110%]. CDT should be accounted for in the same financial year in which provision for dividend is recognized and made. CDT shall be disclosed in profit and loss account below the line just after the provision for dividend. Such disclosure would give a proper picture regarding payments involved with reference to dividends. Disclosure of CDT in the profit and Loss Account will be as follows: Dividend Corporate Dividend Tax XXXX XXXX Corporate Dividend Tax is also known as Dividend Distribution Tax . 19 XXXX INTEGRATED PROFESSIONAL COMPTENCE EXAMINATION: NOVEMBER, 2009 (vi) Para 16 of AS 10, Accounting for Fixed Assets states that goodwill can be recorded in the books only when some consideration in money or money s worth has been paid for it. Therefore, only purchased goodwill should be recorded in the books. In the said case, payment of Rs.50,000 was made towards purchase of goodwill, hence to this extent goodwill can be recorded in the books. Additional goodwill of Rs.50,000 is self generated goodwill, which should not be recorded. On admission, death or retirement of a partner, goodwill adjustments can be carried out through capital accounts. 20

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