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CA IPCC : Question Paper (with Answers) - ADVANCED ACCOUNTING Nov 2012

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DISCLAIMER The Suggested Answers hosted in the website do not constitute the basis for evaluation of the students answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for the correctness or otherwise of the answers published herein. The Institute of Chartered Accountants of India PAPER 5: ADVANCED ACCOUNTING Question No. 1 is compulsory Answer any five questions from the remaining six questions. Wherever necessary, suitable assumption(s) may be made by the candidates. Working notes should form part of the answer. Question 1 Answer the following questions: (a) A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been classified as doubtful assets (upto 1 year). Details of the accounts are : Outstanding ` 6,73,000 ECGC coverage 25% (Limited to ` 1,00,000) Value of security held ` 1,50,000 Compute the necessary provision to be made by a Bank as per applicable rates. (b) ABC Ltd. came up with public issue of 3,00,000 Equity Shares of ` 10 each at ` 15 per share. P, Q and R took underwriting of the issue in ratio of 3 : 2: 1 with the provisions of firm underwriting of 20,000, 14,000 and 10,000 shares respectively. Applications were received for 2,40,000 shares excluding firm underwriting. The marked applications from public were received as under: P - 60,000 Q - 50,000 R - 60,000 Compute the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit of firm underwriting is not given to individual underwriters. (c) A company acquired for its internal use a software costing ` 10 lakhs on 28.01.2012 from the USA for US $ 1,00,000. The exchange rate on that date was ` 52 per USD. The seller allowed trade discount @ 5 %. The other expenditure were: (i) Import Duty : 20% (ii) Purchase Tax : 10% (iii) Entry Tax : 5 % (Recoverable later from tax department) The first sentence of this question should be read as A company acquired for its internal use a software on 28.01.2012 from the USA for US $ 1,00,000. The Institute of Chartered Accountants of India 2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 (iv) Installation expenses : ` 25,000 (v) Profession fees for Clearance from Customs : ` 20,000 Compute the cost of Software to be capitalized. (d) Give Journal Entries in the books of Head Office to rectify or adjust the following: (i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to accept any liability. (ii) Branch paid ` 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 ` 25,000 which was not received by Branch till 31st March, 2012. (iv) A remittance of ` 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 ` 25,000 for purchase of goods by Branch and wrongly debited its own purchase account. (4 5 = 20 Marks) Answer (a) ` Doubtful Assets (upto 1 year) 6,73,000 Less: Value of security (excluding ECGC cover) (1,50,000) 5,23,000 Less: ECGC coverage (limited to ` 1,00,000) Unsecured portion (1,00,000) 4,23,000 Provision: 4,23,000 for unsecured portion @100% on ` 4,23,000 37,500 for secured portion @ 25% on ` 1,50,000 Total provision to be made in the books of the bank 4,60,500 (b) Calculation of liability of each underwriter (in shares) assuming that the benefit of firm underwriting is not given to individual underwriters (Number of shares) P Gross Liability 1,50,000 Less: Marked applications The Institute of Chartered Accountants of India Q 1,00,000 R 50,000 Total 3,00,000 PAPER 5 : ADVANCED ACCOUNTING (excluding firm underwriting) 3 (60,000) (50,000) (60,000) (1,70,000) Balance 90,000 50,000 (10,000) 1,30,000 Less: Surplus of R allocated to P and Q in the ratio of 3:2 (6,000) (4,000) 10,000 - 84,000 46,000 - 1,30,000 (57,000) (38,000) (19,000) (1,14,000) 27,000 8,000 (19,000) 16,000 (11,400) (7,600) 19,000 - 15,600 400 - 16,000 Add: Firm underwriting 20,000 14,000 10,000 44,000 Total Liability 35,600 14,400 10,000 60,000 Balance Less: Unmarked applications including firm underwriting (Refer W.N.) Net Liability Less: Surplus of R allocated to P and Q in the ratio of 3:2 Working Note: Applications received from public Add: Shares underwritten firm (20,000 + 14,000 + 10,000) 2,40,000 shares 44,000 shares Total applications 2,84,000 shares Less: Marked applications (60,000 + 50,000 + 60,000) Unmarked applications including firm underwriting (1,70,000 shares) 1,14,000 shares (c) Calculation of cost of software (intangible asset) acquired for internal use Purchase cost of the software Less: Trade discount @ 5% $ 1,00,000 ($ 5,000) Cost in ` (US $ 95,000 x ` 52) $ 95,000 49,40,000 Add: Import duty on cost @ 20% (`) The Institute of Chartered Accountants of India 9,88,000 4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 59,28,000 Purchase tax @ 10% (`) 5,92,800 Installation expenses (`) 25,000 Profession fee for clearance from customs (`) 20,000 65,65,800 Cost of the software to be capitalised (`) Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part of the cost of the asset. (d) In the books of Head Office Journal Entries Particulars Loss of goods due to theft during transit To Purchases account Dr. Cr. Amount ` (i) Dr. Amount ` 12,000 12,000 (Being goods lost on account of theft during transit) (ii) Salaries account Dr. 15,000 To Branch account 15,000 (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 Dr. 10,000 10,000 (Being remittance by branch not received by 31st March, 2012) (v) Branch account To Purchases account Dr. 25,000 25,000 (Being rectification of entry for payment for goods purchased by branch wrongly debited to purchase account) Note: 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. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 5 Question 2 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, 2012 are as follows: Liabilities ` Assets Capital Accounts: P 30,000 20,000 Plant & Machinery 50,000 Q R ` Fixtures 20,000 Stock 1,00,000 Sundry Debtors Reserve Fund 50,000 30,000 60,000 Creditors 1,08,000 48,000 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 01-04-2012. 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 ` 10 each. On 01-04-2012, 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 31.03.2008 Profit 10,000 Year ended 31.03.2009 Loss 5,000 Year ended 31.03.2010 Profit 18,000 Year ended 31.03.2011 Profit 27,000 Year ended 31.03.2012 Profit 30,000 The loss for the year ended 31-03-2009 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 31-03-2012 except Plant & Machinery which is valued at ` 1,02,000. You are required to prepare (a) the Balance Sheet of the Company as at 01-04-2012, (b) Partners' Capital Accounts and (c) Statement showing the final settlement between the partners taking Q's capital as basis. (16 Marks) The Institute of Chartered Accountants of India 6 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 Answer Balance Sheet of the PQR Pvt Ltd. as on 1-4-2012 (a) Note No. ` Equity and Liabilities Shareholders funds Share Capital 1 1,90,000 Current liabilities Trade Payables 48,000 Total 2,38,000 Assets Non-current assets Fixed Assets Tangible Assets 2 1,22,000 Intangible Assets 3 36,000 Current assets Inventories 50,000 Trade Receivables 30,000 Total 2,38,000 Notes to Accounts ` 1. Share Capital Equity share capital 18,000 fully paid shares of ` 10 each Preference share capital (9% Preference Shares) 1,80,000 10,000 (All the shares have been issued for consideration other than cash) 1,90,000 2. Tangible assets Plant and Machinery Fixtures 1,02,000 20,000 1,22,000 3. Intangible asset Goodwill The Institute of Chartered Accountants of India 36,000 PAPER 5 : ADVANCED ACCOUNTING (b) 7 In the books of Partnership Firm Partners Capital Accounts P and R P Q R ` To Plant machinery A/c Q ` ` ` ` ` 3,000 2,000 1,000 By b/d Balance 50,000 30,000 20,000 30,000 20,000 10,000 To Equity shares in 90,000 60,000 30,000 By Reserve PQR Pvt. Ltd. fund To 9% Preference By Realization* shares in PQR Pvt. A/c (Profit Ltd. 5,000 5,000 on sale of business) 18,000 12,000 6,000 98,000 62,000 36,000 98,000 62,000 36,000 (c) Statement showing the final settlement between the Partners taking Q s capital as basis P R Total ` Value of Equity Shares to be allotted, taking Q s capital as basis P s Capital =60,000 3/2 R s Capital =60,000 1/2 Q ` ` ` 90,000 60,000 30,000 Total value of Equity Shares allotted to P,Q and R 9% Preference Shares to be allotted to P ` (95,000-90,000) 9%Preference Shares to be allotted to R ` (35,000-30,000) Total Value of Preference Shares allotted to P and R Total Purchase Consideration (W.N.2) 1,80,000 5,000 5,000 10,000 1,90,000 Taking Q s capital as basis, both P and R have ` 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 ` 5,000 each and the remaining amount of ` 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. The Institute of Chartered Accountants of India 8 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 Note: The question requires that the profit sharing ratio should be maintained even after conversion of partnership firm into a company. Further, it also requires that priority in regard to repayment of capital should also be preserved. Therefore, it is also possible that 9% preference shares equivalent and proportionate to the capital balance of partners as on 31.3.2012 may be issued, so that such preference shares earn dividend equivalent to the interest on such capital @ 9%. Further, priority in regard to repayment of capital should be ensured to the extent of preference share capital and dividend thereon. Thereafter, to maintain the profit sharing ratio, equity share capital may be issued in the ratio of sharing profits and losses. In that case, 1,00,000, 9% Preference shares will be issued to P, Q and R in the proportion of 5:3:2 and Equity shares will be issued to P, Q and R in the proportion of 3:2:1. Working Notes: 1. Calculation of goodwill 2007-08 2009-10 2010-11 2011-12 ` ` ` ` ` 10,000 (5,000) 18,000 27,000 30,000 10,000 10,000 Profits 2008-09 5,000 18,000 27,000 30,000 Adjustment for abnormal loss in 2008-09 ` Total Profit from 2007-08 to 2011-12 90,000 Average Profit (90,000 / 5) 18,000 Goodwill equal to 2 years purchase 36,000 2. Computation of Purchase consideration ` Assets: Goodwill Plant and Machinery Fixtures Stock Sundry Debtors Less: Liabilities: Creditors Purchase Consideration The Institute of Chartered Accountants of India 36,000 1,02,000 20,000 50,000 30,000 2,38,000 48,000 1,90,000 PAPER 5 : ADVANCED ACCOUNTING 9 Question 3 (a) M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2012 : ` in 000 ` in 000 Equity & Liabilities Share Capital: Authorised Capital: 5,000 Issued and Subscribed Capital : 3,00,000 Equity shares of ` 10 each fully paid up 3,000 20,000 9% Preference Shares of 100 each 2,000 (issued two months back for the purpose of buy back) 5,000 Reserve and Surplus: Capital reserve Revenue reserve Securities premium Profit and Loss account 10 4,000 500 1,800 Non-current liabilities - 10% Debentures 6,310 400 Current liabilities and provisions 40 11,750 Assets Fixed Assets: Cost Less: Provision for depreciation Non-current investments at cost 3,000 250 2,750 5,000 Current assets, loans and advances (including cash and bank balances) 4,000 11,750 (1) The company passed a resolution to buy back 20% of its equity capital @ ` 15 per share. For this purpose, it sold its investments of ` 30 lakhs for ` 25 lakhs. (2) The company redeemed the preference shares at a premium of 10% on 1st April, 2012. The Institute of Chartered Accountants of India 10 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 (3) Included in its investments were 'Investments in own debentures' costing ` 3 lakhs (face value ` 3.30 lakhs). These debentures were cancelled on 1st April, 2012. You are required to pass necessary Journal entries and prepare the Balance Sheet on 01.04.2012. (12 Marks) (b) Define the term Finance Lease. State any three situations when a lease would be classified as finance lease. (4 Marks) Answer (a) In the books of M Ltd. Journal Entries Dr. ` in 000 1 Cr. ` in 000 Bank A/c Dr. 2,500 Profit and Loss A/c To Investment A/c Dr. 500 3,000 (Being investment sold for the purpose of buy-back) 2 Preference share capital A/c Dr. 2,000 Premium on redemption of Preference Shares A/c Dr. 200 To Preference shareholders A/c (Being redemption of preference share capital at premium of 10%) 3 Preference shareholders A/c To Bank A/c 2,200 Dr. 2,200 2,200 (Being payment made to preference shareholders) 4 Revenue Reserve A/c To Capital redemption reserve A/c (Refer Note) Dr. 2,000 2,000 (Being creation of capital redemption reserve to the extent of nominal value of preference shares redeemed) 5 Equity share capital A/c Dr. Securities Premium A/c (Premium payable on buy- Dr. back) To Equity shares buy-back A/c (Being the amount due on buy-back ) The Institute of Chartered Accountants of India 600 300 900 PAPER 5 : ADVANCED ACCOUNTING 6 Equity shares buy-back A/c 11 Dr. 900 To Bank A/c 900 (Being payment made for buy-back) 7 10% Debentures A/c To Own debentures A/c Dr. 330 300 To Capital reserve A/c (Profit on cancellation) (Being own debentures cancelled at profit) 8. 30 Securities Premium A/c Dr. 200 To Premium on redemption of preference shares A/c 200 (Being premium on redemption of preference shares adjusted through securities premium) Balance Sheet of the M Ltd. as on 1st April, 2012 Notes No. 1 ` in 000 Equity and Liabilities Shareholders funds Share capital Reserves and Surplus 2 3 1 2 2,400 5,340 Non-current liabilities Long term borrowings 3 70 Current liabilities 40 7,850 Total 1 Assets Non-current assets (a) Fixed assets (b) Non-current investments 2 2,750 1,700 4 Current assets 5 3,400 7,850 Total Notes to Accounts ` 000 in ` in 000 1. Share Capital Authorised share capital: The Institute of Chartered Accountants of India 5,000 12 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 Issued, subscribed and fully paid up share capital: 2,400 2,40,000 Equity shares of ` 10 each, fully paid up (60,000 equity shares had been bought back and cancelled during the year) 2. Reserves and Surplus Capital Reserves Add: Profit on cancellation of debentures Securities Premium Less: Premium on redemption of preference shares Premium on buy-back of equity shares Revenue Reserve Less: Transfer to Capital Redemption Reserve Capital Redemption reserve Surplus (Profit & Loss Account) 3. Less: Loss on sale of investment Long term borrowings 4. 10 30 40 500 (200) (300) - 4,000 (2,000) 2,000 2,000 1,800 10% Debentures (400 - 330) Non-current investments Balance as on 31.03.2012 Less: Investment sold Own debentures cancelled 5 (500) 1,300 5,340 70 5,000 (3,000) (300) Current assets Balance as on 31.03.2012 4,000 Add: Cash received on sale of investment 2,500 Less: Payment made to equity shareholders for buy back of shares 1,700 (900) Payment made to preference shareholders (2,200) 3,400 Note: In the given solution, it is assumed that buy-back of shares has been done out of the proceeds of issue of preference shares, therefore, no amount is transferred to capital redemption reserve for buy-back. However, if it is assumed that buy-back is from sale of investments and not from the proceeds of issue of preference shares, then, amount of revenue reserves transferred to capital redemption reserve will be ` 2,600 instead of ` 2,000. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 13 (b) As per AS 19 Leases , a finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. As per para 8 of the standard, classification of lease into a finance lease or an operating lease depends on the substance of the transaction rather than its form. Three situations which would normally lead to a lease being classified as a finance lease are: (a) the lessor transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred. Question 4 Following are the summarized Balance Sheet of Companies K Ltd. and W Ltd., as at 31-12-2011 : Liabilities (` in 000) K Ltd. W Ltd. Share Capital : Equity shares of ` 100 each (` in 000) Assets K Ltd. 20 2,000 2,400 1,150 615 680 38 1,500 Other Fixed Assets - 625 412 Goodwill W Ltd. 155 10% Preference shares of ` 100 each 700 400 Debtors Stock General Reserve 240 170 Cash at bank Profit and Loss Account 12% Debentures of ` 100 each 192 600 15 Own Debenture (Nominal value of 200 ` 2,00,000) Sundry Creditors 560 315 Discount on issue of debentures 2 Profit and Account 4,100 Loss 2,600 411 4,100 2,600 On 01-04-2012, K Ltd. adopted the following scheme of reconstruction: (i) Each equity share shall be sub-divided into 10 equity shares of ` 10 each fully paid up. 50% of the equity share capital would be surrendered to the company. The Institute of Chartered Accountants of India 14 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 (ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 80% of the dividend claim and accept payment for the balance. (iii) Own debentures of ` 80,000 (nominal value) were sold at ` 98 cum interest and remaining own debentures were cancelled. (iv) Debenture holders of ` 3,00,000 agreed to accept one machinery of book value of ` 3,20,000 in full settlement. (v) Creditors, Debtors and stock were valued at ` 5,00,000, ` 6,00,000 and ` 4,00,000 respectively. Goodwill, discount on issue of debentures and Profit and Loss account (Dr.) are to be written off. (vi) The company paid ` 20,000 as penalty to avoid capital commitments of ` 4,00,000. On 02.04.2012, a scheme of absorption was adopted. K Ltd. would take over W Ltd. The purchase consideration was fixed as below: (a) Equity shareholders of W Ltd. will be given 50 equity shares of ` 10 each fully paid up, in exchange for every 5 shares held in W Ltd. (b) Issue of 10% preference shares of ` 100 each in the ratio of 4 preference shares of K Ltd. for every 5 preference shares held in W Ltd. (c) Issue of 12% debentures of ` 100 each of K Ltd. for every 12% debenture in W Ltd. Pass necessary Journal entries in the books of K Ltd. and draw the resultant Balance Sheet as at 2nd April, 2012. (16 Marks) Answer In the books of K Ltd. Journal Entries Particulars Dr. Amount 1. Equity share capital A/c Dr. Amount ` 01.04.2012 Cr. ` 20,00,000 To Equity share capital A/c 20,00,000 (Being sub-division of one share of ` 100 each into 10 shares of ` 10 each) 2. Equity share capital A/c To Capital reduction A/c (Being reduction of capital by 50%) The Institute of Chartered Accountants of India Dr. 10,00,000 10,00,000 PAPER 5 : ADVANCED ACCOUNTING 3. Capital reduction A/c 4. To Bank A/c (Being payment in cash of 20% of arrears of 3 years preference dividend) Bank A/c 5. 6. To Own debentures A/c [(1,92,000/2,00,000) x 80,000] To Capital reduction A/c (Being profit on sale of own debentures transferred to capital reduction A/c) 12% Debentures A/c To Own debentures A/c [(1,92,000/2,00,000) x 1,20,000] To Capital reduction A/c (Being profit on cancellation of own debentures transferred to capital reduction A/c) 12% Debentures A/c Capital reduction A/c Dr. 15 42,000 42,000 Dr. 78,400 76,800 1,600 Dr. 1,20,000 1,15,200 4,800 Dr. Dr. 3,00,000 20,000 To Machinery A/c 7. (Being machinery of ` 3,20,000 taken up by the debenture holders for ` 3,00,000) Creditors A/c 3,20,000 Dr. 60,000 To Capital reduction A/c (Being liabilities revalued) 8. Capital reduction A/c 60,000 Dr. 10,04,400 To Debtors A/c 25,000 To Stock A/c 12,000 To Goodwill A/c 20,000 2,000 To Discount on debentures A/c To Profit and Loss A/c To Bank A/c To Capital reserve A/c (Being assets revalued and losses written off and penalty paid off through capital reduction account and the balance of capital reduction account transferred to capital reserve account) The Institute of Chartered Accountants of India 4,11,000 20,000 5,14,400 16 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 02.04.2012 9. Business Purchase A/c Dr. 18,20,000 To Liquidators of W Ltd. 18,20,000 (Being the purchase consideration payable to W Ltd.) 10. Fixed assets A/c Dr. 11,50,000 Stock A/c Debtors A/c Dr. Dr. 6,80,000 6,15,000 Cash at bank A/c Dr. 1,55,000 To Sundry creditors A/c 3,15,000 To 12% Debentures A/c of W Ltd. 2,00,000 To Profit and Loss A/c To General reserve A/c 15,000 1,70,000 To Capital reserve A/c (W.N.2) To Business purchase A/c 80,000 18,20,000 (Being the takeover of all assets and liabilities of W Ltd. by K Ltd.) 11. Liquidators of W Ltd. A/c Dr. 18,20,000 To Equity share capital A/c To 10% Preference share capital A/c 15,00,000 3,20,000 (Being the purchase consideration discharged) 12. 12% Debentures of W Ltd. A/c To 12% Debentures A/c Dr. 2,00,000 2,00,000 (Being K Ltd. issued their 12% Debentures against 12% Debentures of W Ltd.) Balance Sheet of K Ltd. as on 2nd April, 2012 Notes No. Amount (`) (a) Share Capital 1 35,20,000 (b) Reserves and Surplus 2 10,19,400 Particulars I. Equity and Liabilities (1) Shareholder's Funds The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (2) 17 Non-Current Liabilities (a) Long-term borrowings 3 3,80,000 4 8,15,000 (3) Current Liabilities (a) Trade payables Total II. 57,34,400 Assets (1) Non-current assets (a) Fixed assets (i) Tangible assets 5 6 (b) Trade receivables (c) Cash and cash equivalents 10,80,000 7 8 (2) Current assets (a) Inventories 32,30,000 12,15,000 2,09,400 Total 57,34,400 Notes to Accounts ` 1 Share Capital Equity Share Capital Less: Surrender 50% equity capital Add: Equity share capital issued to W Ltd. 10% Preference share capital Add: Preference share capital issued to W Ltd. 20,00,000 (10,00,000) 15,00,000 25,00,000 7,00,000 3,20,000 10,20,000 35,20,000 2. Reserves and Surplus Profit and Loss A/c 15,000 General Reserve (2,40,000 + 1,70,000) Capital Reserve (5,14,400 + 80,000) 3. 4,10,000 5,94,400 Long-term borrowings 12% Debentures Less: Settled in consideration of machinery 6,00,000 (3,00,000) Less: Cancelled debentures (1,20,000) The Institute of Chartered Accountants of India 10,19,400 18 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 Add: 12% Debentures issue to W Ltd. 4. 2,00,000 Trade payables of K Ltd. 5,60,000 Less: Reduction due to revaluation Add: Trade payables of W Ltd. 5. (60,000) 3,15,000 Add: Other fixed assets of W Ltd. Inventories Less: Reduction due to revaluation Add: Inventories of W Ltd. 7. Trade receivables Less: Reduction due to revaluation Add: Trade receivables of W Ltd. 8. 8,15,000 Tangible assets Balance of Other fixed assets Less: Machinery taken up by debenture holders 6. 3,80,000 24,00,000 (3,20,000) 11,50,000 32,30,000 4,12,000 (12,000) 6,80,000 10,80,000 6,25,000 (25,000) 6,15,000 Cash and cash equivalents Less: Payment of arrear of preference dividend 38,000 (42,000) Add: Profit on sale of own debentures Less: Penalty paid 78,400 (20,000) Add: Cash and cash equivalents of W Ltd. 1,55,000 12,15,000 2,09,400 Working Notes: 1. Purchase Consideration Equity share capital [(15,000 x 50/5) x ` 10] 10% Preference share capital [(4,000x 4/5) x ` 100] = ` 15,00,000 3,20,000 18,20,000 2. Capital Reserve ` Share Capital of W Ltd. (Equity + Preference) The Institute of Chartered Accountants of India 19,00,000 PAPER 5 : ADVANCED ACCOUNTING Less: Share Capital issued by K Ltd. 19 (18,20,000) Capital reserve 80,000 Note: In the question, summarised balance sheets of K Ltd. and W Ltd. as on 31.12.2011 are given. However, the internal reconstruction and amalgamation took place on 1.4.2012 and 2.4.2012 respectively. Since, no information have been provided for the intervening period of 3 months (i.e. from 1.1.2012 to 31.3.2012), the above solution is given assuming this date of summarised balance sheets as 31.3.2012 instead of 31.12.2011. Alternatively, the solution may be given on the basis of 31.12.2011. In that case, the only difference will be that dividend on preference shares and interest on debentures for period of 3 months (i.e. from 1.1.2012 to 31.3.2012) will be considered at the time of internal reconstruction. Question 5 (a) The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-2012 : ` Interest and discount received 38,00,160 Interest paid on deposits 22,95,360 Issued and subscribed capital 10,00,000 Salaries and allowances Directors Fees and allowances Rent and taxes paid Postage and telegrams 2,50,000 35,000 1,00,000 65,340 Statutory reserve fund 8,00,000 Commission, exchange and brokerage 1,90,000 Rent received Profit on sale of investment 72,000 2,25,800 Depreciation on assets 40,000 Statutory expenses 38,000 Preliminary expenses 30,000 Auditor's fee 12,000 The following further information is given: (1) A customer to whom a sum of ` 10 lakhs was advanced has become insolvent and it is expected only 55% can be recovered from his estate. (2) There was also other debts for which a provisions of ` 2,00,000 was found necessary. The Institute of Chartered Accountants of India 20 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 (3) Rebate on bill discounted on 31-03-2011 was ` 15,000 and on 31-03-2012 was ` 20,000. (4) Income tax of ` 2,00,000 is to be provided. The directors desire to declare 5% dividend. Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2012 and also show, how the Profit and Loss account will appear in the Balance Sheet if the Profit and Loss account opening balance was NIL as on 31-03-2011. (8 Marks) (b) Prepare the Fire Insurance Revenue A/c of Jasmine Fire Insurance Co. Ltd. as per IRDA regulations for the year ended 31st March, 2012 from the following details: Particulars Amount (`) Claims Paid 5,00,000 Legal Expenses regarding claims 10,000 Premiums received 12,50,000 Re-insurance premium paid 50,000 Commission Expenses of Management 3,00,000 2,00,000 Provision against unexpired risk as on 1st April, 2011 Claims unpaid on 1st April, 2011 5,75,000 50,000 Claims unpaid on 31st March, 2012 80,000 Provide for unexpired risk @ 50% less reinsurance. (8 Marks) Answer (a) KLM Bank Limited Profit and Loss Account for the year ended 31st March, 2012 Schedule Year ended 31.03.2012 ` I. Income: Interest earned 13 37,95,160 Other income 14 4,87,800 Total II. 42,82,960 Expenditure Interest expended The Institute of Chartered Accountants of India 15 22,95,360 PAPER 5 : ADVANCED ACCOUNTING Operating expenses 21 16 5,70,340 Provisions and contingencies (4,50,000+2,00,000+2,00,000) 8,50,000 Total IIII. 37,15,700 Profits/Losses Net profit for the year 5,67,260 Profit brought forward Nil 5,67,260 IV. Appropriations Transfer to statutory reserve (25% of 5,67,260) Proposed dividend 1,41,815 Balance carried over to balance sheet 3,75,445 5,67,260 50,000 Profit & Loss Account balance of ` 3,75,445 will appear under the head Reserves and Surplus in Schedule 2 of the Balance Sheet. Year ended 31.3.2012 ` I. Schedule 13 Interest Earned Interest/discount on advances/bills (Refer W.N.) I. II. III. Schedule 14 Other Income Commission, exchange and brokerage Profit on sale of investment Rent received I. Schedule 15 Interest Expended Interests paid on deposits I. II. III. Schedule 16 Operating Expenses Payment to and provisions for employees (salaries & allowances) Rent, taxes paid Depreciation on assets The Institute of Chartered Accountants of India 37,95,160 37,95,160 1,90,000 2,25,800 72,000 4,87,800 22,95,360 22,95,360 2,50,000 1,00,000 40,000 22 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 IV. V. VI. VII. VIII. Director s fee, allowances and expenses Auditor s fee Statutory (law) expenses Postage and telegrams Preliminary expenses 35,000 12,000 38,000 65,340 30,000 5,70,340 Working Note: ` Interest and discount received Add: Rebate on bills discounted on 31.3.2011 38,00,160 15,000 Less: Rebate on bills discounted on 31.3.2012 (20,000) 37,95,160 (b) FORM B - RA Name of the Insurer: Jasmine Fire Insurance Co. Ltd. Registration No. and Date of Registration with the IRDA: Revenue Account for the year ended 31st March, 2012 Particulars (1) Amount (`) 1 Premium earned (2) (3) Schedule 11,75,000 Other income Interest, dividend and rent Total (A) 11,75,000 (4) (5) Claims incurred Commission 2 3 5,40,000 3,00,000 (6) Operating expenses related to Insurance business Total (B) 4 2,00,000 10,40,000 Operating Profit (A)- (B) Schedule 1 : Premium earned (net) Premium received Less: Re-insurance premium It is assumed that preliminary expenses have been fully written off during the year. The Institute of Chartered Accountants of India 1,35,000 ` 12,50,000 (50,000) PAPER 5 : ADVANCED ACCOUNTING Net premium Adjustment for change in reserve for unexpired risks (Refer W.N.) 23 12,00,000 (25,000) 11,75,000 Schedule 2 : Claims Incurred Claims paid including legal expenses (5,00,000 + 10,000) Add : Claims outstanding at the end of the year Less : Claims outstanding at the beginning of the year Total claims incurred Schedule 3 : Commission Commission paid ` 5,10,000 80,000 (50,000) 5,40,000 ` 3,00,000 3,00,000 Schedule 4: Operating expenses Expenses of management ` 2,00,000 2,00,000 Working Note: Change in the provision for unexpired risk ` Unexpired risk reserve on 31st March, 2012 =50% of net premium (i.e. 50% of ` 12,00,000) Less : Unexpired risk reserve as on 1st April 2011 Change in the provision for unexpired risk 6,00,000 (5,75,000) 25,000 Question 6 (a) Himalayas Ltd. had ` 10,00,000, 8% Debentures of ` 100 each as on 31st March, 2011. The company purchased in the open market following debentures for immediate cancellation: On 01-07-2011 1,000 debentures @ ` 97 (cum interest) On 29-02-2012 1,800 debentures @ ` 99 (ex interest) Debenture interest due date is 30th September and 31st March. Give Journal Entries in the books of the company for the year ended 31 t March, 2012. (8 Marks) (b) Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost. Department B sells goods to A and C at a profit of 10% and 20% The Institute of Chartered Accountants of India 24 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 on sales respectively. Department C sells goods to A and B at 15% and 10% profit on cost respectively. Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager's commission, but before adjustment of unrealized profit are as under: ` Department A 36,000 Department B 27,000 Department C 18,000 Stock lying at different departments at the end of the year are as below: Department A Department B Department C ` ` ` Transfer from Department A Transfer from Department B 19,000 7,200 - 5,750 15,000 Transfer from Department C 4,600 3,300 - Find out correct departmental profits after charging manager's commission. (8 Marks) Answer (a) In the books of Himalayas Ltd. Journal Entries Date 1.07.2011 Own Debentures A/c Dr. Debenture Interest Account A/c Dr. [1,000 100 8% (3/12)] To Bank A/c (Being 1,000 Debentures purchased @ ` 97 cum interest for immediate cancellation) 8% Debentures A/c Dr. To Own Debentures A/c To Capital reserve A/c (Profit on cancellation of debentures) (Being profit on cancellation of 1,000 Debentures transferred to capital reserve account) The Institute of Chartered Accountants of India Dr. Cr. ` 1.07.2011 Particulars ` 95,000 2,000 97,000 1,00,000 95,000 5,000 PAPER 5 : ADVANCED ACCOUNTING 30.09.2011 29.02.2012 29.02.2012 31.03.2012 31.3.2012 31.03.2012 Debenture interest A/c [9,000 100 8% (1/2)] To Debenture holders A/c (Being interest accrued on 9,000 debentures and credited to debenture holders account) Debentureholders A/c To Bank A/c (Being interest amount paid) Own Debentures A/c Debenture Interest Account A/c [1,800 100 8% (5/12)] To Bank A/c (Purchase of 1,800 Debentures @ ` 99 ex interest for immediate cancellation) 8% Debentures A/c To Own Debentures A/c To Capital reserve A/c (Profit on cancellation of debentures) (Being profit on cancellation of 1,800 Debentures transferred to capital reserve account) Debentures Interest A/c [7,200 100 8% (1/2)] To Debentureholders A/c (Being interest accrued on 7,200 debentures and credited to debenture holders account) Dr. 36,000 36,000 Dr. 36,000 Dr. Dr. 1,78,200 6,000 36,000 1,84,200 Dr. 1,80,000 Dr. 28,800 Debentureholders A/c Dr. To Bank A/c (Being amount paid) Profit and Loss A/c Dr. To Debentures Interest A/c (Being interest on debentures for the year transferred to profit and loss account at the year end) The Institute of Chartered Accountants of India 25 1,78,200 1,800 28,800 28,800 72,800 28,800 72,800 26 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 (b) Calculation of correct Departmental Profit Department Department Department A B C ` ` ` 36,000 27,000 18,000 4,000 3,000 2,000 40,000 30,000 20,000 (1,950) (4,900) (900) Profit before Manager s commission Less: Commission for Department 38,050 25,100 19,100 Manager @10% Correct profit after charging manager s commision (3,805) (2,510) (1,910) 34,245 22,590 17,190 Profit after charging managers commission but before adjustment for unrealized profit Add back : Managers commission (1/9) Less: Unrealised profit on stock (Working Note) Working Note : Department A Department B Department C Total ` ` ` ` Department A __ 7,200 x 20/120 = 1,200 5,750 x 15/115= 750 1,950 Department B 19,000 x 10% = 1,900 __ 15,000 x 20% = 3,000 4,900 Department C 4,600 x 15/115= 600 3,300 x 10/110= 300 __ 900 Unrealised Profit on transfer to: Question 7 Answer any four of the following: (a) Annual lease rent = ` 40,000 at the end of each year Lease period = 5 years Guaranteed residual value = ` 14,000 Fair value at the inception (beginning) of lease = ` 1,50,000 Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7, 0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively. Show the Journal entry to record the asset taken on finance lease in the books of the lessee. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 27 (b) A new Plant X was acquired in exchange of old Plant B and on payment of ` 20,000. The carrying amount of the old Plant B was ` 1,75,000 (Historical cost less depreciation). The fair value of the Plant B on the date of exchange was ` 1,50,000. Suggest the accounting entry in the books of the enterprise. (c) A company is in a dispute involving allegation of infringement of patents by a competitor company who is seeking damages of a huge sum of ` 900 lakhs. The directors are of the opinion that the claim can be successfully resisted by the company. How would you deal the same in the annual accounts of the company? (d) State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies. (e) Give two examples on each of the following items: (i) Change in Accounting Policy (ii) Change in Accounting Estimate (iii) Extra Ordinary Items (iv) Prior Period Items. (4 4 = 16 Marks) Answer (a) In the books of Lessee Journal entry ` Asset A/c Dr. To Lessor ` 1,49,888 1,49,888 (Being recognition of finance lease as an asset and a liability) Working Note: Year Lease Payments ` Discounting Factor (12.6%) Present Value ` 1 40,000 0.89 35,600 2 3 40,000 40,000 0.79 0.70 31,600 28,000 4 5 40,000 40,000 0.622 0.552 24,880 22,080 5 14,000 (GRV) 0.552 7,728 1,49,888 The Institute of Chartered Accountants of India 28 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 (b) When a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. Accordingly, the value of Plant X will be ` Exchange value of Plant B 1,50,000 Add: Additional cash paid 20,000 1,70,000 Journal entries for acquisition of Plant X will be given as: ` 1 Plant X A/c Dr. ` 1,70,000 To Plant B A/c 1,50,000 To Bank A/c 20,000 (Being new plant X acquired in exchange of Plant B on additional payment of ` 20,000) 2 Profit and Loss A/c Dr. 25,000 To Plant B A/c 25,000 (Being loss on exchange of old Plant B transferred to Profit and Loss Account) Note: Fair value of Plant B on the date of exchange has been considered for computation of cost of Plant X in the above answer. An alternative treatment is also possible when the assets exchanged are similar in nature. In such a case, new asset may be recorded at the net book value of the asset given up after making adjustments for balance receipt or payment of cash. Accordingly, the value of plant will be ` 1,95,000 (1,75,000+20,000) instead of ` 1,70,000 and the following entry will be made: ` Plant X A/c To Plant B A/c To Bank A/c (Being New plant X was acquired in the exchange of plant B on additional payment of ` 20,000) The Institute of Chartered Accountants of India Dr. ` 1,95,000 1,75,000 20,000 PAPER 5 : ADVANCED ACCOUNTING 29 (c) As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets , a provision should be recognised when (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. If these conditions are not met, no provision should be recognised. In the given situation, since, the directors of the company are of the opinion that the claim can be successfully resisted by the company, therefore there will be no outflow of the resources. The company will disclose the same as contingent liability by way of the following note: Litigation is in process against the company relating to a dispute with a competitor who alleges that the company has infringed patents and is seeking damages of ` 900 lakhs. However, the directors are of the opinion that the claim can be successfully resisted by the company. (d) A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting. (ii) the resolution specifies the number of shares, current market price, the consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued. (iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was entitled to commence business. (iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf. But in the case of company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed. (e) (i) Examples of Changes in Accounting Policy: a. Change of depreciation method from WDV to SLM and vice-versa. b. Change in cost formula in measuring the cost of inventories. (ii) Examples of Changes in Accounting Estimates: a. Change in estimate of provision for doubtful debts on sundry debtors. The Institute of Chartered Accountants of India 30 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012 b. Change in estimate of useful life of fixed assets. (iii) Examples of Extraordinary items: a. Loss due to earthquakes / fire / strike b. Attachment of property of the enterprise by government (iv) Examples of Prior period items: a. Applying incorrect rate of depreciation in one or more prior periods. b. Omission to account for income or expenditure in one or more prior periods. The Institute of Chartered Accountants of India

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