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CA IPCC : Question Paper (with Answers) - ADVANCED ACCOUNTING May 2010

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PAPER 5: ADVANCED ACCOUNTING Answer all questions Wherever appropriate, suitable assumption(s) should be made by the candidates. Working notes should form part of the answer Question 1 Answer the following questions: (i) A Company had issued 20,000, 13% Convertible debentures of Rs.100 each on 1st April, 2007. The debentures are due for redemption on 1st July, 2009. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debentureholders to convert 20% of their holding into equity shares (Nominal value Rs.10) at a price of Rs.15 per share. Debentureholders holding 2,500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the Debentureholders exercising the option to the maximum. (ii) Santosh Ltd. has received a grant of Rs.8 crores from the Government for setting up a factory in a backward area. Out of this grant, the company distributed Rs.2 crores as dividend. Also, Santosh Ltd. received land free of cost from the State Government but it has not recorded it at all in the books as no money has been spent. In the light of AS 12 examine, whether the treatment of both the grants is correct. (iii) Rohini Limited has obtained loan from an Institution for Rs.500 lacs for modernization and renovation of its plant and machinery. The installation of plant and machinery was completed on 31.3.2009 amounting to Rs.320 lacs and Rs.50 lacs was advanced to suppliers of additional assets and the balance of Rs.130 lacs has been utilized for working capital requirements. Total interest paid for the above loan amounted to Rs.65 lacs during 2008-09. You are required to state how the interest on institutional loan is to be accounted for in the year 2008-09. (iv) A Company follows April to March as its financial year. The Company recognizes cheques dated 31st March or before, received from customers after balance sheet date, but before approval of financial statement by debiting Cheques in hand account and crediting Debtors account . The cheques in hand is shown in the Balance Sheet as an item of cash and cash equivalents. All cheques in hand are presented to bank in the month of April and are also realised in the same month in normal course after deposit in the bank. State with reasons, whether the collection of cheques bearing date 31st March or before, but received after Balance Sheet date is an adjusting event and how this fact is to be disclosed by the company? (v) What is Piecemeal payments method under Partnership Dissolution? Briefly explain the two methods followed for determining the order in which the payments are made? The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 (vi) Briefly explain Reserve for Unexpired Risks under General Insurance Business. What are the percentages of such reserve to be created under IRDA Act for various General Insurance businesses? (vii) On 31st March, 2010, the following ledger balances have been extracted from the books of Washington branch office: Ledger Accounts $ Building 180 Stock as on 1.4.2009 26 Cash and Bank Balances 57 Purchases 96 Sales 110 Commission receipts 28 Debtors 46 Creditors 65 You are required to convert above Ledger balances into Indian Rupees. Use the following rates of exchange: Rs. per $ Opening rate 46 Closing rate 50 Average rate 48 For fixed assets 42 (viii) Mention the condition when a cash credit overdraft account is treated as out of order . (ix) From the following information, calculate the amount of sundry debtors as on 31.3.2010: Balance as on 1.4.2009 is Rs.50,000. Bad debts are 2% and discount to the customers is given @ 1% of the opening balance of sundry debtors. Returns from the customers are Rs.3,000. Cash received from debtors is Rs.2,30,000. Cash received from debtors in transit is Rs.14,000. Cash sales are Rs.5,00,000. Credit sales are Rs.2,50,000. 2 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (x) Closing stock for the year ending on 31.3.2010 is Rs.50,000 which includes stock damaged in a fire in 2008-09. On 31.3.2009, the estimated net realisable value of the damaged stock was Rs.12,000. The revised estimate of net realisable value of damaged goods amounting Rs.4,000 has been included in closing stock of Rs.50,000 as on 31.3.2010. Find the value of closing stock to be shown in Profit and Loss account for the year 2009-10. (10 2 = 20 Marks) Answer (i) Calculation of number of equity shares to be allotted Number of debentures Total number of debentures Less: 20,000 Debenture holders not opted for conversion Debenture holders opted for conversion (2,500) 17,500 Option for conversion 20% Number of debentures to be converted (20% of 17,500) Redemption value of 3,500 debentures at a premium of 5% [3,500 x (100+5)] 3,500 Rs.3,67,500 Equity shares of Rs.10 each issued on conversion [Rs.3,67,500/ Rs.15 ] 24,500 shares (ii) As per AS 12 Accounting for Government Grants , when government grant is received for a specific purpose, it should be utilised for the same. So the grant received for setting up a factory is not available for distribution of dividend. In the second case, even if the company has not spent money for the acquisition of land, land should be recorded in the books of accounts at a nominal value. The treatment of both the grants is incorrect as per AS 12. (iii) As per AS 16 Borrowing Costs , borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets should be capitalised as part of the cost of that asset. Other borrowing costs are recognized as expense in the period in which they are incurred. A qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use or sale. 3 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 The treatment for total interest amount of Rs.65 lakhs can be given as: Purpose Nature Interest to be capitalised (Rs. in lakhs) Installation of Plant and Machinery Qualifying asset 320 x Advance to suppliers for additional assets Qualifying asset 50 x Working Capital Not a qualifying asset 65 = 500 65 = 500 Interest to be charged to Profit and Loss A/c (Rs. in lakhs) 41.60 6.50 130 x 48.10 65 = 500 16.90 16.90 (iv) Even if the cheques bear the date 31st March or before, the cheques received after 31st March do not represent any condition existing on the balance sheet date i.e. 31 st March. Thus, the collection of cheques after balance sheet date is not an adjusting event. Cheques that are received after the balance sheet date should be accounted for in the period in which they are received even though the same may be dated 31st March or before as per AS 4 Contingencies and Events Occurring after the Balance Sheet Date . Moreover, the collection of cheques after balance sheet date does not represent any material change affecting financial position of the enterprise, so no disclosure in the Director s Report is necessary. (v) Generally, the assets sold upon dissolution of partnership are realised only in small instalments over a period of time. In such circumstances the choice is either to distribute whatever is collected or to wait till whole amount is collected. Usually, the first course is adopted. In order to ensure that the distributed cash amongst the partners is in proportion to their interest in the partnership concern either of the two methods described below may be followed for determining the order in which the payment should be made. (1) Maximum Loss Method: Each instalment realised is considered to be the final payment i.e. outstanding assets and claims are considered worthless and partners accounts are adjusted on that basis each time when a deposit is made following either Garner Vs. Murray rule or the profit sharing ratio rule. (ii) Highest Relative Capital Method: According to this method, the partner who has the higher relative capital, that is, whose capital is greater in proportion to his profit sharing ratio is first paid off. This method is also called as proportionate capital method. 4 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (vi) The need for unexpired risks reserve arises from the fact that all policies are renewed annually except in specific cases where short period policies are issued. Since the insurers close their accounts on a particular date, not all risks under policies expire on that date. Many policies normally extend beyond this date into the following year during which risks continue. In other words, at the closing date, there is unexpired liability under various policies, which may occur during the remaining term of the policy beyond the year end. According to the requirements of the Insurance Act, it is sufficient if the provision is made for unexpired risks at 50 per cent for Fire, Marine Cargo and Miscellaneous business except for Marine Hull which has to be 100 per cent. (vii) Conversion of ledger balances (in Dollars) into Rupees $ Rate per $ Amount in Rupees 180 42 7,560 Stock as on 01.04.2009 26 46 1,196 Cash and bank balances 57 50 2,850 Purchases 96 48 4,608 110 48 5,280 Commission receipts 28 48 1,344 Debtors 46 50 2,300 Creditors 65 50 3,250 Building Sales (viii) A cash credit overdraft account is treated as NPA if it remains out of order for a period of more than 90 days. An account is treated as 'out of order' if any of the following conditions is satisified: (a) The outstanding balance remains continuously in excess of the sanctioned limit/drawing power. (b) Though the outstanding balance is less than the sanctioned limit/drawing power (i) there are no credits continuously for more than 90 days as on the date of balance sheet; or (ii) credits during the aforesaid period are not enough to cover the interest debited during the same period. (c) Further any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. 5 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 (ix) Calculation of sundry debtors as on 31.03.2010 Rs. Sundry debtors as on 01.04.2009 Add: Credit sales 50,000 2,50,000 3,00,000 Add: Cash received from debtors 2,30,000 Cash received from debtors in transit Returns from the customers Bad debts @ 2% of Rs.50,000 14,000 3,000 1,000 Discount to the customers @ 1% of Rs.50,000 500 Sundry debtors as on 31.03.2010 2,48,500 51,500 (x) The fall in estimated net realisable value of damaged stock Rs.8,000 is the effect of change in accounting estimate. As per AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies , the effect of a change in accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate. Thus, the value of closing stock for the year 2009-10 will be as follows: Rs. Closing Stock (including damaged goods) 50,000 Less: Revised value of damaged goods (4,000) Closing stock (excluding damaged goods) 46,000 Question 2 P and Q are partners of P & Co. sharing Profit and Losses in the ratio of 3:1 and Q and R are partners of R & Co., sharing profits and losses in the ratio of 2:1. On 31st March, 2009, they decide to amalgamate and form a new firm M/s PQR & Co., wherein P, Q and R would be partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on the above date are as under: Liabilities P & Co. Rs. R & Co. Assets Rs. Capitals: R & Co. Rs. 50,000 60,000 Fixed assets: P 2,40,000 Q P & Co. Rs. 1,60,000 ---- Building 2,00,000 Plant & machinery 1,50,000 1,60,000 It is assumed that information for cash in transit has already been received. 6 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING R ---- Reserves 50,000 Sundry creditors 1,20,000 Due to P & Co. ---- Bank overdraft 80,000 1,00,000 Office equipment 6,000 1,50,000 Current assets: 1,16,000 Stock-in-trade 1,20,000 1,40,000 1,00,000 Sundry debtors 1,60,000 2,00,000 ----- Bank balance Cash in hand Due from R & Co. 6,50,000 20,000 6,66,000 30,000 90,000 20,000 1,00,000 10,000 ----- 6,50,000 6,66,000 The amalgamated firm took over the business on the following terms: (a) Building of P & Co. was valued at Rs.1,00,000. (b) Plant and machinery of P & Co. was valued at Rs.2,50,000 and that of R & Co. at Rs.2,00,000. (c) All stock in trade is to be appreciated by 20%. (d) Goodwill valued of P & Co. at Rs.1,20,000 and R & Co. at Rs.60,000, but the same will not appear in the books of PQR & Co. (e) Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals according to the profit sharing ratio. (f) Provisions for doubtful debts has to be carried forward at Rs.12,000 in respect of debtors of P & Co. and Rs.26,000 in respect of debtors of R & Co. You are required to prepare the Balance Sheet of new firm and capital accounts of the partners in the books of old firms. (16 Marks) Answer Balance Sheet of M/s PQR & Co. as at 31st March, 2009 Liabilities Rs. Assets Capitals: Building (Rs.1,00,000 + Rs.60,000) 1,60,000 4,50,000 P 5,52,000 Plant & machinery (Rs.2,50,000+Rs.2,00,000) Q 3,68,000 Office equipment (Rs.20,000+Rs.6,000) R 1,84,000 11,04,000 Stock-in-trade (Rs.1,44,000+Rs.1,68,000) Sundry creditors (Rs.1,20,000+1,16,000) Bank overdraft Rs. 26,000 3,12,000 Sundry debtors 2,36,000 (Rs.1,60,000+ Rs.2,00,000) 3,60,000 80,000 Less: Provision for doubtful debts (Rs.12,000+Rs.26,000) (38,000) 3,22,000 7 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Bank balance (Rs.30,000+Rs.90,000) 1,20,000 Cash in hand 30,000 14,20,000 14,20,000 In the books of P & Co. Partners Capital Accounts Particulars Rs. Q Rs. Rs. 2,40,000 1,60,000 37,500 12,500 2,11,500 70,500 4,89,000 2,43,000 Q R Rs. Rs. Balance b/d 2,00,000 1,00,000 Reserve (2:1) 1,00,000 50,000 By 4,89,000 P By Capital A/cs M/s PQR & Co. Q Rs. To P Particulars Profit on Realisation (W.N.5) 68,000 34,000 3,68,000 1,84,000 2,43,000 By Balance b/d By By 4,89,000 Reserve (3:1) Profit on Realisation A/c (W.N.4) 2,43,000 In the books of R & Co. Partners Capital Accounts Particulars R Rs. To Capital A/cs M/s PQR & Co. Q Rs. 3,68,000 3,68,000 Particulars 1,84,000 By 1,84,000 Working Notes: 1. Computation of purchase considerations P & Co. R & Co. Rs. Rs. 1,20,000 60,000 Assets: Goodwill Rs.20,000+Rs.10,000+Rs.1,53,000+Rs.30,000 Rs.1,83,000 = Rs.30,000. 8 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Building 1,00,000 60,000 Plant & machinery 2,50,000 2,00,000 20,000 6,000 Stock-in-trade 1,44,000 1,68,000 Sundry debtors 1,60,000 2,00,000 Bank balance 30,000 90,000 Cash in hand 20,000 10,000 1,00,000 - 9,44,000 7,94,000 1,20,000 1,16,000 12,000 26,000 Due to P & Co. - 1,00,000 Bank overdraft 80,000 - 2,12,000 2,42,000 7,32,000 5,52,000 Office equipment Due from R & Co. (A) Less: Liabilities: Creditors Provision for doubtful debts (B) Purchase consideration (A-B) 2. Computation of proportionate capital Rs. M/s PQR & Co. (Purchase Consideration) (Rs.7,32,000+ Rs.5,52,000) Less: 12,84,000 Goodwill adjustment (1,80,000) Total capital of new firm (Distributed in ratio 3:2:1) 11,04,000 P s proportionate capital Q s proportionate capital 3,68,000 R s proportionate capital 3. 5,52,000 1,84,000 Computation of Capital Adjustments P R Total Rs. Balance transferred from P & Co. Q Rs. Rs. Rs. 4,89,000 2,43,000 Balance transferred from R & Co. 7,32,000 Goodwill written off in the ratio of 3:2:1 Existing capital 1,84,000 5,52,000 4,89,000 Less: 3,68,000 6,11,000 1,84,000 12,84,000 (90,000) (60,000) (30,000) (1,80,000) 3,99,000 5,51,000 1,54,000 9 The Institute of Chartered Accountants of India 11,04,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Proportionate capital 5,52,000 3,68,000 1,84,000 Amount to be brought in (paid off) 1,53,000 (1,83,000) 30,000 4. 11,04,000 In the books of P & Co. Realisation Account Rs. Rs. To Building 50,000 By To Plant & machinery To Office equipment To Stock-in-trade 1,20,000 (purchase consideration) To Sundry debtors 1,60,000 (W.N.1) To Bank balance 30,000 To Cash in hand 20,000 To Due from R & Co. To Partners capital A/cs P 70,500 1,20,000 1,50,000 By Bank overdraft 80,000 20,000 By M/s PQR & Co. 7,32,000 1,00,000 2,11,500 Q Creditors 2,82,000 9,32,000 5. 9,32,000 In the books of R & Co. Realisation Account Rs. Rs. To Building 60,000 By To Plant & machinery To Office equipment To Stock-in-trade 1,40,000 (purchase consideration) To Sundry debtors 2,00,000 (W.N.1) To Bank balance 90,000 To Cash in hand 10,000 To Partners capital A/cs Q 34,000 1,16,000 1,60,000 By Due to P & Co. 1,00,000 6,000 By M/s PQR & Co. 5,52,000 68,000 R Creditors 1,02,000 7,68,000 7,68,000 10 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Question 3 Following is the Balance Sheet of XYZ Ltd. as on 31st March, 2010: Liabilities Rs. Assets Rs. 8,000 - 7 Preference shares @ Rs.100 each fully paid 8,00,000 Plant and Machinery 8,50,000 1,80,000 Equity shares @ Rs.10 each fully paid 18,00,000 Furniture and Fittings 1,60,000 11% Debentures 10,00,000 Patents and Copyright 60,000 Goodwill 35,000 Investments (at cost) 65,000 Bank overdraft Loan from director Trade creditors 1,65,000 15,000 6,20,000 Sundry debtors 12,00,000 Stock 13,00,000 Cash in hand 12,000 Profit & Loss A/c 44,00,000 7,18,000 44,00,000 Due to heavy losses and overvaluation of assets, the following scheme of reconstruction was finalised: (i) Preference shareholders will surrender their 20% shares and they have been allotted 9% (new) preference shares for the remaining amount. (ii) Debentureholders having charge on plant and machinery would accept plant and machinery in full settlement. (iii) Trade creditors accepted to take over the stock upto the value of Rs.6,20,000. (iv) Equity shareholders are to accept reduction of Rs.4 per share. (v) Investment is to be valued at market price i.e., Rs.60,000. (vi) Sundry debtors and remaining stock is to be valued at 90% of their book value. (vii) Directors have to forgo their loan in full. (viii) Patents and Copyright and Goodwill have no more value. Pass necessary journal entries in the books of XYZ Ltd. assuming that all the legal formalities have been completed. Prepare capital reduction account and Balance Sheet of the company after reduction. (16 Marks) 11 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Answer In the books of XYZ Ltd. Journal Entries Rs. (i) 7 % Preference share capital A/c Dr. Rs. 8,00,000 To 9% Preference share capital A/c 6,40,000 To Capital reduction A/c 1,60,000 (Being surrender of 20% shares by 7.5% Preference shareholders and issuance of 9% preference shares for remaining balance as per the scheme of reconstruction) (ii) 11% Debentures A/c Dr. 10,00,000 To Debenture holders A/c (Being 11% debentures transferred to debenture holders account) (iii) Debenture holders A/c 10,00,000 Dr. 10,00,000 To Plant & machinery A/c To Capital reduction A/c 8,50,000 1,50,000 (Being plant and machinery given to debenture holders in full settlement as per the scheme of reconstruction) (iv) Trade creditors A/c To Stock A/c Dr. 6,20,000 6,20,000 (Being stock given to trade creditors against their dues as per the scheme of reconstruction) (v) Equity share capital A/c (Rs.10) Dr. 18,00,000 To Equity share capital A/c (Rs.6) 10,80,000 To Capital reduction A/c 7,20,000 (Being reduction of Rs.4 per equity share as per the scheme of reconstruction) (vi) Capital reduction A/c Dr. To Debtors A/c 10,06,000 1,20,000 To Investment A/c 5,000 To Stock A/c 68,000 To Patents and copyright 60,000 To Goodwill 35,000 12 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING To Profit and Loss A/c 7,18,000 (Being writing off losses and reduction in the values of assets as per the scheme of reconstruction) (vii) Director s loan A/c Dr. 15,000 To Capital reduction A/c (Being loan forgo by directors as per the scheme of reconstruction) (viii) Capital reduction A/c 15,000 Dr. 39,000 To Capital reserve A/c (Being balance of capital reduction account transferred to capital reserve account) 39,000 Capital Reduction Account Rs. To Provision for doubtful debts A/c To To Rs. 1,20,000 By 7 % Preference share capital A/ 1,60,000 Investment A/c Stock A/c 5,000 By 11% Debentures A/c 68,000 By Equity share capital A/c 1,50,000 7,20,000 To To Patents and copyright A/c Goodwill A/c 60,000 By Director s loan A/c 35,000 To To Profit and loss A/c Capital reserve A/c 15,000 7,18,000 39,000 10,45,000 10,45,000 Balance Sheet (and reduced) of M/s XYZ Ltd. Liabilities Amount Assets (Rs.) 6,400, 9% Preference shares of Rs.100 each 6,40,000 1,80,000, Equity shares of Rs.6 each 10,80,000 Capital reserve Bank overdraft Amount (Rs.) Furniture and fittings 1,60,000 Investments 60,000 39,000 Stock 6,12,000 1,65,000 Sundry debtors Less: Provision doubtful debts Cash in hand 19,24,000 12,00,000 for (1,20,000) 10,80,000 12,000 19,24,000 13 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Question 4 (a) Ram Limited of Chennai has a branch at Nagpur to which office, goods are invoiced at cost plus 25%. The branch makes sales both for cash and on credit. Branch expenses are paid direct from Head Office and the branch has to remit all cash received into the Head Office Bank Account at Nagpur. From the following details, relating to the year 2009, prepare the accounts in Head Office Ledger and ascertain Branch Profit as per stock and debtors method. Branch does not maintain any books of accounts, but sends weekly returns to head office: Rs. Goods received from head office at invoice price Returns to head office at invoice price 1,20,000 2,400 Stock at Nagpur branch on 1.1.2009 at invoice price 12,000 Sales during the year Cash 40,000 Credit 72,000 Debtors at Nagpur branch as on 1.1.2009 14,400 Cash received from debtors 64,000 Discounts allowed to debtors 1,200 Bad debts during the year 800 Sales returns at Nagpur branch 1,600 Salaries and wages at branch 12,000 Rent, rates and taxes at branch 3,600 Office expenses at Nagpur branch 1,200 Stock at branch on 31.12.2009 at invoice price 24,000 (b) From the following information furnished to you by Ayushman Insurance Co. Ltd., you are required to pass Journal entries relating to unexpired risk reserve and show in columnar form Unexpired Risks Reserve Account for 2009. (a) On 31.12.2008, it had reserve for unexpired risks amounting to Rs.40 crores. It comprised of Rs.15 crores in respect of marine insurance business, Rs.20 crores in respect of fire insurance business and Rs.5 crores in respect of miscellaneous insurance business. (b) Ayushman Insurance Co. Ltd. creates reserves at 100% of net premium income in respect of marine insurance policies and at 50% of net premium income in respect of fire and miscellaneous income policies. 14 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (c) During 2009, the following business was conducted: (Amount in crores) Marine Fire Miscellaneous (a) Insured in respect of policies issued 18.00 43.00 12.00 (b) Other insurance companies respect of risks undertaken in 7.00 5.00 4.00 Premium paid/payable to other insurance companies on business ceded 6.70 4.30 7.00 Premium collected from: (8+8=16 Marks) Answer (a) Nagpur Branch Stock Account Particulars Particulars Amount (Rs.) To Balance b/d To Goods sent to branch A/c To Branch debtors A/c (Returns) To Branch adjustment A/c (Surplus over invoice price) Amount (Rs.) 12,000 By Goods sent to branch A/c (Returns) 2,400 1,20,000 By Bank A/c (Cash sales) 40,000 Branch debtors A/c (credit sales) 72,000 Balance c/d 24,000 1,600 By By 4,800 1,38,400 1,38,400 Nagpur Branch Adjustment Account Particulars Particulars Amount (Rs.) To Stock reserve - 20% of Rs.24,000 (closing stock) 4,800 To Branch profit & loss A/c (Gross profit) 25,920 By Stock reserve - 20% of Rs.12,000 (Opening stock) By Goods sent to branch A/c 20% of Rs.1,17,600 By Branch stock A/c 30,720 15 The Institute of Chartered Accountants of India Amount (Rs.) 2,400 23,520 4,800 30,720 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Branch Profit & Loss Account Particulars Particulars Amount (Rs.) To Branch expenses A/c 16,800 By To Branch debtors A/c (Discount) 1,200 To Branch debtors A/c (Bad Debts) 800 To Net profit (transferred to Profit & Loss A/c) Amount (Rs.) Branch adjustment A/c (Gross Profit) 25,920 7,120 25,920 25,920 Branch Expenses Account Particulars To Bank A/c (Rent, rates & taxes) To Bank A/c (Salaries & wages) To Bank A/c (Office expenses) Amount (Rs.) Particulars 3,600 By Branch profit and loss A/c (Transfer) Amount (Rs.) 16,800 12,000 1,200 16,800 16,800 Branch Debtors Account Particulars Particulars Amount (Rs.) Amount (Rs.) To Balance b/d 14,400 By Bank A/c To Branch stock A/c 72,000 By Branch profit and loss A/c (Bad debts and discount) 2,000 By Branch stock A/c (Sales returns) 1,600 By Balance c/d (bal.fig.) 86,400 16 The Institute of Chartered Accountants of India 64,000 18,800 86,400 PAPER 5 : ADVANCED ACCOUNTING Goods sent to Branch Account Particulars Amount (Rs.) To Branch stock A/c 2,400 By To Branch adjustment A/c Purchases A/c Amount (Rs.) 23,520 To Particulars Branch stock A/c 94,080 1,20,000 (b) 1,20,000 1,20,000 In the books of Ayushman Insurance Co. Ltd. Journal Entries Date Particulars (Rs. in crores) Dr. 1.1.2009 Unexpired Risk Reserve (Fire) A/c Dr. 20.00 Unexpired Risk Reserve (Marine) A/c Dr. 15.00 Unexpired Risk Reserve (Miscellaneous) A/c Dr. Cr. 5.00 To Fire Revenue Account 20.00 To Marine Revenue Account 15.00 To Miscellaneous Revenue Account 5.00 (Being unexpired risk reserve brought forward from last year) 31.12.2009 Marine Revenue A/c Dr. 18.30 To Unexpired Risk Reserve A/c 18.30 (Being closing reserve for unexpired risk created at 100% of net premium income amounting to Rs.18.3 crores i.e.18+7-6.70) Fire Revenue A/c Dr. 21.85 To Unexpired Risk Reserve A/c 21.85 (Being closing reserve for unexpired risk created at 50% of net premium income of Rs.43.7 crores i.e.43+5-4.30) Miscellaneous Revenue A/c To Unexpired Risk Reserve A/c (Being closing reserve for unexpired risk created at 50% net premium income of Rs.9 crores i.e. 12+4-7) 17 The Institute of Chartered Accountants of India Dr. 4.50 4.50 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Unexpired Risk Reserve Account Date Particulars 1.1.2009 To Revenue A/c Marine (Rs.) Fire (Rs.) Misc. Date (Rs.) 5.00 18.30 21.85 4.50 33.30 41.85 31.12.2009 To Balance c/d 15.00 20.00 Particulars 9.50 5.00 18.30 21.85 31.12.2009 By Revenue A/c Misc. (Rs.) 15.00 20.00 By Balance b/d Fire (Rs.) 4.50 33.30 41.85 1.1.2009 Marine (Rs.) 9.50 Question 5 (a) Given below is an extract from the trial balance of T.K. Bank Limited as on 31st December, 2009: Particulars Debit Rs. Rs. 12,64,000 ---- ---- Bills discounted Credit 8,340 Rebate on bills discounted (1.1.2009) Discount received for the year 85,912 An analysis of the bills discounted is shown below: Amount Due date in 2010 Rate of discount Rs. (% p.a.) 1,40,000 March 6th 5 4,36,000 March 12th 4.5 2,82,000 26th 6 6th 4 March 4,06,000 April Show the workings, how the relevant items will appear in the bank s Profit and Loss account as on 31st December, 2009 and in bank s Balance Sheet as on 31st December, 2009. (b) From the following Trial Balance of PQ Ltd. on 31.12.2009, prepare liquidators final statement of account: Rs. Rs. ---- 1,25,000 2,000 Equity shares @ Rs.100 each fully paid up --- 2,00,000 2,000 Equity shares @ Rs.100 each, Rs.50 paid up ---- 1,00,000 9% Preference share capital (1,250 Preference shares @ Rs.100 each fully paid up) Equity share capital: 18 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Plant 3,00,000 Stock-in-trade 3,60,000 Sundry debtors 85,000 --- --- 2,21,000 Sundry creditors Bank balance 1,20,000 Preliminary expenses 6,000 --- 6% Mortgage loan ---- 2,30,000 Outstanding liabilities for expenses --- 25,000 Profit and loss account 30,000 (Trading loss for the year 2009) 9,01,000 9,01,000 Following points should be kept in mind: (i) On 21st January, 2010 the liquidator of PQ Ltd. sold plant for Rs.2,95,000 and stock in trade at 10% less than the book value. He realised 80% of Sundry debtors and incurred cost of collection of Rs.1,850 (remaining debtors are to be treated as bad). (ii) The loan mortagage was discharged on 31st January, 2010 along with interest for 6 months. Creditors were discharged subject to 5% discount. Outstanding expenses paid at 20% less. (iii) Preference share dividend is due for one year and paid with final payment. (iv) Liquidation expenses incurred are Rs.1,800 and liquidators remuneration is settled at 4% on disbursement to members (excluding preference dividend), subject to minimum of Rs.10,000. (8+8=16 Marks) Answer (a) Profit & Loss Account (an extract) for the period ending 31.12.2009 Rs. Transfer from Rebate on bills discounted account (01.01.2009) Add: Discount for the year 2009 8,340 85,912 94,252 Less: Rebate on bills discounted carried forward to the year 2010 13,274 80,978 19 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Balance Sheet (an extract) as on 31.12.2009 Rs. Other liabilities & provisions: Rebate on bills discounted 13,274 Working Note: Statement of rebate on bills discounted as on 31.12.2009 Due date Amount No. of days (Rs.) after 31.12.2009 Rate of discount (%) Discount of the unexpired period March 6th 1,40,000 65 5 1,247 March 12th 4,36,000 71 4.5 3,816 March 26th 2,82,000 85 6 3,940 April 6th 4,06,000 96 4 4,271 Total rebate on bills discounted to be carried forward (b) 13,274 PQ Ltd. Liquidator s Final Statement of Account Receipts To Rs. Assets realised: Payment Rs. By 1,20,000 Plant 3,24,000 Liquidator s remuneration (W.N.1) Mortgage loan 2,95,000 Stock Liquidation expenses By Bank By Add: Interest for 6 months By (Rs.68,000 Rs.1,850) 66,150 8,05,150 6,900 Outstanding liabilities By 12,510 2,30,000 Unsecured creditors By Debtors 1,800 2,36,900 Preference shareholders: Preference share capital Arrears of dividend By 2,09,950 20,000 1,25,000 11,250 1,36,250 Equity shareholders Rs.50 on 2,000 fully paid shares Rs.21.935 on 4,000 equity shares (W.N.2) 8,05,150 1,00,000 87,740 8,05,150 20 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Working Notes: 1. Liquidator s remuneration Rs. Available surplus Less: 3,25,250 Liquidator s remuneration @ 4% (Rs. 3,25,250 x 4 ) 104 Balance to be paid to Members 2. (12,510) 3,12,740 Disposal of amount to members Rs. 3,12,740 (1,25,000) 1,87,740 (1,00,000) 87,740 Balance available for members Less: Preference share capital Less: Rs.50 on 2,000 fully paid Equity shares Rs.21.827 on 4,000 Equity shares Question 6 (a) 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 Application (Number of debentures) A B 16,000 5,700 C 8,300 Calculate the net liability of each one of the underwriters. (b) How will you disclose the following Ledger balances in the Final accounts of DVD bank: Rs. in lacs Current accounts Saving accounts 500 Fixed deposits 700 Cash credits 600 Term Loans 500 Bills discounted & purchased 700 800 Surplus available = Rs.8,07,000 Rs.1,800 Rs.2,36,900 Rs.2,09,950 Rs.1,850 - Rs.20,000 Rs.11,250 = Rs.3,25,250. 21 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 Additional information: (i) Included in the current accounts ledger are accounts overdrawn to the extent of Rs.250 lacs. (ii) One of the cash credit account of Rs.10 lacs (including interest Rs.1 lac) is doubtful. (iii) 60% of term loans are secured by government guarantees, 20% of cash credits are unsecured, other portion is secured by tangible assets. (c) B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under: (i) Lease period is 3 years, in the beginning of the year 2009, for equipment costing Rs.10,00,000 and has an expected useful life of 5 years. (ii) The Fair market value is also Rs.10,00,000. (iii) The property reverts back to the lessor on termination of the lease. (iv) The unguaranteed residual value is estimated at Rs.1,00,000 at the end of the year 2011. (v) 3 equal annual payments are made at the end of each year. Consider IRR = 10%. The present value of Re.1 due at the end of 3rd year at 10% rate of interest is Re.0.7513. The present value of annuity of Re.1 due at the end of 3rd year at 10% IRR is Rs.2.4868. State whether the lease constitute finance lease and also calculate unearned Finance income. (d) ABC Electricity Company laid down a main at a cost of Rs.24,00,000. Some years later the company replaced by improving the plant 2/3 portion of the main at a cost of Rs.40,00,000. The cost of material and labour having gone up by 25%. Sale of old material realised Rs.95,000. Old material value Rs.1,05,000 were used in renewal (including in above). Calculate the amount to be capitalised and show the journal entries for recording the transaction. (4 Marks each = 16 Marks) Answer (a) Statement showing net liability of underwriters A Gross liability B C Total (600) (400) (2,000) 11,400 7,600 38,000 (16,000) Marked applications 40,000 (5,700) (8,300) (30,000) 3,000 Less: 8,000 (1,000) Unmarked applications in the ratio of 5:3:2 12,000 19,000 Less: 20,000 5,700 (700) 8,000 22 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Credit of C s surplus to A and B in the ratio of 5:3 (438) (262) 700 - Net liability 2,562 5,438 - 8,000 (b) Relevant Schedules (forming part of the Balance sheet) of DVD Bank Schedule 3: Deposits Rs. in lacs A Demand deposits (700 .250) 450 B Saving bank deposits 500 C Term deposits 700 1,650 Schedule 9: Advances Rs. in lacs A (i) Bills discounted and purchased 800 (ii) Cash credits and overdrafts (600 + 250) 850 (iii) Term loans 500 2,150 B. (i) Secured by tangible assets (bal. fig.) 1,730 (ii) Secured by Bank/Government guarantees (500 x 60%) 300 (iii) Unsecured (600 x 20%) 120 2,150 Schedule 5: Other Liabilities & Provisions Rs. in lacs Others (Provision for doubtful debts) 10 Profit and Loss Account (an extract) Rs. in lacs Less: Provision for doubtful debts* 10 *Note: It is assumed that the cash credit has been in doubtful category for more than three years. 23 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010 (c) (i) Computation of annual lease payment to the lessor Rs. Cost of equipment 10,00,000 Unguaranteed residual value 1,00,000 Present value of residual value after third year @ 10% (Rs.1,00,000 0.7513) Fair value to be recovered from lease payments (Rs.10,00,000 Rs.75,130) 75,130 9,24,870 Present value of annuity for three years is 2.4868 Annual lease payment = Rs. 9,24,870/ 2.4868 3,71,911.70 The present value of lease payment i.e., Rs.9,24,870 equals 92.48% of the fair market value i.e., 10,00,000. As the present value of minimum lease payments substantially covers the initial fair value of the leased asset and lease term (i.e. 3 years) covers the major part of the life of asset (i.e. 5 years). Therefore, it constitutes a finance lease. (ii) Computation of Unearned Finance Income Rs. Total lease payments (Rs.3,71,911.70 x 3) Add: Unguaranteed residual value Gross investment in the lease Less: 1,00,000 1,215,735 Present value of investment (lease payments and residual value) (Rs.75,130 + Rs.9,24,870) Unearned finance income (d) 11,15,735 (10,00,000) 2,15,735 Statement showing amount to be capitalised Rs. Cash cost of building new main 38,95,000 Add: Value of old material used in the construction of new main 1,05,000 40,00,000 Less: Estimated current cost of replacing old plant (Refer W.N.) Total amount to be capitalized (20,00,000) 20,00,000 24 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING In the books of ABC Electricity Company Journal Entries Rs. Replacement A/c Dr. Rs. 20,00,000 To Bank 20,00,000 (Being current cost of replacement) New Main A/c Dr. 20,00,000 To Bank To Replacement 18,95,000 1,05,000 (Being additional cost of New Main to be capitalised) Bank A/c Dr. 95,000 To Replacement 95,000 (Being the sale of old materials) Revenue A/c (Refer W.N.) Dr. 18,00,000 To Replacement (Being the replacement cost to be written off to revenue) 18,00,000 Working Note: Statement showing amount to be written off to Revenue Account Rs. Cost of old plant 24,00,000 Replacement of 2/3 portion of old plant (Rs.24,00,000 x Add: 2 ) 3 25% increase in cost of material and labour 16,00,000 4,00,000 Current cost of old plant 20,00,000 Less: Cost of material used 1,05,000 Cost of material sold 95,000 Amount to be written off to Revenue A/c (2,00,000) 18,00,000 25 The Institute of Chartered Accountants of India

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