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

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CA IPCC
Tilak Vidyalaya Higher Secondary School (TVHSS), Kallidaikurichi

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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 machine having expected useful life of 6 years, is leased for 4 years. Both the cost and the fair value of the machinery are ` 7,00,000. The amount will be paid in 4 equal instalments and at the termination of lease, lessor will get back the machinery. The unguaranteed residual value at the end of the 4th year is ` 70,000. The IRR of the investment is 10%. The present value of annuity factor of ` 1 due at the end of 4th year at 10% IRR is 3.169. The present value of ` 1 due at the end of 4th year at 10% rate of interest is 0.683. State with reasons whether the lease constitutes finance lease and also compute the unearned finance income. (b) A company is showing an intangible asset at ` 88 lakhs as on 01.04.2013. This asset was acquired for ` 120 lakhs on 01.04.2009 and the same was available for use from that date. The company has been following the policy of amortization of the intangible assets over a period of 15 years on straight line basis. Comment on the accounting treatment of the above with reference to the relevant Accounting Standard. (c) Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The company entered into a forward contract for 6 months @ ` 62.15 per dollar. On 30th November, 2013; the exchange rate was ` 60.75 per dollar. How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year ended 31st March, 2014 ? (d) WZW Ltd. is in dispute involving allegation of infringement of patents by a competitor company who is seeking damages of a huge sum of ` 1000 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? (4 x 5 = 20 Marks) Answer (a) (i) Determination of nature of lease Fair value of asset ` 7,00,000 Unguaranteed residual value ` 70,000 Present value of residual value at the end of 4th Year = ` 70,000 x 0.683 = ` 47,810 2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Present value of lease payment recoverable = ` 7,00,000 - ` 47,810 = ` 6,52,190 The percentage of present value of lease payment to fair value of the asset is = (` 6,52,190/`7,00,000)x100 = 93.17% Since it substantially covers the major portion of lease payment and life of the asset, the lease constitutes a finance lease. (ii) Calculation of Unearned finance income Annual lease payment = ` 6,52,190 / 3.169 = ` 2,05,803 (approx.) Gross investment in the lease = Total minimum lease payment + unguaranteed residual value. = (` 2,05,803 x 4) + `70000 = ` 8,23,212 + `70,000 = ` 8,93,212 Unearned finance income = Gross investment Present value of minimum lease payment and unguaranteed residual value. = ` 8,93,212 ` 7,00,000 (` 6,52,190 + ` 47,810) = ` 1,93,212 (b) As per AS 26 'Intangible Assets', the depreciable amount of an intangible asset should be allocated on systematic basis over the best estimates of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Company has been following the policy of amortisation of the intangible asset over a period of 15 years on straight line basis. The period of 15 years is more than the maximum period of 10 years specified as per AS 26. Accordingly, the company would be required to restate the carrying amount of intangible asset as on 01.04.2013 at ` 72 lakhs i.e. ` 120 lakhs less 48 lakhs ` 120 Lakhs 4 years = 48 Lakhs 10 years The difference of ` 16 Lakhs (` 88 lakhs ` 72 lakhs) will be adjusted against the opening balance of revenue reserve. The carrying amount of ` 72 lakhs will be amortised over remaining 6 years by amortising ` 12 lakhs per year. PAPER 5: ADVANCED ACCOUNTING 3 (c) Calculation of Profit or Loss to be recognised in the book of Stem Ltd. Forward contract rate ` 62.15 per dollar Less Spot Rate ` 60.75 per dollar Loss ` 1.40 per dollar Forward Contract Amount US$ 30000 Total Loss on entering into forward contract = (US$ 30,000 x ` 1.40 = ` 42,000 Contract Period 6 Months Out of total contract period of 6 months, 4 months are falling in the financial year 2013-14. Loss for the period from 1st Dec.2013 to 31st March, 2014= (` 42,000/6) x 4 = ` 28,000. Thus the loss amounting to ` 28,000 for the period is to be recognised in the year 2013-14. (d) As per AS 29 'Provisions, Contingent Liabilities and Contingent Assets', a provision should be recognised when: (i) An enterprise has a present obligation as a result of past event; (ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (iii) A reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. A contingent liability is disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. The possibility of an outflow of resources embodying economic benefits is remote in the given situation, since the directors of WZW Ltd. are of the opinion that the claim can be successfully resisted by the company. Therefore, the company shall not disclose the same as contingent liability. However, following note in this regard may be given in annual accounts: "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 ` 1,000 lakhs. However, the directors are of the opinion that the claim can be successfully resisted by the company". Question 2 P and Q were carrying on business sharing profits and losses equally. The firm s Balance Sheet as at 31.12.2013 was: Liabilities Capital Accounts: P ` Assets 1,50,000 Plant Building ` 1,60,000 48,000 4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Q 1,30,000 2,80,000 Debtors 75,000 70,000 Sundry Creditors 80,000 Stock Bank Overdraft 45,000 Joint Life Policy 6,000 Profit & Loss A/c 30,000 Drawings Account: P 9,000 Q 7,000 16,000 4,05,000 4,05,000 The operations of the business were carried on till 30.06.2014. P and Q both withdrew in equal amount half the amount of profit made during the current period of six months after charging depreciation at 10% per annum on plant and after writing off 5% on building. During the current period of six months, creditors were reduced by ` 20,000 and bank overdraft by ` 5,000. The joint life policy was surrendered for ` 6,000 before 30th June 2014. Stock was valued at ` 84,000 and debtors at ` 68,000 on 30th June 2014. The other items remained the same as at 31.12.2013. On 30.06.2014, the firm sold its business to PQ Ltd. The value of goodwill was estimated at ` 1,30,000 and the remaining assets were valued on the basis of the balance sheet as on 30.06.2014. PQ Ltd. paid the purchase consideration in equity shares of ` 10 each. You are required to prepare: (a) Balance sheet of the firm as at 30.06.2014, (b) Realisation account, (c) Partners' Capital Accounts showing the final settlement between them. (16 Marks) Answer (a) Balance sheet of the firm as at 30.06.2014 Liabilities ` Assets Capital Accounts ` Plant : P's Capital 1,33,800 Opening Balance Q's Capital 1,15,800 Less: Depreciation @ 10% Creditors 60,000 40,000 Opening Balance 8,000 1,52,000 Building: Bank Overdraft 1,60,000 Less: Written-off @ 5% 48,000 2,400 45,600 PAPER 5: ADVANCED ACCOUNTING 5 Debtors Stock Total 3,49,600 (b) 68,000 84,000 Total 3,49,600 Realisation Account Dr. Cr. Particulars Amount Particulars To Sundry Assets: Plant Building Stock Debtors To Profit: P's Capital A/c Q's Capital A/c By Creditors 1,52,000 By Bank Over Draft 45,600 84,000 By PQ Limited A/c 68,000 (working note 2) Total Amount 60,000 40,000 4,79,600 Total 3,79,600 65,000 65,000 (c) 4,79,600 Partner's Capital Account Date Particulars 01.01.14 To Profit Loss A/c & 15,000 01.01.14 To Drawing A/c 9,000 7,000 30.06.14 By Profit (W. N. 1) 30.06.14 To Drawing A/c (W. N.-1) 7,800 7,800 30.06.14 To Balance C/d 1,33,800 1,15,800 Total 1,45,600 Q (`) Date Particulars 1,65,600 To Shares in 1,98,800 PQ Limited 1,98,800 P (` ) Q (`) 1,50,000 1,30,000 15,600 15,600 Total 1,65,600 1,45,600 30.06.14 By Balance b/d 30.06.14 P (` ) 1,33,800 1,15,800 65,000 65,000 1,98,800 1,80,800 15,000 1.1.14 By Balance b/d 180,800 30.06.14 By Realisation A/c (Profit) 1,80,800 Working Notes (1) Ascertainment of profit for the 6 Months ended 30.06.2014 Closing Assets Amount (`) Stock 84,000 Debtors 68,000 Plant Less Depreciation 1,52,000 6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Building Less Written off 45,600 Total 3,49,600 Less: Closing Liabilities: Creditors 60,000 Bank Over Draft 40,000 1,00,000 Closing Net Assets 2,49,600 Less: Opening adjusted Capital P (`1,50,000 `15,000 `9,000) 1,26,000 Q (`1,30,000 `15,000 `7,000) 1,08,000 2,34,000 Profit Net of drawings 15,600 Actual Profit for Six Months before drawings(half of profit) = 15,600 x 2 31,200 Combined Drawing during six months (half of profit) 15,600 (2) Ascertainment of purchase consideration Closing Net Assets (As above) Add Goodwill Total Purchase Consideration ` 2,49,600 1,30,000 3,79,600 Question 3 (a) X Ltd. granted 500 stock options to its employees on 1.4.2011 at ` 50 per share. The vesting period is 2 years and the maximum exercise period is one year. Market price on that date is ` 140 per share. All the options were exercised on 30.06.2014. Pass journal entries giving suitable narrations, if the face value of equity share is ` 10 per share. (b) Venus Limited recently made a public issue in respect of which the following information is available: (i) No. of partly convertible debentures issued 4,00,000; face value and issue price of ` 100 per debenture. (ii) Convertible portion per debenture - 80%, date of conversion - on expiry of 7 months from the date of closing of issue. (iii) Date of closure of subscription list - 01.06.2013, date of allotment - 01.07.2013, Rate of interest on debentures - 10% p.a. payable from the date of allotment. Value of equity share for the purpose of conversion - ` 40 (Face value ` 10) (iv) Underwriting commission - 3% (v) No. of debentures applied for 3,00,000 PAPER 5: ADVANCED ACCOUNTING 7 (vi) Interest payable on debentures - half yearly on 30th September and 31st March. Write relevant journal entries for all transactions arising out of the above during the year (8 + 8 = 16 Marks) ended on 31st March, 2014 (including cash and bank entries). Answer (a) Journal entries in the books of X Ltd. Date Particulars 31.03.12 Employees Compensation Expense A/c Debit (`) Dr. Credit (`) 18,000 To Employees Stock Option Outstanding A/c 18,000 (Being compensation expenses recognised in respect of 500 option granted to employees at discount of `90 each, amortised on straight line basis over 2 years) Profit & Loss Account Dr. 18,000 To Employee Compensation Expense A/c 18,000 (Being compensation expense of the year transferred to profit and loss account) 31.03.13 Employee Compensation Expense A/c Dr. 18,000 To Employees Stock Option Outstanding A/c 18,000 (Being compensation expenses recognised in respect of 500 option granted to employees at discount of `90 each, amortised on straight line basis over 2 years) Profit & Loss Account Dr. 18,000 To Employee Compensation Expense A/c 18,000 (Being compensation expense of the year transferred to profit and loss account) 31.03.14 Employee Compensation Expense A/c Dr. 9,000 To Employees Stock Option Outstanding A/c 9,000 (balance of compensation expenses amortised `45000 less `36000) Profit & Loss Account To Employee Compensation Expense A/c (Being compensation expense of the year transferred to profit and loss account) Dr. 9,000 9,000 8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 30.06.14 Bank Account (`50 x 500) Dr. Employees Stock Option Outstanding A/c (` 90 x 500) 25,000 Dr. 45,000 To Equity Share Capital Account 5,000 To Securities Premium Account 65,000 (Being exercise of 500 stock option at a price of ` 50 per share) Notes: 1. Total employees compensation expenses = 500 x (`140-`50) = `45,000 2. Employees compensation expense has been written off during 2 years on straight line basis as under: Ist Year = ` 18,000 (for full year) IInd Year = ` 18,000 (for full year) IIIrd Year = ` 9,000 (for half year) (b) In the books of Venus Ltd. Journal Entries Date Particulars 01.06.13 Bank Account Debit (`) Dr. Credit (`) 3,00,00,000 To Debenture Application A/c 3,00,00,000 (Being Application money received on 3,00,000 debentures @ `100 each) 01.07.13 Debenture Application Account Dr. 3,00,00,000 Underwriters Account Dr. 1,00,00,000 To 10% Debentures Account 4,00,00,000 (Being Allotment of 3,00,000 debentures to applicants and 1,00,000 debentures to underwriters) Underwriting Commission To Underwriters Account (Being commission payable to underwriters on 4,00,000 debentures of `100 each @ 3%) Dr. 12,00,000 12,00,000 PAPER 5: ADVANCED ACCOUNTING Bank Account Dr. 9 88,00,000 To Underwriters Account (Being amount underwriters on account) 30.09.13 88,00,000 received from settlement of Debenture Interest Account Dr. 10,00,000 To Bank Account 10,00,000 (Being interest paid on debentures for 3 months from 01.07.2013 to 30.09.2013 on `4,00,00,000 @ 10% p.a.) 31.12.13 10% Debentures Account Dr. 3,20,00,000 To Equity Share Capital Account 80,00,000 To Securities Premium Account 2,40,00,000 (Being conversion of 80% of debentures into shares @ `40 per share with face value of `10 each) 31.03.14 Debenture Interest Account Dr. 12,00,000 To Bank Account 12,00,000 (Being interest paid on debentures for the half year) Profit and Loss A/c Dr. To Debenture Interest A/c 22,00,000 22,00,000 (Being debenture interest for the year charged to Profit & Loss A/c) Working note:Calculation of debenture interest for the half year ended 31st March, 2014 ` On ` 80,00,000 for 6 Months @ 10% p.a. 4,00,000 On ` 3,20,00,000 for 3 Months @ 10% p.a. 8,00,000 Total Question 4 The Balance Sheet of X Ltd. as at 31st March, 2014 was as follows: 12,00,000 10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 X Limited Balance Sheet as at 31.03.2014 Particulars I Amount ` Equity and Liabilities 1 Shareholders Fund Share Capital 40000 equity shares of ` 100 each fully paid 40,00,000 20000, 10% preference shares of `100 each fully paid 20,00,000 Reserve & Surplus (a) Securities Premium Account 1,50,000 (b) Profit & Loss Account 2. (23,00,000) Non Current Liabilities 4,00,000 Long Term Borrowings 7% Debentures of ` 100 each 3. Current Liabilities Other Current Liabilities (a) Creditors 10,00,000 (b) Loan from Director 2,00,000 Total Liabilities II 54,50,000 Assets 1 Non Current Assets Fixed Assets (a) Land & Building 20,00,000 (b) Plant & Machinery 12,00,000 32,00,000 Intangible Assets Goodwill 2. 4,00,000 Current Assets (a) Debtors 12,00,000 (b) Stock 5,00,000 (c) Cash at Bank 1,50,000 Total Assets No Dividend on Preference Shares has been paid for last 5 Years. 18,50,000 54,50,000 PAPER 5: ADVANCED ACCOUNTING 11 The following scheme of reorganisation was duly approved by the Court: (i) Each equity share to be reduced to ` 25. (ii) Each existing Preference Share to be reduced to ` 75 and then exchanged for one new 13% Preference Share of ` 50 each and one Equity Share of ` 25 each. (iii) Preference Shareholders have forgone their right for dividend for four years. One year's dividend at the old rate is however, payable to them in fully paid equity shares of ` 25. (iv) The Debenture Holders be given the option to either accept 90% of their claims in cash or to convert their claims in full into new 13 % Preference Shares of ` 50 each issued at par. One-fourth (in value) of the Debenture Holders accepted Preference Shares for their claims. The rest were paid in cash. (v) Contingent Liability of ` 2,00,000 is payable which has been created by wrong action of one Director. He has agreed to compensate this loss out of the loan given by the Director to the Company. (vi) Goodwill does not have any value in the present. Decrease the value of Plant & Machinery, Stock and Debtors by ` 3,00,000; ` 1,00,000 and ` 2,00,000 respectively. Increase the value of Land & Building to ` 25,00,000. (vii) 50,000 new Equity Shares of ` 25 each are to be issued at par payable in full on application. The issue was underwritten for a commission of 4%. Shares were fully taken up. (viii) Total expenses incurred by the Company in connection with the Scheme excluding underwriting Commission amounted to ` 20,000. Pass necessary Journal Entries to record the above transactions. (16 Marks) Answer In the books of X Ltd. Journal Entries Particulars Equity Share Capital (` 100) A/c Amount (`) Dr. Amount (`) 40,00,000 To Equity Share Capital (` 25) A/c 10,00,000 To Capital Reduction A/c 30,00,000 (Being Equity Shares of ` 100 each reduced to ` 25 each and balance transferred to Capital Reduction a/c) 10% Preference Share Capital (` 100) A/c To 10% Preference Share Capital (` 75) A/c Dr. 20,00,000 15,00,000 12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 To Capital Reduction A/c 5,00,000 (Being Preference Shares of ` 100 each reduced to ` 75 each and balance transferred to Capital Reduction A/c) 10% Preference Share Capital (` 75) A/c Dr. 15,00,000 10,00,000 To 13% Preference Share Capital (` 50) A/c To Equity Share Capital A/c 5,00,000 (Being one new 13% Preference Share of ` 50 each and one Equity Share of ` 25 each issued against 10% Preference Share of ` 75 each) Capital Reduction A/c Dr. 2,00,000 To Preference Share Dividend Payable A/c 2,00,000 (Being arrear of Preference Share Dividend payable for one year) Preference Share Dividend Payable A/c Dr. To Equity Share Capital A/c (` 25) 2,00,000 Dr. 2,00,000 (Being Equity Shares of ` 25 each issued for arrears of Preference Share Dividend) 7% Debenture A/c Dr. 4,00,000 To Debenture Holders A/c 4,00,000 (Being balance of 7% Debentures transferred to Debenture Holders A/c) Debenture Holders A/c Dr. 4,00,000 To 13% Preference Share Capital A/c 1,00,000 To Bank A/c 2,70,000 To Capital Reduction A/c 30,000 (Being 25% of Debenture Holders opted to take 13% Preference Shares at par and remaining took 90% cash payment for their claims) Loan from Director Dr. 2,00,000 To Provision for Contingent Liability A/c 2,00,000 (Being contingent liability of ` 2,00,000 is payable and adjusted against loan from Director A/c) Bank A/c Dr. 12,50,000 PAPER 5: ADVANCED ACCOUNTING 13 To Equity Share Application & Allotment A/c 12,50,000 (Being application money received on 50,000 Equity Shares @ ` 25 each) Equity Share Application & Allotment A/c Dr. 12,50,000 To Equity Share Capital A/c 12,50,000 (Being application money transferred to Capital A/c on allotment) Underwriting Commission A/c Dr. 50,000 To Bank A/c 50,000 (Being underwriting commission paid) Land & Building A/c Dr. 5,00,000 To Capital Reduction A/c 5,00,000 (Being value of land & Building appreciated) Expenses on Reconstruction A/c Dr. 20,000 To Bank A/c 20,000 (Being payment of expenses on reconstruction Capital Reduction A/c Dr. 38,30,000 To Goodwill A/c 4,00,000 To Plant & Machinery A/c 3,00,000 To Stock A/c 1,00,000 To Debtors A/c 2,00,000 To Profit & Loss A/c To Expenses on Reconstruction A/c To Underwriting Commission A/c To Capital Reserve A/c 23,00,000 20,000 50,000 4,60,000 (Being various losses written off and balance of Capital Reduction A/c transferred to Capital Reserve A/c) Question 5 (a) Metro General Insurance Company submits the following information for the year ended 31st March, 2014: 14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Director Business (`) Reinsurance (`) 75,25,000 8,25,000 - 4,90,000 49,70,000 5,10,000 1st April, 2013 6,85,000 95,000 31st March, 2014 7,38,000 70,000 - 3,95,000 1st April, 2013 - 75,000 31st - 1,25,000 2,90,000 - 1,60,000 15,000 - 18,000 Particulars Premium received Premium paid Claim paid during the year Claim payable: Claims received Claims receivable: March, 2014 Expenses of Management Commission: On Insurance accepted On Insurance ceded The following additional information are also available: (1) Expenses of Management include ` 45,000 Surveyor's fees and ` 55,000 Legal expenses for settlement of claims. (2) Reserve for unexpired risk is to be maintained @ 40%. The balance of Reserve for unexpired risk as on 01.04.2013 was ` 28,40,000. You are required to make the Revenue Account for the year ended 31st March, 2014. (b) A commercial bank has the allowing capital funds and assets. Segregate the capital funds into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted asset ratio. State your observation on the risk weighted asset ratio. Particulars Amount (` in crores) Equity Share Capital 400.000 Statutory Reserve 250.000 Capital Reserve (of which Reserve ` 18 crores were due to revaluation of assets and the balance due to sale of capital assets) 86.000 Assets Cash Balance with RBI 12.00 PAPER 5: ADVANCED ACCOUNTING 15 Balance with other Banks 20.00 Other Investments 40.00 Loans & Advances (i) Guaranteed by Government 14.50 (ii) Others 5,465.00 Premises Furniture & Fixtures 74.00 Off Balance Sheet Items (i) Guarantees and other obligations 700 (ii) Acceptances, endorsements and letter of credit 4,900.00 (8 + 8 = 16 Marks) Answer (a) Form B-RA (Prescribed by IRDA) Metro General Insurance Company Revenue Account for the year ended 31st March, 2014 Particulars Schedule Premium earned (Net) 1 Interest, dividend and rent Amount (`) 75,56,000 - Other Income Total (A) 75,56,000 Claims incurred (Net) 2 51,63,000 Commission 3 1,57,000 Operating expenses related to insurance business 4 1,90,000 Bad Debts - Total (B) 55,10,000 Operating profit from insurance business (A-B) 20,46,000 Schedules forming part of revenue account Schedule 1: Premium Earned (Net) Particulars Premium from direct business Add: Premium on reinsurance accepted Less: Premium on reinsurance ceded Amount (`) 75,25,000 8,25,000 (4,90,000) 16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Net Premium 78,60,000 Adjustment for change in Reserve for unexpired risk (W.N.2) (3,04,000) Total Premium earned (net) 75,56,000 Schedule 2: Claims Incurred (Net) Particulars Amount (`) Claims paid direct business (W.N.1) 51,23,000 Add: Re-insurance accepted (W.N.1) 4,85,000 Less: Re-insurance ceded (W.N.1) (4,45,000) Net Claims paid 51,63,000 Schedule 3: Commission Particulars Amount (`) Commission paid on direct business 1,60,000 Add: Commission on reinsurance accepted 15,000 Less: Commission on reinsurance ceded (18,000) 1,57,000 Schedule 4: Operating Expenses related to Insurance Business Particulars Amount (`) Expenses of management (2,90,000 45,000 55,000) 1,90,000 1,90,000 Working Notes: 1. Claims incurred Particulars Paid / received Add: Outstanding at the end of the year Add: Expenses in connection with settlement of claims (45,000 + 55,000) Less: Outstanding at the beginning of the year Direct Re-insurance Re-insurance Business (`) accepted (`) Ceded (` 49,70,000 5,10,000 3,95,000 7,38,000 70,000 1,25,000 1,00,000 (6,85,000) (95,000) (75,000) 51,23,000 4,85,000 4,45,000 PAPER 5: ADVANCED ACCOUNTING 2. 17 Change in Reserve for unexpired risk Particulars Amount (`) Opening Reserve as on 31st March, 2013 28,40,000 Less: Closing Reserve as on 31st March, 2014 (`78,60,000 x 40%) (31,44,000) 3,04,000 (b) Computation of Tier I and Tier II Capital Fund Amount (` in crores) Particulars Capital Funds Tier I Equity Share Capital 400.00 Statutory Reserve 250.00 Capital Reserve (arising out of sale of assets) (` 86 cr `18 cr) 68.00 718.00 Capital Fund Tier-II Capital Reserve (arising out of revaluation of assets) 18.00 Less: Discount to the extent of 55% (9.90) 8.10 726.10 Risk Adjusted Assets Particulars Funded Risk Assets Cash Balance with RBI Balance with other Banks Other Investments Loans & Advances : (i) Guaranteed by Government (ii) Others Premises Furniture & Fixture Total (i) Off Balance Sheet Items Guarantees and other obligations Amount (` in crores) % of weight Amount (` in crores) 12.00 20.00 40.00 0 20 100 0.00 4.00 40.00 14.50 5,465.00 74.00 0 100 100 0.00 5,465.00 74.00 5583.00 700.00 100 700.00 18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Acceptances, endorsements and letter of credit Total (ii) Total [(i) + (ii)] 4,900.00 100 4,900.00 5,600.00 11,183.00 Risk Weighted Assets Ratio: Capital Fund x 100 Risk Adjusted Assets = (726.10 / 11,183) x 100 = 6.49% At present capital adequacy ratio as per RBI norms is 9%. Therefore, Bank has to improve the ratio by introducing further Tier I capital or by reducing risk adjusted assets. Question 6 (a) LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% profit on sale. Branch has been instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses, which are met by the Branch. From the following particulars, prepare branch account in the books of head office: Particulars Amount Particulars (`) Stock as on 1st April, 2013 (Invoice price) 40,000 Discount allowed to debtors Expenses paid by head Sundry Debtors as on 1st April, 2013 Amount (`) 25,000 office: Cash in hand as on 1st April, 2013 1,000 Salary Office furniture as on 1st April, 2013 4,000 Staff Welfare Goods invoiced from the head office 1,80,000 Telephone Expenses (invoice price) Other Misc. Expenses paid Goods return to head office Goods return by debtors Cash received from Debtors Cash sales Credit sales 6,000 by branch 1,250 Stock as on 31st March, 65,000 2014 (at invoice price) 1,20,000 Depreciation to be provided 70,000 on branch furniture 300 4,000 750 1,200 700 35,000 10% p.a. (b) Mega Ltd. has two departments, A and B. From the following particulars, prepare departmental Trading A/c and General Profit & Loss Account for the year ended 31st March, 2014. PAPER 5: ADVANCED ACCOUNTING 19 Amount (`) Particulars Department A Department B 70,000 54,000 3,92,000 2,98,000 6,000 9,000 54,000 36,000 5,72,000 4,60,000 Opening stock as on 01.04.2013 (at cost) Purchases Carriage Inward Wages Sales Purchased Goods Transferred By Department B to A 50,000 By Department A to B 36,000 Finished Goods Transferred By Department B to A 1,50,000 By Department A to B 1,75,000 Return of Finished Goods By Department B to A 45,000 By Department A to B 32,000 Closing Stock Purchased Goods 24,000 1,02,000 Finished Goods 30,000 62,000 Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 30% of the closing finished stock with each department represents finished goods received from the other department. (8 + 8 = 16 Marks) Answer (a) In the books of Head Office - LMN Mumbai Branch Account (At invoice price) Particulars Amount (`) To Balance b/d: Particulars Amount (`) By Stock Reserve (opening) Stock 40,000 By Remittances Debtors 25,000 Cash Sales 10,000 1,20,000 Cash in hand 1,000 Cash from Debtors 65,000 Furniture 4,000 By Goods sent to Branch 1,85,000 45,000 20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 To Goods sent to branch 1,80,000 To Goods returned by branch 1,500 (loading) (loading) By Goods returned by 6,000 branch (Returns to HO) To Bank (Expenses paid by By Balance c/d: Head Office) Stock 35,000 Debtors 28,450 Salary 4,000 Staff Welfare 750 Telephone 1,200 To Stock Reserve (closing) To Profit Transferred to 300 Cash (`1,000-`700) 5,950 Furniture (`4,000-`400) 3,600 8,750 47,150 General Profit & Loss A/c 3,13,350 3,13,350 Working Note: Debtors Account Particulars Amount (`) Particulars To Balance b/d 25,000 By Cash A/c To Sales A/c (Credit) 70,000 Amount (`) 65,000 By Sales Return 1,250 By Discount allowed 300 By Balance c/d 28,450 95,000 95,000 Note: It is assumed that goods returned by branch are at invoice price. (b) Department Trading Account in the books of Mega Ltd. for the year ended 31st March, 2014 Particulars To Opening Stock To Purchase To Carriage Inward To Wages Department Department Particulars A B (`) (`) 70,000 3,92,000 54,000 By Sales Department Department A B (`) (`) 5,72,000 4,60,000 36,000 50,000 1,30,000 1,18,000 2,98,000 By Transfer: 6,000 9,000 54,000 36,000 Purchased Goods Finished Goods PAPER 5: ADVANCED ACCOUNTING To Transfers: 21 By Closing Stock: Purchased Goods 50,000 36,000 Finished** Goods 1,18,000 1,30,000 To Gross Profit c/d 1,74,000 1,57,000 8,64,000 Purchased Goods 7,20,000 30,000 1,02,000 62,000 8,64,000 Finished* Goods 24,000 7,20,000 * Finished goods from other department included in closing stock Particulars Department A (`) Department B (`) 1,02,000 62,000 30,600 18,600 Stock of Finished Goods Stock related to other department (30% of Finished Goods) ** Net transfer of Finished Goods by Department A to B = ` (1,75,000 45,000) = `1,30,000 Department B to A = ` (1,50,000 32,000) = `1,18,000 Profit and Loss A/c For the year ended 31st March, 2014 Particulars Amount (`) Amount (`) Particulars To Provision for unrealised profit By Gross Profit b/d: included in closing stock: Department A 1,74,000 Department B 1,57,000 Department A (W.N.2) 8,311 Department B (W.N.2) 4,611 To Net Profit 3,18,078 3,31,000 3,31,000 Working Notes 1. Calculation of ratio of gross profit margin on sales Particulars Department A (`) Department B (`) Sales 5,72,000 4,60,000 Add: Transfer of Finished Goods 1,75,000 1,50,000 7,47,000 6,10,000 22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 Less: Return of Finished Goods (45,000) 7,02,000 Gross Profit margin = 1,74,000 7,02,000 2. 5,78,000 1,74,000 Gross Profit (32,000) 1,57,000 x100 = 24.79% 1,57,000 5,78,000 x100 = 27.16% Unrealised profit included in the closing stock Department A = 27.16% of ` 30,600 (30% of Stock of Finished Goods ` 1,02,000) = ` 8311.00 Department B = 24.79% of `18,600 (30% of Stock of Finished Goods ` 62,000) = ` 4611.00 Question 7 Answer any four of the following: (a) Give two examples of each of the following items: (i) Change in Accounting Policy (ii) Change in Accounting Estimate (iii) Extra Ordinary Items, (iv) Prior Period Item (b) What are the indicators of Non-Integral Foreign Operation (NFO)? (c) In the following list of shares issued, for the purpose of calculation of weighted average number of shares, from which date weight is to be considered: (i) Equity Shares issued in exchange of cash, (ii) Equity Shares issued as a result of conversion of a debt instrument, (iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise, (iv) Equity Shares issued for rendering of services to the enterprise, (v) Equity Shares issued in lieu of interest and/or principal of an other financial instrument, (vi) Equity Shares issued as consideration for the acquisition of an asset other than in cash. Also define Potential Equity Share. (d) Find out the income to be recognised by ABC Bank Ltd. for the year ended 31st March, 2014 in respect of interest on advances [` in Lakhs] as detailed below:. PAPER 5: ADVANCED ACCOUNTING 23 Performing Asset N.P.A. Interest earned Interest received Interest earned Interest received 280 180 170 20 1700 1630 310 48 400 400 180 70 Terms Loan Cash credits and overdrafts Bills purchased and discounted (e) State any four alternative accounting treatment of the fund received by an Electricity Company from consumer towards capital expenditure/ service line contributions. (4 x 4 = 16 Marks) Answer (a) (i) Examples of Change in Accounting Policy (a) Change of depreciation method from WDV to SLM or vice-versa. (b) Change in cost formula in measuring the cost of inventories (ii) Examples of Change in Accounting Estimate: (a) Change in estimate of provision for doubtful debts on sundry debtors (b) Change in estimate of useful life of fixed assets. (iii) Examples of Extra Ordinary Items (a) Loss due to earthquakes / fire / strike (b) Attachment of property of the enterprises by government. (iv) Examples of Prior Period Item (a) Applying incorrect rate of depreciation in one for more prior periods (b) Omission to account for income or expenditure in one or more prior period. (b) The following are the indicators of Non-Integral Foreign Operations (NFO): (i) While the reporting enterprise may control the foreign operation, the activities of foreign operation's are carried independently without much dependence on reporting enterprise. (ii) Transactions with the reporting enterprise are not a high proportion of the foreign operation's activities. (iii) Activities of foreign operation are mainly financed by its operations or from local borrowings. In other words, it raises finance independently and is in no way dependent on reporting enterprises. (iv) Foreign operation's sales are mainly in currencies other than reporting currency. 24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014 (v) Day-to-day cash flow of the reporting enterprises is independent of the foreign operation's cash flow. (vi) Sales price of the foreign operations are not affected by the day-to-day changes in exchange rate of the reporting currency but determined more by local competition or local government regulations. (vii) There is an active local sales market for the foreign operation's product, although there may be significant amount of exports. (viii) Costs of labour, material and other components of foreign operation's products or services are primarily paid or settled in the local currency rather than in the reporting currency. (c) The following dates should be considered for consideration of weights for calculation of weighted average number of shares in the given situations: (i) Date of Cash receivable (ii) Date of conversion (iii) Date on which settlement becomes effective (iv) When the services are rendered (v) Date when interest ceases to accrue (vi) Date on which the acquisition is recognised. A Potential Equity Share is a financial instrument or other contract that entitles, or may entitle its holder to equity shares. (d) Interest on Performing assets to be recognised on accrual basis, but interest on NonPerforming assets should be recognised on cash basis. ` in Lakhs Interest on Term Loan Cash Credits and Over Drafts Bills Purchases and Discounted Total Interest to be recognised (280+20) 300 (1700+48) 1748 (400+70) 470 2518 (e) Accounting treatment of the fund received by an Electricity Company from consumer towards capital expenditure / service line contributions can be given as follows: (i) Amount received from consumer towards capital/service line contributions is accounted as liability and subsequently recognised as income over the life of the asset; (ii) Amount received from consumer towards capital/service line contributions is accounted as reserves as the amount is not refundable and reported under the head PAPER 5: ADVANCED ACCOUNTING 25 Reserves and Surplus without transferring any proportionate amount to the income statement over the life of asset; (iii) Amount received from consumer towards capital/service line contributions is accounted as Capital Reserve as the amount is not refundable and subsequently proportionate amount is transferred to income statement during the expected life of asset to match against depreciation on total cost of such asset; (iv) Amount received from consumer towards capital/service line contributions is accounted as reduction in the cost of Non-current Asset and depreciation may be provided on such reduced cost.

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