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CA IPCC : Sample / Mock Test Paper (with Model Answers) - ADVANCED ACCOUNTING Oct 2014

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Test Series: October, 2014 MOCK TEST PAPER 2 INTERMEDIATE (IPC) : GROUP II PAPER 5: ADVANCED ACCOUNTING Question No. 1 is compulsory. Answer any five questions from the remaining six questions. Wherever necessary suitable assumptions may be made and disclosed by way of a note. Working Notes should form part of the answer. Time Allowed: 3 Hours 1. Maximum Marks: 100 (a) A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2010, when the exchange rate was Rs. 43 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for the import transaction was made on 5th April, 2012 when the exchange rate was Rs. 47 per US Dollar. However, on 31st March, 2012, the rate of exchange was Rs. 48 per US Dollar. The company passed an entry on 31 st March, 2012 adjusting the cost of raw materials consumed for the difference between Rs. 47 and Rs. 43 per US Dollar. In the background of the relevant accounting standard, is the company s accounting treatment correct? Discuss. (b) Sohan Ltd. provides you the following information: Issued capital 1,00,000 equity shares of Rs. 10 each Reserves and surplus Capital reserve Rs. 5,00,000 Securities premium Rs. 9,00,000 Revenue reserve Rs. 15,00,000 The company resolved to buy back 10% of its equity share capital @ Rs. 60 per share. Give the necessary journal entries in the books of Sohan Ltd. (c) A company went into liquidation whose creditors are Rs. 36,000. This amount of Rs. 36,000 includes Rs. 6,000 on account of wages of 15 men at Rs. 100 per month for 4 months, immediately before the date of winding up, Rs. 9,000 being the salaries of 5 employees at Rs. 300 per month for the previous 6 months, Rent for godown for the last six months amounting to Rs. 3,000, Income-tax deducted out of salaries of employees Rs. 1,000. In addition it is estimated that the company would have to pay Rs. 3,000 as compensation to an employees for injuries suffered by him, which was contingent liability not accepted by the company and not included in above said creditors figure. The Institute of Chartered Accountants of India Find the amount of Preferential Creditors. (d) S. Square Private Limited has taken machinery on lease from S.K. Ltd. information is as under: The Lease term = 4 years Fair value at inception of lease = Rs. 20,00,000 Lease rent = Rs. 6,25,000 p.a. at the end of year Guaranteed residual value = Rs. 1,25,000 Expected residual value = Rs. 3,75,000 Implicit interest rate = 15% Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively. Calculate the value of the lease liability as per AS 19. 2. (4x 5 = 20 Marks) P, Q and R are partners sharing profits and losses in the ratio 3 : 2 : 1 after allowing interest on capital @ 9% p.a. Their Balance Sheet as at 31st March, 2014 are as follows: Liabilities Capital Accounts: P 50,000 Q 30,000 R 20,000 Reserve Fund Creditors Rs. Assets Plant & Machinery Fixtures Stock 1,00,000 Sundry Debtors 60,000 48,000 Rs. 1,08,000 20,000 50,000 30,000 2,08,000 2,08,000 They applied for conversion of the firm into a Private Limited Company named PQR Pvt. Ltd. and the certificate was received on 01-04-2014. They decided to maintain same profit sharing ratio and to preserve the priority in regard to repayment of capital as far as possible. For that purpose, they decided to insert a clause of issuance of Preference shares in Memorandum of Association in addition to issuance of Equity shares of Rs. 10 each. On 01-04-2014, the value of goodwill is to be determined on the basis of 2 years' purchase of the average profit from the business of the last 5 years. The particulars of profits are as under: Year ended 31.03.2010 Year ended 31.03.2011 Profit Loss The Institute of Chartered Accountants of India Rs. 10,000 5,000 Year ended 31.03.2012 Year ended 31.03.2013 Year ended 31.03.2014 Profit Profit Profit 18,000 27,000 30,000 The loss for the year ended 31-03-2011 was on account of loss by strike to the extent of 10,000. It was agreed that rest of the assets are valued on the basis of the Balance Sheet as at 31-03-2014 except Plant & Machinery which is valued at Rs. 1,02,000. You are required to prepare (a) the Balance Sheet of the Company as at 01-04-2014,(b) Partners' Capital Accounts and (c) Statement showing the final settlement between the partners taking Q's capital as basis. (16 Marks) 3. Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2014. A new company Star Ltd. was formed to take over the business of the existing companies. The draft Balance Sheets of Sun Ltd. and Moon Ltd. as at 31 st March, 2014 are given below: Liabilities Share capital: Equity shares of Rs. 100 each 12% Preference shares of Rs. 100 each Reserves and surplus: Revaluation reserve General reserve Investment allowance reserve Profit and Loss Account Secured loan: 10% Debentures (Rs. 100 each) Current liabilities and provisions: Sundry creditors Acceptance Sun Moon Assets Ltd. Ltd. Fixed Assets: 400 375 Land & Building 150 100 Plant & Machinery Investments Current Assets, Loans and Advances: 75 50 Stock 85 75 Sundry Debtors 25 25 Bills Receivables Cash and Bank balances 25 15 30 60 35 750 275 175 75 200 125 25 175 125 25 150 125 150 25 100 1,000 750 15 135 75 1,000 (Rs. in lakhs) Sun Moon Ltd. Ltd. The Institute of Chartered Accountants of India Additional information: (a) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares for each equity share of Moon Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10 per share. (b) Preference shareholders of the two companies are issued equivalent number of 15% preference shares of Star Ltd. at a price of Rs. 150 per share (face value Rs.100). (c) 10% Debentureholders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing such number of its 15% Debentures of Rs. 100 each so as to maintain the same amount of interest. (d) Investment allowance reserve is to be maintained for 4 more years. (e) Liquidation expenses are: Sun Ltd. Rs. 2,00,000 Moon Ltd. Rs. 1,00,000 It was decided that these expenses would be borne by Star Ltd. (f) All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value. (g) Authorised equity share capital of Star Ltd. is Rs. 5,00,00,000, divided into equity shares of Rs. 10 each. After issuing required number of shares to the Liquidators of Sun Ltd. and Moon Ltd., Star Ltd. issued balance shares to public. The issue was fully subscribed. Required : Prepare the Balance Sheet of Star Ltd. as at 1 st April, 2014 after amalgamation has been carried out on the basis of Amalgamation in the nature of purchase. (16 Marks) 4. (a) A Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier-1 and Tier-II Capitals. Find out the risk-adjusted and risk weighted assets and capital adequacy ratio. Capital Funds: Paid up Equity Share Capital Statutory Reserve Share Premium Capital Reserve (of which Capital Funds Rs. 40 crore were due to revaluation of assets and balance due to sale) Assets: Cash balance with RBI Claims on Banks Other Investments The Institute of Chartered Accountants of India (Rs. in crores) 750 150 150 90 60 170 2,300 Loans and Advances: Guaranteed by Government of India/State Government Granted to Staff of bank. fully covered by Super Annuation Benefits and mortgage of Flat/House Other Loans and Advances Premises, Furniture and Fixtures, Other Assets Intangible Assets Off-Balance Sheet items: Acceptance, Endorsements and Letter of Credit, Guarantees and Other obligations. 400 50 6,170 3,925 15 1,550 (b) Beta Ltd. has its share capital divided into shares of Rs. 10 each. On 1st April, 2011, it granted 25,000 employees stock options at Rs. 50 when the market price was Rs. 140 per share. The options were to be exercised between 1 st January, 2012 and 28th February, 2012. The employees exercised options for 24,000 shares only; the remaining options lapsed. The company closes its books of account on 31st March every year. You are required to show necessary journal entries reflecting these transactions. (12 +4 = 16 Marks) 5. (a) Trading and Profit and Loss Account of Umeed Equipment Co. for the six months ended at 31.3.2012 is presented to you in the following form: Particulars Purchases: Dry cleaners (Dept. X) Dumpsters (Dept. Y) Spares Parts (Dept. Z) Salaries and wages Rent Profit Rs. Particulars Sales: 70,350 Dry cleaners (Dept. X) 45,300 Dumpsters (Dept. Y) 32,200 Spares Parts 24,000 Stock as on 31.3.2012 10,900 Dry cleaners (Dept. X) 17,250 Dumpsters (Dept. X) Spare Parts (Dept. Z) 2,00,000 Rs. 75,000 50,000 12,500 30,050 10,150 22,300 2,00,000 Other information s are as follows: (i) Department X and Department Y represents the show room and Department Z represents the work shop. (ii) Dry cleaners and Dumpsters are sold at the show room and spare parts at work shop. The Institute of Chartered Accountants of India (iii) Salaries and wages were allocated between show room and work shop in the ratio of 3:1. It was decided to allocate the show room salaries and wages in the ratio of 1 : 2 between the departments X and Y. (iv) The work shop rent is Rs. 250 per month. The rent of show room is to be divided equally between the departments X and Y. You are required to prepare Departmental Trading and Profit and Loss Account for each of the three departments X, Y and Z and a General Account. (b) Give Journal Entries in the books of Head Office to rectify or adjust the following: (i) Goods sent to Branch Rs. 12,000 stolen during transit. Branch manager refused to accept any liability. (ii) Branch paid Rs. 15,000 as salary to the officer of Head Office on his visit to the branch. (iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at Rs. 25,000 which was not received by Branch till 31st March, 2012. (iv) A remittance of Rs. 10,000 sent by the branch on 30th March, 2012, received by the Head Office on 1st April, 2012. (v) Head Office made payment of Rs. 25,000 for purchase of goods by Branch and wrongly debited its own purchase account. (10 +6 = 16 Marks) 6. (a) From the following information of Bigfish Marine Insurance Ltd., prepare the Revenue Account as per the regulations of IRDA for the year ended 31st March, 2014: Particulars Premium received Premium outstanding on March 31, 2014 Premium paid on reinsurance ceded Claims paid Estimated liability in respect of outstanding claims: On April 1, 2013 On March 31, 2014 Expenses of management (includes Rs. 45,000 surveyor s fee and Rs. 65,000 legal expenses paid for settlement of claims) Interest and dividend (Gross) Income tax on the above Profit on sale of investments Commission paid The Institute of Chartered Accountants of India Amount (Rs.) 18,75,000 1,25,000 2,28,000 10,54,000 1,89,000 2,25,000 4,85,000 1,65,250 49,575 46,000 1,94,000 Balance of fund on 1st April, 2013 was Rs. 18,50,000 including additional reserve of Rs. 1,80,000. Additional reserve has to be maintained at 10% of net premium for the year. (b) Chaitanya Limited issues 40,000 shares. Issue is underwritten by A, B and C in the ratio of 5:3:2 respectively. Unmarked applications totalled 2,000 whereas marked applications are as follows: Underwriters A B C Application (Number of shares) 16,000 5,700 8,300 Calculate the net liability of each one of the underwriters. 7. (12+4 = 16 Marks) Answer any four of the following: (a) A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crores had taken up the marketing of a new product. It was estimated that the company would have a turnover of Rs. 25 crores from the new product. The company had debited to its Profit and Loss account the total expenditure of Rs. 2 crore incurred on extensive special initial advertisement campaign for the new product. Is the procedure adopted by the company correct? (b) An oil company has been contaminating land for several years. It does not clean up because there is no legislation requiring cleaning up. At 31st March 2012, it is virtually certain that a law requiring a clean up of land already contaminated will be enacted shortly after the year end. Is provisioning presently necessary? (c) No. of equity shares outstanding Basic earnings per share No. of 12% convertible debentures of Rs. 100 each Each debenture is convertible into 10 equity shares Tax Rate 30,00,000 Rs. 5.00 50,000 30% Compute Diluted Earnings per Share. Working note should form part of the answer. (d) A company has filed a legal suit against the debtor from whom Rs. 15 lakh is recoverable as on 31.3.2012. The chances of recovery by way of legal suit are not good as per legal opinion given by the counsel in April, 2012. Can the company provide for full amount of Rs. 15 lakhs as provision for doubtful debts? Discuss in detail. (e) Yogya Ltd. received a specific grant of Rs. 300 lakhs for acquiring the plant of Rs. 1,500 lakhs during 2009-10 having useful life of 10 years. The grant received was credited to deferred income and shown in the balance sheet. During 2012-13, The Institute of Chartered Accountants of India due to non-compliance of conditions laid down for the grant the company had to refund the grant to the Government. Balance in the deferred income on that date was Rs. 210 lakhs and written down value of plant was Rs. 1,050 lakhs. (i) What should be the treatment for the refund of the grant and the effect on cost of the fixed asset and the amount of depreciation to be charged during the year 2012-13 in profit and loss account? Assume that depreciation is charged on assets as per straight line method. (ii) What should be the treatment of the refund if grant was deducted from the cost of the plant during 2009-10? (4 x 4 = 16 Marks) The Institute of Chartered Accountants of India Test Series: October, 2014 MOCK TEST PAPER - 2 INTERMEDIATE (IPC): GROUP II PAPER 5: ADVANCED ACCOUNTING SUGGESTED ANSWERS/HINTS 1. (a) As per AS 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates , monetary items denominated in a foreign currency should be reported using the closing rate at each balance sheet date. The effect of exchange difference should be taken into profit and loss account. Trade payables is a monetary item, hence should be valued at the closing rate i.e, Rs. 48 at 31st March, 2012 irrespective of the payment for the same subsequently at lower rate in the next financial year. The difference of Rs. 5 (Rs. 48-Rs. 43) per US dollar should be shown as an exchange loss in the profit and loss account for the year ended 31st March, 2012 and is not to be adjusted against the cost of raw- materials. In the subsequent year, the company would record an exchange gain of Re.1 per US dollar, i.e., the difference between Rs. 48 and Rs. 47 per US dollar. Hence, the accounting treatment adopted by the company is incorrect. (b) Journal Entries (Rs.) Dr. Equity shares buy back A/c Dr. 6,00,000 To Bank A/c (Being Buy back of 10,000 shares @ Rs. 60) Equity share capital A/c Securities premium A/c 6,00,000 Dr. Dr. 1,00,000 5,00,000 To Equity shares buy back A/c (Being cancellation of equity shares bought back) Revenue reserves A/c To Capital redemption reserve A/c (Being amount equal to nominal value of shares bought back transferred to capital redemption reserve) The Institute of Chartered Accountants of India Cr. 6,00,000 Dr. 1,00,000 1,00,000 (c) Calculation of Preferential Creditors Rs. Tax deducted at source on salaries 1,000 Wages (15 men for 4 months at Rs. 100 each) Salaries (5 men for 4 months at Rs. 300 each) 6,000 6,000 Workmen s compensation 3,000 Total 16,000 Note: (i) Wages or Salaries payable to any employee due for the period not exceeding 4 months within the twelve months next before commencement of winding up subject to maximum 20,000 per claimant are preferential creditors. (ii) Rent for godown is not included in preferential creditors. (d) According to para 11 of AS 19 Leases , the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of the leased asset at the inception of the finance lease. However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease. Present value of minimum lease payments will be calculated as follows: Year Minimum Lease Payment Rs. Internal rate of return (Discount rate @ 5%) Present value Rs. 1 6,25,000 0.8696 5,43,500 2 3 6,25,000 6,25,000 0.7561 0.6575 4,72,563 4,10,937 0.5718 4,28,850 4 7,50,000 Total 26,25,000 18,55,850 Present value of minimum lease payments Rs. 18,55,850 is less than fair value at the inception of lease i.e. Rs. 20,00,000, therefore, the lease liability should be recognized at Rs. 18,55,850 as per AS 19. Minimum Lease Payment of 4th year includes guaranteed residual value amounting Rs. 1,25,000. The Institute of Chartered Accountants of India 2. (a) Balance Sheet of the PQR Pvt. Ltd. as on 1-4-2014 Note No. Equity and Liabilities Shareholders funds Share capital Current liabilities Trade Payables Total Assets Non-current assets Fixed assets Tangible assets Intangible assets Current assets Inventories Trade Receivables Total Rs. 1 1,90,000 48,000 2,38,000 2 3 1,22,000 36,000 50,000 30,000 2,38,000 Notes to Accounts Rs. 1. 2. 3. Share Capital Equity share capital 18,000 fully paid shares of Rs. 10 each Preference share capital (9% Preference Shares) (All the shares have been issued for consideration other than cash) Tangible assets Plant and Machinery Fixtures 1,80,000 10,000 1,90,000 1,02,000 20,000 1,22,000 Intangible assets Goodwill 36,000 (b) In the books of Partnership Firm Partners Capital Accounts P R P Q R Rs. To Plant and machinery Q Rs. Rs. Rs. Rs. Rs. 3,000 2,000 The Institute of Chartered Accountants of India 1,000 By Balance b/d 50,000 30,000 20,000 account To Equity 90,000 60,000 30,000 By shares in PQR fund Pvt. Ltd. To 9% Preference shares in PQR Pvt. Ltd. By 5,000 5,000 Reserve Realization* A/c (Profit on sale of business 98,000 62,000 36,000 30,000 20,000 10,000 18,000 12,000 6,000 98,000 62,000 36,000 (c) Statement showing the final settlement between the Partners taking Q s capital as basis P Rs. Q Rs. R Rs. Total Rs. Value of Equity Shares to be allotted, taking Q s capital as basis P s Capital = 60,000 3/2 90,000 60,000 30,000 R s Capital = 60,000 1/2 Total Value of Equity Shares allotted to P,Q 1,80,000 and R 9% Preference Shares to be allotted to P Rs. (95,000-90,000) 5,000 9%Preference Shares to be allotted to R Rs. (35,000-30,000) 5,000 Total Value of Preference Shares allotted to P and R 10,000 Total Purchase Consideration 1,90,000 Taking Q s capital as Basis, both P and R have Rs. 5,000 each as excess in their capital account balances. Since interest on capital is meant to compensate those whose capital is in excess of proportionate limits and since in the case of partners it is an appropriation of profit, it will be proper to give 9% preference shares to P and R for Rs. 5,000 each and the remaining amount of Rs. 1,80,000 in the form of Equity Shares to be divided among P, Q and R in the ratio 3:2:1. They will then share the company s profit in the ratio 3:2:1 after allowing preference dividend. Working Notes: 1. Calculation of goodwill Profits 2009-10 Rs. 10,000 The Institute of Chartered Accountants of India 2010-11 Rs. (5,000) 2011-12 Rs. 18,000 2012-13 Rs. 27,000 2013-14 Rs. 30,000 Adjustment loss in 2010-11 for abnormal 10,000 10,000 5,000 18,000 27,000 Total Profit from 2009-10 to 2013-14 Average Profit (90,000 / 5) Goodwill equal to 2 years purchase 2 30,000 90,000 18,000 36,000 Purchase consideration Computation of Value placed on business: Assets : Goodwill Plant & Machinery Fixtures Stock Sundry Debtors Less: Liabilities: Creditors Purchase Consideration 3. Rs. 36,000 1,02,000 20,000 50,000 30,000 2,38,000 48,000 1,90,000 Balance Sheet of Star Ltd. as at 1st April, 2014 Particulars 1 Note No. (Rs. in lakhs) EQUITY AND LIABILITIES Shareholders' funds a) Share capital 750 b) Reserves and Surplus 2 1 2 875 3 30 4 305 Non-current liabilities Long-term borrowings 3 Current liabilities Trade Payables Total 1,960 ASSETS 1 Non-current assets a) Fixed assets i) Tangible assets The Institute of Chartered Accountants of India 5 775 ii) Intangible assets b) Non-current investments Other non-current assets 2 6 13 7 100 8 50 Current assets a) Inventories (175+125) 300 b) Trade receivables 9 325 c) Cash and cash equivalents 10 397 Total 1,960 Notes to Accounts (Rs. in Lakhs) 1. Share Capital Authorised share capital: 50,00,000 Equity shares of Rs. 10 each 500 Issued and subscribed: 50,00,000 Equity shares of Rs. 10 each 500 2,50,000 Preference shares of Rs. 100 each 250 (Of the above shares 35,00,000 equity shares and all preference shares are allotted as fully paid up for consideration other than cash) 750 2. Reserves and Surplus Securities premium Preference shares (2.5 Lakhs x Rs. 50) 125 Equity shares (35 Lakhs x Rs. 20) 700 Investment allowance reserve (25+25) 3. 4. 825 50 875 Long-term borrowings Secured 15% Debentures (W.N. 2) Trade Payables 30 Acceptances (75+35) 110 Sundry creditors (135+60) 195 305 The Institute of Chartered Accountants of India 5. Tangible assets Land and building (275+200) 475 Plant and machinery (175+125) 300 775 6. Intangible assets Goodwill (10+2+1) 7. Non-current investments 8. 13 Other non-current investments(75+25) Other non-current assets 100 Amalgamation adjustment account 9. 50 Trade receivables Sundry debtors (125+150) Bills receivables (25+25) 275 50 325 10. Cash and cash equivalents Cash and bank (250+150-3) 397 Working Notes: 1. Computation of Purchase Consideration Rs. in lakhs Sun Moon Ltd. Ltd. (a) Preference shareholders: 1,50,00,000/100 = 1,50,000 shares Share capital = 1,50,000 shares Rs. 100 each Securities premium = 1,50,000 shares Rs. 50 each 150 75 225 1,00,00,000/100 = 1,00,000 shares Share capital = 1,00,000 shares Rs. 100 each Securities premium= 1,00,000 shares Rs. 50 each 100 50 150 (b) Equity shareholders: 4,00,00,000/100 5 = 20,00,000 shares Share capital = 20,00,000 shares Rs. 10 each 200 Securities premium=20,00,000 shares Rs. 20 each 400 3,75,00,000/100 4 = 15,00,000 shares The Institute of Chartered Accountants of India 600 Share capital = 15,00,000 shares Rs. 10 each Securities premium = 15,00,000 shares Rs. 20 each 150 300 450 Amount of purchase consideration 825 600 Rs. in lakhs 2. Calculation of number of debentures issued Sun Ltd. 30 10% Debentures of Rs. 100 each Moon Ltd. 15 15% Debentures to be issued to maintain same amount of interest: Interest = Rs. 30,00,000 x 10% = Rs. 3,00,000 Value of 15% Debentures = ` 3,00,000 15 20 100 Interest = Rs. 15,00,000 x 10% Value of 15% Debentures = ` 1,50,000 15 10 100 Rs. in lakhs 3. Net assets taken over Sun Ltd. Moon Ltd. Land and building Plant and machinery 275 175 200 125 Investments Stock 75 175 25 125 Sundry debtors Bills receivable 125 25 150 25 Cash and bank 150 100 1,000 750 20 10 135 60 75 35 230 105 770 645 Assets taken over (A) Less: Liabilities taken over Debentures Sundry Creditors Bills payable (B) Net assets taken over (A B) The Institute of Chartered Accountants of India Purchase consideration 825 600 (Goodwill)/ Capital Reserve (55) 45 Net goodwill (10) 4. As the Liquidation expenses of Sun Ltd. and Moon Ltd., Rs. 2 lakhs and Rs. 1 lakh respectively are borne by Star Ltd. the same will be debited to Goodwill account in the books of Star Ltd. 4. (a) Calculation of Tier I and Tier II Capital Rs. in crores (i) Capital funds Tier I Equity share capital Statutory reserve Securities Premium Capital reserve (arising out of sale of assets) (90-40) 750 150 150 50 1,100 (15) 1,085 Less: Intangible Assets Capital funds Tier II Capital reserve (arising out of revaluation of assets) Less: Discount to the extent of 55% Rs. in crores 40 (22) 18 1,103 Rs. in crores Rs. in crores (ii) Risk Adjusted Assets Funded Risk Assets Cash balance with RBI Claims on banks Other investments Loans and advances: (i) Guaranteed by the government (ii) Granted to staff of bank, fully covered by Super Annuation Benefits and mortgage of Flat/House The Institute of Chartered Accountants of India % of risk weight 60 170 2,300 0 20 100 0 34 2,300 400 0 0 50 20 10 (iii) Other loans and advances Other assets Premises, furniture and fixtures and other assets 6,170 100 6,170 3,925 100 3,925 12,439 Rs. in crores Off-Balance Sheet items: Acceptances, endorsements and Letters of credit, Guarantees and other obligations Capital Adequacy Ratio = Credit conversion factor 1,550 100 1,550 13,989 Capital fund 100 = Risk adjusted assets + off balance sheet items ` 1,103 crores 100 = 7.89% ` 13,989 crores (b) Journal Entries Rs. Rs. 1.1.12 Bank A/c Dr. 12,00,000 to Employees compensation expense A/c Dr. 21,60,000 28.2.12 To Equity Share Capital A/c 2,40,000 To Securities Premium A/c 31,20,000 (Allotment of 24,000 equity shares of Rs.10 each at a premium of Rs.130 per share to the employees) 31.3.12 Profit and Loss A/c Dr. 21,60,000 To Employees Compensation Expense A/c 21,60,000 (For transfer of employees compensation expense to profit and loss account) The Institute of Chartered Accountants of India 5. (a) Departmental Trading and Profit and Loss Account for six months ending 31.3.2012 Particulars X Y Rs. Rs. To Purchases 70,350 45,300 To Gross Profit c/d 34,700 14,850 1,05,050 60,150 To Salaries & Wages 6,000 12,000 To Rent 4,700 Z Particulars 4,700 34,800 By Gross Profit 6,000 b/d Rs. 75,000 50,000 12,500 30,050 10,150 22,300 60,150 34,800 34,700 14,850 2,600 - 1,850 4,900 16,700 7,500 1,500 By Net Loss To Net Profit (Departmental) Rs. 34,700 By Closing 2,600 Stock Z 1,05,050 32,200 By Sales Y Rs. Rs. X (Departmental) 24,000 34,700 16,700 7,500 General Profit and Loss Account for six months ending 31.3.2012 Particulars Rs. Particulars To Profit & Loss A/c (Dept. Y) 1,850 By Profit & Loss A/c (Dept. X) To Profit & Loss A/c (Dept. Z) Rs. 4,900 To Profit (to be transferred to Balance Sheet) 24,000 17,250 24,000 24,000 Working Notes: (i) Salaries and wages are to be allocated first between show room and workshop in the ratio of 3:1 i.e. Rs.18,000 and Rs. 6,000. Work shop salaries are to be charged to Dept. Z. (ii) Since, Dry cleaners and Dumpsters are sold at show room, salaries are to be allocated to Dept. X and Dept. Y respectively in the ratio of 1 : 2. (iii) Rent to workshop at Rs. 250 p.m. for six months, Rs. 1,500 is to be charged to Dept. Z first and the balance Rs. 9,400 is to be divided equally between Dept. X and Y . The Institute of Chartered Accountants of India (b) In the books of Head Office Journal Entries Particulars (i) Loss of goods due to theft during transit To Purchases account (Being goods lost on account of theft during transit) (ii) Salaries account To Branch account (Being salary paid by the branch for H.O. employee) (iii) No entry in the books of head office for goods sent to branch not received by branch till 31st March 2012 (iv) Cash in transit account To Branch account (Being remittance by branch not received by 31st March, 2012) (v) Branch account To Purchases account (Being rectification of entry for payment for goods purchased by branch wrongly debited to purchase account) Dr. Dr. Cr. Amount Amount Rs. Rs. 12,000 12,000 Dr. 15,000 15,000 Dr. 10,000 10,000 Dr. 25,000 25,000 Note: 1. 2. 6. In entry (i), it is assumed that refusal of branch manager (to accept liability of stolen goods) is accepted by the Head Office. Alternatively, Branch account will be credited on the basis of assumption that refusal of branch manager is not accepted by the Head Office. In entry (iii) the goods in transit entry will be passed in the Books of the Branch. (a) FORM B-RA Name of the Insurer: Bigfish Marine Insurance Ltd. Revenue Account for the year ended 31st March, 2014 Particulars Premium earned (Net) Profit on sale of investment The Institute of Chartered Accountants of India Schedule 1 Rs. 16,72,800 46,000 Interest, dividend and rent (Gross) Total (A) Claims incurred (Net) Commission Operating expenses related to insurance business Total (B) Profit for Marine Insurance Business (A-B) 2 3 4 1,65,250 18,84,050 12,00,000 1,94,000 3,75,000 17,69,000 1,15,050 Schedule -1 Premium Earned (Net) Premium received Add: Outstanding premium as on 31.03.2014 Less: Premium on reinsurance ceded Less: Adjustment for change in reserve for unexpired risk (Refer W.N. 1) Net premium earned Rs. 18,75,000 1,25,000 20,00,000 (2,28,000) 17,72,000 (99,200) 16,72,800 Schedule -2 Claim Incurred (Net) Claim paid Add: Surveyor s fee & legal expenses paid for settlement of claim (Rs. 45,000 + Rs. 65,000) Add: Outstanding claims as on 31.03.2014 Less: Outstanding claims as on 01.04.2013 Claim incurred (Net) Rs. 10,54,000 1,10,000 2,25,000 13,89,000 (1,89,000) 12,00,000 Schedule -3 Commission Commission paid Rs. 1,94,000 Schedule -4 Operating expenses related to insurance business Expenses of Management Less: Surveyor s fee & legal expenses The Institute of Chartered Accountants of India Rs. 4,85,000 (1,10,000) 3,75,000 Working Notes: 1. Calculation for change in Reserve for Unexpired Risk Rs. Unexpired risk reserve at the beginning (including additional reserve) Less: Reserve for unexpired risk as on 31.03.2014 (100% of Rs. 17,72,000) Additional reserve as on 31.03.2014 (10% of Rs. 17,72,000) Change in provision for unexpired risk 2. 18,50,000 17,72,000 1,77,200 (19,49,200) 99,200 Income tax on interest and dividend Rs. 49,575 is part of Profit & Loss Account, therefore, not given effect to in the Revenue Account. (b) Statement showing net liability of underwriters Gross liability Less: Unmarked applications in the Gross Liability ratio of 5:3:2 Less: Marked applications Credit of C s surplus to A and B in the ratio of 5:3 Net liability 7. (No. of shares) A 20,000 B 12,000 C 8,000 Total 40,000 (1,000) 19,000 (16,000) 3,000 (600) 11,400 (5,700) 5,700 (400) 7,600 (8,300) (700) (2,000) 38,000 (30,000) 8,000 (438) 2,562 (262) 5,438 700 - 8,000 (a) According to paras 55 and 56 of AS 26 Intangible Assets , expenditure on an intangible item should be recognised as an expense when it is incurred unless it forms part of the cost of an intangible asset . In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the marketing of a new product which may provide future economic benefits to an enterprise by having a turnover of Rs. 25 crores. Here, no intangible asset or other asset is acquired or created that can be recognised. Therefore, the accounting treatment by the company of debiting the entire advertising expenditure of Rs. 2 crores to the Profit and Loss account of the year is correct. (b) As per para 29 of AS 29 Provisions, Contingent Liabilities and Contingent Assets , a past event will lead to present obligation when the enterprise has no realistic alternative to settle the obligation created by the past event. The Institute of Chartered Accountants of India However, when environmental damage is caused there may be no obligation to remedy the consequences. The causing of the damage will become an obligating event when a new law requires the existing damage to be rectified. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted. In the given case it is virtually certain that law will be enacted requiring clean-up of a land already contaminated. Therefore, an oil company has to provide for such clean up cost in the year in which the law is virtually certain to be enacted. (c) Earnings for the year = No. of Shares x Basic EPS = 30,00,000 shares x Rs. 5 per share = Rs.1,50,00,000 Adjusted net profit for the current year = Earnings for the year + Interest on debentures (net of tax) = 1,50,00,000 + (6,00,000 1,80,000) = Rs. 1,54,20,000 No. of equity shares resulting from conversion of debentures = 50,000 x 10 shares = 5,00,000 shares Total number of equity shares for diluted EPS = 30,00,000 + 5,00,000 = 35,00,000 shares. Diluted earnings per share = Rs. 1,54,20,000/ 35,00,000 shares = Rs. 4.4 per share. (d) As per para 13 of AS 4 Contingencies and Events Ocurring After the Balance Sheet Date , assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date. In the given case, company should make the provision for doubtful debts, as legal suit has been filed on 31st March, 2012 and the chances of recovery from the suit are not good. Though, the actual result of legal suit will be known in future yet situation of non-recovery from the debtors exists before finalisation of financial statements. Therefore, provision for doubtful debts should be made for the year ended on 31st March, 2012. (e) As per para 21 of AS 12, Accounting for Government Grants , amount refundable in respect of a grant related to revenue should be applied first against any unamortized deferred credit remaining in respect of the grant. To the extent the amount refundable exceeds any such deferred credit, the amount should be charged to the Statement of Profit and Loss. (i) In this case, the grant refunded is Rs. 300 lakhs and balance in deferred income is Rs. 210 lakhs. Therefore, Rs. 90 lakhs shall be charged to the Statement of Profit and Loss for the year 2012-13. There will be no effect on the cost of the fixed asset and depreciation charged will be same as charged The Institute of Chartered Accountants of India in the earlier years. (ii) As per para 21 of AS 12, the amount refundable in respect of grant which was related to specific fixed assets should be recorded by increasing the book value of the assets by the amount refundable. Where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. Therefore, in this case the book value of the plant shall be increased by Rs. 300 lakhs. The increased cost of Rs. 300 lakhs of the plant should be amortised over 7 years (remaining useful life). Depreciation charged during the year 2012-13 shall be 1200/10 + 300/7 = 162.86 lakhs. The Institute of Chartered Accountants of India

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