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CA IPCC : Question Paper (with Answers) - ADVANCED ACCOUNTING Nov 2013

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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) State with reasons, how the following events would be dealt with in the financial statements of Pradeep Ltd. for the year ended 31 st March, 2013: (i) An agreement to sell a land for ` 30 lakh to another company was entered into on 1st March, 2013. The value of land is shown at ` 20 lakh in the Balance Sheet as on 31st March, 2012. However, the Sale Deed was registered on15th April, 2013. (ii) The negotiation with another company for acquisition of its business was started on 2nd February, 2013. Pradeep Ltd. invested ` 40 lakh on 12th April, 2013. (b) Cost of a machine acquired on 01.04.2009 was ` 5,00,000. The machine is expected to realize ` 50,000 at the end of its working life of 10 years. Straight-line depreciation of ` 45,000 per year has been charged upto 2011-2012. For and from 2012-13, the company switched over to 15% p.a. reducing balance method of depreciation in respect of the machine. The new rate of depreciation is based on revised useful life of 15 years. The new rate shall apply with retrospective effect from 01.04.2009. State how would you deal with the above in the annual accounts of the Company for the year ended 31 st March, 2013 in the light of AS 5. (c) Beekay Ltd. purchased fixed assets costing ` 5,000 lakh on 01.04.2012 payable in foreign currency (US$) on 05.04.2013. Exchange rate of 1 US$ = ` 50.00 and ` 54.98 as on 01.04.2012 and 31.03.2013 respectively. The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual equal instalments. First instalment was due on 01.05.2013. You are required to state, how these transactions would be accounted for in the books of accounts ending 31st March, 2013. (d) (i) Vasudha Ltd. provides following information: Raw Material stock holding period : 3.5 months Work-in-progress holding period : 1 month Finished goods holding period : 4.5 months Debtors collection period : 6 months The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 You are required to compute the operating cycle of Vasudha Ltd. What would happen if the trade payables of the company are paid in 14 months-whether these should be classified as current or non-current liability? (ii) The management of Kshitij Ltd. contends that the work in progress is not valued since it is difficult to ascertain the same in view of the multiple processes involved. They opine that the value of opening and closing work in progress would be more or less the same. Accordingly, the management had not separately disclosed the work in progress in its financial statements. Comment in line with Revised Schedule VI. (4 x 5 = 20 Marks) Answer (a) (i) According to AS 4 Contingencies and Events Occurring after the Balance Sheet Date , assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date. In the given case, sale of immovable property was carried out before the closure of the books of accounts. This is clearly an event occurring after the balance sheet date but agreement to sell was effected on 1st March, 2013 i.e. before the balance sheet date. Registration of the sale deed on 15 th April, 2013, simply provides additional information relating to the conditions existing at the balance sheet date. Therefore, adjustment to assets for sale of land is necessary in the financial statements of Pradeep Ltd. for the year ended 31 st March, 2013. (ii) AS 4 (Revised) defines "Events occurring after the balance sheet date" as those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company. Accordingly, the acquisition of another company is an event occurring after the balance sheet date. However, no adjustment to assets and liabilities is required as the event does not affect the determination and the condition of the amounts stated in the financial statements for the year ended 31st March, 2013. Applying provisions of the standard which clearly state that/disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise, the investment of ` 40 lakhs in April, 2013 in the acquisition of another company should be disclosed in the report of the Board of Directors to enable users of financial statements to make proper evaluations and decisions. (b) WDV of asset at the end of year 2011-12= ` 5,00,000 ` 45,000 x 3 = ` 3,65,000 WDV of asset at the end of year 2011-12 (by reducing balance method) The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 3 = ` 5,00,000 (1 0.15)3 = ` 3,07,062.50 Depreciation to be charged in year 2012-13 = (` 3,65,000 ` 3,07,062.50) + 15% of ` 3,07,062.50 ` 57,937.50 + 46,059.38 = ` 1,03,997 (approx.) As per AS 5 Net profit or loss for the period, Prior Period Items and Changes in Accounting Policies the revision of remaining useful life is change in accounting estimate, and adoption of reducing balance method of depreciation instead of the straight-line method is change in accounting policy. Since it is difficult to segregate impact of these two changes, the entire amount of difference between depreciation at old rate and depreciation charged in 2012-13 (` 1,03,997- ` 45,000 = ` 58,997) is regarded as an effect of change in accounting estimate as per provisions of the standard. The effect of this change in accounting estimate should be properly disclosed in the financial statements of the company for the year ended 31st March, 2013. (c) As per AS 11 (Revised) The Effects of Changes in Foreign Exchange Rates , exchange differences arising on the settlement of monetary items or on reporting an enterprise s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as an expense in the period in which they arise. However, Ministry of Corporate Affairs has recently amended AS 11 through a notification. As per the notification, exchange difference arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to requisition of depreciable capital asset, can be added to or deducted from cost of asset. The MCA has given an option for the enterprises to capitalize the exchange differences arising on reporting of long term foreign currency monetary items till 31st March, 2020. Thus the company can capitalize the exchange differences arising due to long term loans linked with the acquisition of fixed assets. Transaction 1: Calculation of exchange difference on fixed assets Foreign Exchange Liability = 5,000 50 = US $ 100 lakhs Exchange Difference = US $ 100 lakhs x (` 54.98 ` 50) = ` 498 lakhs. Loss due to exchange difference amounting ` 498 lakhs will be capitalised and added in the carrying value of fixed assets. Depreciation on the unamortised amount will be provided in the remaining years Transaction 2: Soft loan exchange difference (US $ 1 lakh i.e ` 50 lakhs) Value of loan 31.3.13 US $ 1 lakh x 54.98 = ` 54,98,000 The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 AS 11 also provides that in case of liability designated as long-term foreign currency monetary item , the exchange difference is to be accumulated in the Foreign Currency Monetary Item Translation Difference (FCMITD) and should be written off over the useful life of such long-term liability, by recognition as income or expenses in each of such periods. Exchange difference between reporting currency (INR) and foreign currency (USD) as on 31.03.2013 = US$1.00 lakh X ` (54.98 50) = ` 4.98 lakh. Loan account is to be increased to 54.98 Iakh and FCMITD account is to be debited by 4.98 lakh. Since loan is repayable in 3 equal annual instalments, ` 4.98 lakh/3 = ` 1.66 lakh is to be charged in Profit and Loss Account for the year ended 31st March, 2013 and balance in FCMITD A/c ` (4.98 lakh 1.66 lakh) = ` 3.32 lakh is to be shown on the 'Equity & Liabilities' side of the Balance Sheet as a negative figure under the head 'Reserve and Surplus' as a separate line item. Note: The above answer is given on the basis that the company has availed the option under para 46A of AS 11 (d) (i) According to Schedule VI An operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents . Therefore, operating cycle of Vasudha Ltd. will be computed as: Raw material stock holding period + Work-in-progress holding period + Finished goods holding period + Debtors collection period =3.5 + 1 + 4.5 + 6= 15 months A Liability shall be classified as current when it is expected to be settled in the Company s normal operating cycle. Since the operating cycle of Vasudha Ltd. is 15 months, trade payables expected to be paid in 14 months should be treated as a current liability. (ii) Revised schedule VI does not require WIP to be disclosed in the Statement of Profit and Loss, thus amounts for which WIP have been completed at the beginning and at the end of the accounting period may not be disclosed. Therefore, the nondisclosure in the financial statements by the company may not amount to violation of Revised Schedule VI if the differences between opening and closing WIP are not material. Question 2 Avi and Bishnu are partners of Abhay & Co. sharing profit and losses in the ratio 3 : 1 and Bishnu and Joe are partners of Bijoy & Co. sharing profit and losses in the ratio 2 : 1. On Asset or liability which is expressed in foreign currency and has a term of 12 months or more at the time of origination of the asset or liability. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 5 31st March, 2013, they decided to amalgamate and form a new firm M/s Abeejay & Co., wherein Avi, Bishnu and Joe would be partners sharing profit and losses in the ratio 3 : 2 : 1. The Balance Sheets of the two firms on 31st March, 2013 were as under: Liabilities Abhay & Co. ` Capitals: Avi Bishnu Joe Reserves Sundry Creditors Bank O/D Due to R & Co. Bijoy & Co. Abhay & Co. Assets ` ` Bijoy & Co. ` 3,50,000 2,80,000 2,00,000 1,50,000 3,97,000 90,000 2,00,000 10,000 12,000 9,000 38,000 45,000 1,20,000 89,000 65,000 70,000 90,000 1,00,000 90,000 - 1,00,000 80,000 60,000 20,000 1,00,000 9,53,000 7,95,000 9,53,000 7,95,000 The amalgamated firm M/s Abeejay & Co. took over the business on the following terms: 5,31,000 2,00,000 Building Plant & Machinery Vehicles Furniture Office Equipments Stock in trade Sundry Debtors Bank Balances Cash in hand Due from R & Co. (a) Goodwill of Abhay & co. was worth ` 42,000 and that of Bijoy & Co. ` 30,000. Goodwill account was not to be opened in the books of the new firm, the adjustments being recorded through capital accounts of the partners. (b) The following assets were valued as below: Abhay & Co. Bijoy & Co. (`) (`) Building 4,00,000 3,00,000 Plant & Machinery 2,50,000 2,00,000 - 98,000 Furniture Office Equipments 39,000 11,000 50,000 Stock in trade 70,000 80,000 Vehicles (c) Provision for doubtful debt was carried forward at ` 4,000 in respect of Debtors of Abhay & co. and ` 3,000 in respect of Debtors of Bijoy & Co. (d) Partners of new firm brought necessary cash to pay other partners to adjust their capitals according to the profit sharing ratio. The Institute of Chartered Accountants of India 6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 You are required to: (i) Prepare the Balance Sheet of the new firm as on 31st March, 2013. (ii) Prepare Capital Accounts of the partners in the books of old firms. (16 Marks) Answer Balance Sheet of M/s Abeejay & Co. as at 31st March, 2013 Liabilities ` Assets ` Capitals: Building 7,00,000 7,71,000 (` 4,00,000 + ` 3,00,000) Avi Bishnu 5,14,000 Plant & machinery 15,42,000 4,50,000 Joe 2,57,000 (` 2,50,000+` 2,00,000) Sundry creditors Office equipment (1,20,000+89,000) 2,09,000 (` 39,000+` 50,000) 89,000 Bank overdraft 90,000 Vehicle 98,000 Furniture 11,000 Stock-in-trade 1,50,000 (` 70,000+` 80,000) Sundry debtors 1,90,000 (` 1,00,000+` 90,000) Less: Provision for doubtful (7,000) 1,83,000 debts (` 4,000+` 3,000) Bank balance 1,40,000 (` 80,000+` 60,000) Cash in hand 20,000 18,41,000 18,41,000 Partners Capital Accounts in the books of Abhay & Co. Avi Bishnu ` Particulars ` Particulars Avi Bishnu ` ` To Capital A/cs 6,48,000 2,39,000 By Balance b/d 5,31,000 2,00,000 M/s Abeejay & Co. By Reserve (3:1) 9,000 3,000 By Profit on Realisation 1,08,000 36,000 A/c (W.N.4) 6,48,000 2,39,000 6,48,000 2,39,000 ` 20,000+` 1,59,000+` 25,667 ` 184,667 = ` 20,000. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 7 Partners Capital Accounts in the books of Bijoy & Co. Particulars Joe ` To Capital A/cs Bishnu ` 4,83,667 2,43,333 M/s Abjeey & Co. Particulars Bishnu ` 4,83,667 2,43,333 6,000 3,000 40,333 4,83,667 (W.N.5) 2,00,000 80,667 By Reserve (2:1) By Profit on Realisation ` 3,97,000 By Balance b/d Joe 2,43,333 Working Notes: 1. Computation of purchase considerations Abhay & Co. ` Assets: Goodwill Building Vehicle Furniture Plant & machinery Office equipment Stock-in-trade Sundry debtors Bank balance Cash in hand Due from R & Co. (A) Liabilities: Creditors Provision for doubtful debts Due to R & Co. Bank overdraft (B) Purchase consideration (A-B) The Institute of Chartered Accountants of India Bijoy& Co. ` 42,000 4,00,000 2,50,000 39,000 70,000 1,00,000 80,000 20,000 1,00,000 11,01,000 30,000 3,00,000 98,000 11,000 2,00,000 50,000 80,000 90,000 60,000 9,19,000 1,20,000 4,000 90,000 2,14,000 8,87,000 89,000 3,000 1,00,000 1,92,000 7,27,000 8 2. INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Computation of proportionate capitals ` 16,14,000 (72,000) 15,42,000 7,71,000 5,14,000 2,57,000 M/s Abeejay & Co. (Purchase Consideration) (` 8,87,000+ ` 7,27,000) Less: Goodwill adjustment Total capital of new firm (Distributed in ratio 3:2:1) Avi s proportionate capital Bishnu s proportionate capital Joe s proportionate capital 3. Computation of Capital Adjustments 4. Joe Total ` ` ` 6,48,000 6,48,000 Less: Goodwill written off in the ratio of 3:2:1 Existing capital Proportionate capital Amount to be brought in (paid off) Bishnu ` Balance transferred from Abhay & Co. Balance transferred from Bijoy & Co. Avi 2,39,000 4,83,667 7,22,667 2,43,333 2,43,333 8,87,000 7,27,000 16,14,000 (36,000) 6,12,000 7,71,000 1,59,000 (24,000) 6,98,667 5,14,000 (1,84,667) (12,000) 2,31,333 2,57,000 25,667 (72,000) 15,42,000 15,42,000 Realisation Account in the books of Abhay & Co. ` To To To To To To To To To Building Plant & machinery Office equipment Stock-in-trade Sundry debtors Bank balance Cash in hand Due from R & Co. Partners capital A/cs: Avi 1,08,000 Bishnu 36,000 3,50,000 By Creditors 2,00,000 By Bank overdraft 38,000 By M/s Abeejay & Co. 65,000 (purchase consideration) 1,00,000 (W.N.1) 80,000 20,000 1,00,000 1,44,000 10,97,000 The Institute of Chartered Accountants of India ` 1,20,000 90,000 8,87,000 10,97,000 PAPER 5 : ADVANCED ACCOUNTING 5. 9 Realisation Account in the books of Bijoy & Co. ` ` To Building 2,80,000 By Creditors To To Plant & machinery Office equipment 1,50,000 By 45,000 By Due to R & Co. M/s Abjeejay & Co. To Vehicle 90,000 (purchase consideration) To Furniture 10,000 (W.N.1) To To Stock-in-trade Sundry debtors 70,000 90,000 To Bank balance 60,000 To Partners capital A/cs : Bishnu Joe 80,667 40,333 89,000 1,00,000 7,27,000 1,21,000 9,16,000 9,16,000 Note: The above answer has been given on the basis that Realization account is prepared while closing the books of Old firms and New firm takes over the business of both old firms. Question 3 (a) M Limited recently made a public issue of debentures. The following information is available in respect of the issue: (i) 3,00,000 partly convertible debentures of face value and issue price of ` 100 per debenture were issued; (ii) Conversion of 50% of each debenture is to be done on expiry of 6 months from date of close of issue; (iii) Date of closure of subscription list is 1st June, 2012. Date of allotment is 1st July, 2012; (iv) Interest on debenture at the rate of 12% is payable from date of allotment; (v) Equity share of ` 10 each are issued at ` 50 per share for the purpose of conversion; (vi) Underwriting commission is 2%; (vii) 2,25,000 debentures were applied for; (viii) Interest on debentures is payable half yearly on 30th September and 31st March. Give Journal entries for all transactions relating to the above, including cash and bank entries for the year ended 31st March, 2013. (8 Marks) The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (b) The summarized Balance Sheet of Entyce Ltd. as on 31st March, 2013 read as under: Liabilities ` Share Capital: 4,00,000 equity shares of ` 10 each fully paid up 40,00,000 General Reserve 50,00,000 Debenture Redemption Reserve 35,00,000 12% Convertible Debentures : 80,000 Debentures of ` 100 each 80,00,000 Other Loans 45,00,000 Current Liabilities and Provisions 90,00,000 3,40,00,000 Assets: Fixed Assets (at cost less depreciation) 1,50,00,000 Debenture Redemption Reserve Investments 30,00,000 Cash and Bank Balances 40,00,000 Other Current Assets 1,20,00,000 3,40,00,000 The debentures are due for redemption on 1st April, 2013. The terms of issue of debentures provided that they were redeemable at a premium 5% and also conferred option to the debentureholders to convert 25% of their holding into equity shares at a predetermined price of ` 11.90 per share and the balance payment in cash. Assuming that: (i) Except for debentureholders holding 12,000 debentures in aggregate, rest of them exercised the option for maximum conversion, (ii) The investments realized ` 32,00,000 on sale, (iii) All the transactions were taken place on 1st April, 2013 without any lag, and (iv) Premium on redemption of debentures is to be adjusted against General Reserve. Redraft the Balance Sheet of Entyce Ltd. as on 01.04.2013 after giving effect to the redemption. Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary. (8 Marks) The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 11 Answer (a) Journal Entries Date Bank A/c To Debenture Allotment A/c Amount Dr. Dr. Application Amount Cr. ` 1.6.2012 Particulars ` 2,25,00,000 and 2,25,00,000 (Application money received on 2,25,000 debentures @ ` 100 each) 1.7.2012 Debenture Application and Allotment A/c Dr. Underwriters A/c Dr. 2,25,00,000 75,00,000 To 12% Debentures A/c (Allotment of 2,25,000 debentures to applicants and 75,000 debentures to underwriters) Underwriting Commission 3,00,00,000 Dr. 6,00,000 To Underwriters A/c (Commission payable to underwriters @ 2% on ` 3,00,00,000) Bank A/c To Underwriters A/c 6,00,000 Dr. 69,00,000 69,00,000 (Amount received from underwriters in settlement of account) 30.09.2012 Debenture Interest A/c To Bank A/c Dr. 9,00,000 9,00,000 (Interest paid on debentures for 3 months @ 12% on ` 3,00,00,000) 01.12.2012 12% Debentures A/c To Equity Share Capital A/c To Securities Premium A/c (Conversion of 50% of debentures into shares of ` 50 each with a face value of ` 10) The Institute of Chartered Accountants of India Dr. 1,50,00,000 30,00,000 1,20,00,000 12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 31.3.2013 Debenture Interest A/c Dr. 12,00,000 To Bank A/c 12,00,000 (Interest paid on debentures for the half year) 31.03.2013 Profit & loss A/c Dr. 6,00,000 To Underwriting commission 6,00,000 (Being underwriting commission charged to Profit & loss A/c at the year end) 31.03.2013 Profit & Loss A/c Dr. 21,00,000 To Debenture Interest 21,00,000 (Being interest on debenture 12,00,000 + 9,00,000 charged to Profit & loss A/c at the year end) Working Note: Calculation of Debenture Interest for the half year ended 31st March, 2013 Interest on `1,50,00,000 for 6 months @ 12% = ` 9,00,000 Interest on ` 1,50,00,000 for 2 months @ 12% = ` 3,00,000 `12,00,000 (b) Entyce Limited Balance Sheet as on 01.04.2013 Particulars I. II. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings - Unsecured Loans (3) Current Liabilities (a) Short-term provisions Total Assets (1) Non-current assets (a) Fixed assets The Institute of Chartered Accountants of India Note No 1 2 Figures as at the end of current reporting period 55,00,000 85,85,000 45,00,000 90,00,000 2,75,85,000 PAPER 5 : ADVANCED ACCOUNTING (i) Tangible assets (2) Current assets (a) Cash and cash equivalents (b) Other current assets 13 1,50,00,000 5,85,000 1,20,00,000 2,75,85,000 Total Notes to Accounts ` 1 Share Capital 55,00,000 5,50,000 Equity Shares of ` 10 each 2 Reserve and Surplus General Reserve 50,00,000 Add: Debenture Redemption Reserve transfer 35,00,000 85,00,000 Add: Profit on sale of investments 2,00,000 87,00,000 Less: Premium on redemption of debentures (80,000 x ` 5) (4,00,000) 83,00,000 2,85,000 Securities Premium Account (1,50,000 x ` 1.9) 85,85,000 Working Notes: (i) Calculation of number of shares to be allotted Total number of debentures 80,000 Less : Number of debentures not opting for conversion 12,000 68,000 25% of 68,000 17,000 Redemption value of 17,000 debentures ` 17,85,000 Number of Equity Shares to be allotted: = 17,85,000 11.90 = 1,50,000 shares of ` 10 each. (ii) Calculation of cash to be paid Number of debentures 80,000 Less: number of debentures to be converted into equity shares 17,000 63,000 The Institute of Chartered Accountants of India 14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Redemption value of 63,000 debentures (63,000 ` 105) (iii) Cash and Bank Balance ` 66,15,000 ` Balance before redemption Add : Proceeds of investments sold 40,00,000 32,00,000 72,00,000 (66,15,000) 5,85,000 Less : Cash paid to debenture holders Question 4 The summarized Balance Sheet of Vasant Ltd. as on 31 st March, 2013, being the date of voluntary winding up is as under: Liabilities Amount Assets ` Share Capital: Issued: 10% Pref. Shares of ` 10 each 10,000 Equity Shares of ` 10 each, fully paid up 5,000 Equity Shares of ` 10 each, ` 8 per share paid up 13% Debentures Mortgage Loan Bank overdraft Trade Creditors Income Tax Arrears (assessment concluded in February, 2013) Amount ` Land & Building 1,30,000 1,50,000 Sundry Current Assets 4,36,000 1,00,000 Profit and Loss Account 35,000 Debenture issue expenses 40,000 not written off 2,000 1,50,000 70,000 30,000 38,000 25,000 6,03,000 6,03,000 Mortgage loan was secured against Land & Building. Debentures were secured by a floating charge on all assets. The company was unable to meet the payments and therefore the debentureholders appointed a Receiver for the debentureholders. He brought the Land & Buildings to auction and realized ` 1,60,000. He also took charge of Sundry Assets of value of ` 2,36,000 and realized ` 2,00,000. The Bank overdraft was secured by personal guarantee of the directors of the company and on the Bank raising a demand, the Directors paid off the due from their personal resources. Costs incurred by the Receiver were ` 1,950 and by the Liquidator ` 3,000. The receiver was not entitled to any remuneration but the Liquidator was to receive 2% fee on the value of assets realized by him. Preference Shareholders have not been paid dividend for period after 31st March, 2011 and interest for the last half year was due to the Debentureholders. Rest of the assets were realized at ` 1,50,000. Prepare the accounts to be submitted by the receiver and Liquidator. The Institute of Chartered Accountants of India (16 Marks) PAPER 5 : ADVANCED ACCOUNTING 15 Answer Receiver s Receipts and Payments Account Receipts ` ` Payments ` ` Sundry Assets realised 2,00,000 Costs of the Receiver 1,950 Surplus received from Preferential payments: Mortgage loan : - 25,000 Income Taxes (raised Sale Proceeds of land within 12 months) and building 1,60,000 Debentures holders: Principal amount 1,50,000 Less: Applied to discharge of Interest for half year 9,750 1,59,750 mortgage loan (70,000) 90,000 Surplus transferred to the 1,03,300 Liquidator 2,90,000 2,90,000 Liquidator s Final Statement of Account Receipts Surplus received from Receiver Assets Realised Calls on Contributories : On holder of 5,000 Equity Shares at the rate of ` 1.38 per share ` Payments 1,03,300 Cost of Liquidation Remuneration to Liquidator 1,50,000 (1,50,000 x 2%) Unsecured Creditors : 6,900 Trade Directors for Bank O/D cleared Preferential Shareholders: Capital Arrears of Dividends Equity shareholders: Return of money to holders of 10,000 equity shares at 62 paise each 2,60,200 ` 3,000 3,000 38,000 30,000 68,000 1,50,000 30,000 1,80,000 6,200 2,60,200 Working Note: Call from partly paid shares Deficit before call from Equity Shares = `(1,03,300+1,50,000) `(3,000+3,000+68,000+1,80,000) = Notional call on 5,000 shares @ ` 2 each The Institute of Chartered Accountants of India ` 700 10,000 16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Net balance after notional call (a) 9,300 No. of shares deemed fully paid (b) 15,000 Refund on fully paid shares 9,300 = ` 0.62 15,000 Calls on partly paid share (` 2 ` 0.62) = ` 1.38 Question 5 Following information has been provided in respect of Watson Power Generation Project: 1. Date of commercial operation/work completed date : 1st April, 1995 2. Capital Cost at the beginning of the year 2010-11 : ` 135.39 Crore 3. Useful Life : 35 years 4. Details of allowed capital expenditure, details of actual repayment of loan and weighted average rate of interest on loan is as follows: 2010-11 2011-12 2012-13 (` in Crore) (` in Crore) (` in Crore) Additional Capital Expenditure (allowed above) 1.63 0.98 0.52 Repayment of Loan during the year (net) 0.96 0.87 0.68 7.35% 7.48% 7.50% 0.00 0.00 0.00 Weighted Average Interest on Loan Rate of Value of Land 5. Depreciation recovered upto 2008-09 = ` 49.05 Crore 6. Depreciation recovered in 2009-10 = ` 3.26 Crore 7. Cumulative Repayment of Loan upto 2009-10 = ` 14,00 Crore From the above information, calculate the following as per the Central Electricity Commission (Terms and Conditions of Tariff) Regulations, 2009: (a) Average Capital Cost; (b) Return on Equity; (c) Interest on Loans; (d) Depreciation. The Institute of Chartered Accountants of India (16 Marks) PAPER 5 : ADVANCED ACCOUNTING 17 Answer (a) Average capital cost Capital Cost (` in crores) 2010-11 2011-12 2012-13 ` ` ` 135.39 137.02 138 1.63 0.98 0.52 Closing Capital cost (A)+(B) 137.02 138 138.52 Average Capital cost 136.21 137.51 138.26 Opening capital cost (A) Additional capital expenditure (allowed above) (B) (b) Return on equity Debt-Equity ratio Debt-Equity ratio for the purpose of return on equity for the period 2010-13 is 70:30 2010-11 2011-12 2012-13 ` ` ` Opening Capital cost (A) 135.39 137.02 138 Equity-Opening considered now [(A) x 0.30] = (B) 40.617 41.106 41.4 1.63 0.98 0.52 0.489 0.294 0.156 Equity-Closing ((B)+(D))=(E) 41.106 41.4 41.556 Average equity [(B)+(E)]/2 = (F) 40.861 41.253 41.478 Return on Equity @ 14% of (F) 5.720 5.775 5.807 2010-11 2011-12 2012-13 ` ` ` Opening Capital cost (A) 135.39 137.02 138 Gross Opening loan -considered at 70% of (A)=(B) 94.773 95.914 96.6 14 14.96 15.83 80.773 80.954 80.77 1.63 0.98 0.52 Additional allowable capital expenditure (C) Addition of Equity due to admitted additional capital expenditure [(C) x 0.30]=(D) (c) Interest on loan Cumulative Repayment of Loan upto previous year (C) Net Loan Opening (B)-(C)=(D) Additional capital expenditure (allowed above) (E) The Institute of Chartered Accountants of India 18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Addition of loan due to approved additional capital expenditure- considered at 70% of (E)=(F) 1.141 0.686 0.364 0.96 0.87 0.68 Net Loan Closing [(D)+(F)-(G)=(H)] 80.954 80.77 80.454 Average Loan{(D)+(H)/2]=I Weighted Average Rate of Interest on Loan (J) 80.864 7.35% 80.862 7.48% 80.612 7.50% 5.944 6.048 6.046 Repayment of loan during the year (net)(G) Interest on Loan(I) x (J) (d) Depreciation Name of the Power Station : Wastan Power Generation Project Date of commercial operation /Work Completed Date Beginning of Current year Useful life Remaining Useful Life 1/4/95 1/4/10 35 Years 20 Years (Figures in ` crores) S.N. 2010-11 2011-12 2012-13 Capital cost at beginning of the year 135.39 137.02 138 Additional capitalisation during the year Closing capital cost 1.63 137.02 0.98 138 0.52 138.52 1 2 Average capital cost Less: Value of Land 136.205 0.000 137.51 0.000 138.26 0.000 3 Capital cost for depreciation (1-2) Depreciable value (90% of 3) 136.205 122.585 137.51 123.759 138.26 124.434 5 Depreciation recovered up to 2008-09 6 Depreciation recovered in 2009-10 7 Depreciation recovered upto previous year 52.31 55.824 59.400 8 Balance depreciation to be recovered (4-7) 70.27 67.936 65.035 9 Balance useful life of 35 years 20 19 18 10 11 Yearly depreciation from 2010-11 (8/9) Depreciation recovered upto the year (7+10) 3.514 3.576 3.613 55.824 59.400 63.013 The Institute of Chartered Accountants of India 49.05 3.26 PAPER 5 : ADVANCED ACCOUNTING 19 Question 6 (a) Martis Ltd. has several departments. Goods supplied to each department are debited to a Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark-up) to give the normal selling price. The mark-up is credited to a memorandum departmental 'Mark-up account', any reduction in selling prices (mark-down) will require adjustment in the stock account and in mark-up account. The mark up for Department A for the last three years has been 25%. Figures relevant to Department A for the year ended 31 st March, 2013 were as follows: Opening stock as on 1st April, 2012, at cost Purchase at cost Sales ` 65,000 ` 2,00,000 ` 3,00,000 It is further ascertained that : (1) Shortage of stock found in the year ending 31.03.2013, costing ` 1,000 were written off. (2) Opening stock on 01.04.12 including goods costing ` 6,000 had been sold during the year and bad been marked down in the selling price by ` 600. The remaining stock had been sold during the year. (3) Goods purchased during the year were marked down by ` 1,200 from a cost of ` 15,000. Marked-down stock costing ` 5,000 remained unsold on 31.03.13. (4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down. You are required to prepare : (i) A Departmental Trading Account for Department A for the year ended 31st March, 2013 in the books of Head Office. (ii) A Memorandum Stock Account for the year. (iii) A Memorandum Mark-up Account for the year. (12 Marks) (b) From the following information of STP Bank Ltd. pertaining to the financial year 2012-13, compute the provisions to be made in the Profit and Loss Account: Assets Standard Sub-standard Doubtful: For one year (secured) For two years and three years (secured) For more than three years (secured by mortgage of The Institute of Chartered Accountants of India ` in lakh 30,000 20,000 8,000 2,500 20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 2,000 1,700 Plant & Machinery ` 500 lakh) Loss Assets (4 Marks) Answer (i) Department Trading Account For the year ending on 31.03.2013 In the books of Head Office Particulars ` Particulars To Opening Stock ` 65,000 By Sales To Purchases To Gross Profit c/d 3,00,000 2,00,000 By Shortage 58,880 By Closing Stock 1,000 22,880 3,23,880 (ii) 3,23,880 Memorandum stock account (for Department A) (at selling price) Particulars ` Particulars To Balance b/d (` 65,000+25% of ` 65,000) To Purchases (` 2,00,000 + 25% of ` 2,00,000) 81,250 By Profit & Loss A/c (Cost of Shortage) 1,000 2,50,000 By Memorandum Departmental Mark up A/c (Load on Shortage) (` 1,000 x 25%) By Memorandum Departmental Mark-up A/c (Mark-down Current Purchases) By Debtors A/c (Sales) By Memorandum Departmental Mark-up A/c (Mark Down on Opening Stock) By Balance c/d 3,31,250 (iii) ` on 250 1,200 3,00,000 600 28,200 3,31,250 Memorandum Departmental Mark-up Account Particulars To Memorandum Departmental Stock A/c ` Particulars 250 By Balance b/d (` 81,250 x 25/125) The Institute of Chartered Accountants of India ` 16,250 PAPER 5 : ADVANCED ACCOUNTING To To To To (` 1,000 25/100) Memorandum Departmental Stock A/c Memorandum Departmental Stock A/c Gross Profit transferred to Profit & Loss A/c Balance c/d [(` 28,200 + 400*) x 25/125 - 400] *[` 1,200 5,000/15,000] = 400 21 1200 By Memorandum Departmental Stock A/c(2,50,000 x 25/125) 600 50,000 58,880 5,320 66,250 66,250 Working Notes: (i) Calculation of Cost of Sales ` A B Sales as per Books Add: Mark-down in opening stock (given) 3,00,000 600 C Add: mark-down in sales out of current Purchases (` 1,200 x 10,000 /15,000) 800 D Value of sales if there was no mark-down (A+B+C) 3,01,400 E Less: Gross Profit (25/125 of ` 3,01,400) subject to Mark Down (` 600 + ` 800) (60,280) F Cost of sales (D-E) 2,41,120 (ii) Calculation of Closing Stock ` A B Opening Stock Add: Purchases C D Less: Cost of Sales Less: Shortage E 65,000 2,00,000 Closing Stock (A+B-C-D) (2,41,120) (1,000) 22,880 (b) Calculation of amount of provision to be made in the Profit and Loss Account Classification of Assets The Institute of Chartered Accountants of India Amount of Advances % age of provision Amount of provision 22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (` in lakhs) Standard assets % (` in lakhs) 30,000 20,000 0.40 15 120 3,000 For one year (secured) 8,000 25 2,000 For two to three years (secured) 2,500 40 1,000 For more than three years: unsecured 1,500 100 1,500 500 100 500 1,700 100 1,700 Sub-standard assets * Doubtful assets: secured Loss Assets Total provision required 9,820 *Considered as fully secured Question 7 Answer any four of the following: (a) Classify the following into either operating or finance lease: (i) Lessee has option to purchase the asset at lower than fair value, at the end of lease term; (ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the end of the lease term; (iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and has been procured only for use of the lessee; (iv) Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of the asset is "Y". (b) Plymouth Ltd. is engaged in research on a new process design for its product. It had incurred ` 10 lakh on research during first 5 months of the financial year 2012-13. The development of the process began on 1st September, 2012 and upto 31st March, 2013, a sum of ` 8 lakh was incurred as Development Phase Expenditure, which meets assets recognition criteria. From 1st April, 2013, the Company has implemented the new process design and it is likely that this will result in after tax saving of ` 2 lakh per annum for next five years. The cost of capital is 10%. The present value of annuity factor of ` 1 for 5 years @ 10% is 3.7908. Decide the treatment of Research and Development Cost of the project as per AS 26. (c) State the basis on which the following common expenses, the benefit of which is shared by all the departments is distributed among the departments: The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (i) 23 Rent, rates and taxes, insurance of building; (ii) Selling expenses such as discount, bad debts, selling commission and other such selling expenses; (iii) Carriage Inward; (iv) Depreciation; (v) Interest on loan; (vi) Profit or loss on sale of investment; (vii) Wages; (viii) Lighting and Heating Expenses. (d) Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific project at an interest rate of 6% per annum, payable annually. On the day of taking loan, the exchange rate between currencies was ` 48 per 1 US$. The exchange rate at the closing of the financial year was ` 50 per 1 US$. The corresponding amount could have been borrowed by the company in Indian Rupee at an interest rate of 11 % per annum. Determine the treatment of borrowing cost in the books of accounts. (e) Explain in short, the following principles and term of insurance business: (i) Principle of Indemnity; (ii) Insurable interest; (iii) Principle of UBERRIMAE FIDEI . (iv) Catastrophic Loss (4 x 4 = 16 Marks) Answer (a) (i) If it becomes certain at the inception of lease itself that the option will be exercised by the lessee, it is a Finance Lease*. (ii) The lease will be classified as a finance lease, since a substantial portion of the life of the asset is covered by the lease term. (iii) Since the asset is procured only for the use of lessee, it is a finance lease. (iv) The lease is a finance lease if X = Y, or where X substantially equals Y. (b) Research Expenditure According to AS 26 Intangible Assets , the expenditure on research of new process design for its product ` 10 lakhs should be charged to Profit and Loss Account in the year in which it is incurred. It is presumed that the entire expenditure is incurred in the financial year 2012-13. Hence, it should be written off as an expense in that year itself. Cost of internally generated intangible asset it is given that development phase expenditure amounting ` 8 lakhs incurred upto 31st March, 2013 meets asset recognition The Institute of Chartered Accountants of India 24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 criteria. As per AS 26, for measurement of such internally generated intangible asset, fair value can be estimated by discounting estimated future net cash flows. Savings (after tax) from implementation of new design for next 5 years Company s cost of capital Annuity factor @ 10% for 5 years Present value of net cash flows (` 2 lakhs x 3.7908) ` 2 lakhs p.a. 10 % 3.7908 ` 7.582 lakhs The cost of an internally generated intangible asset would be lower of cost value ` 8 lakhs or present value of future net cash flows ` 7.582 lakhs. Hence, cost of an internally generated intangible asset will be ` 7.582 lakhs. The difference of ` 0.418 lakhs (i.e. ` 8 lakhs ` 7.582 lakhs) will be amortized by Plymouth for the financial year 2012-13. Amortisation - The company can amortise ` 7.582 lakhs over a period of five years by charging ` 1.5164 lakhs per annum from the financial year 2013-2014 onwards. (c) Allocation of Expenses S.No. Expenses 1. Rent, rates and taxes, repairs, insurance of building 2. Selling expenses, e.g., discount, bad debts, selling commission, and other such selling expenses 3. Carriage inward 4. Depreciation 5 Interest on loan 6 Profit & loss on sale of investment 7 8. Wages Lighting and Heating expenses (eg. energy expenses) Basis Floor area occupied by each department (if given) other wise on time basis Sales of each department Purchases of each department Value of assets of each department otherwise on time basis Utilisation of loan amount in each department (if can be identified), otherwise in combined P& L A/c Value of investments sold in each department (if value can be identified), otherwise in combined P& L A/c Time devoted to each department Consumption of energy by each department (d) The following computations would be made to determine the amount of borrowing costs for the purpose of AS 16 Borrowing Costs : Interest for the period = US $ 20,000 ` 50 per US $ 6% = ` 60,000. Increase in the liability towards the principal amount The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING = US$ 20,000 ` (50-48) = ` 40,000. 25 (A) Interest that would have resulted if the loan was taken in Indian Currency = US $ 20,000 48 11% = ` 1,05,600 Difference between interest on local currency borrowing and foreign currency borrowing = ` 1,05,600 ` 60,000 = ` 45,600 (B) In the above case, ` 40,000 (A) is less than ` 45,600 (B), therefore the entire exchange difference of ` 40,000 would be considered as borrowing costs. The total borrowing cost would be ` 100000 (` 60000+ ` 40000) (e) (i) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called indemnifier and the insured is the indemnified. In a contract of indemnity, only those who suffer loss are compensated to the extent of actual loss suffered by them. One cannot make profit by insuring his risks. (ii) Insurable interest: All and sundry cannot enter into contracts of insurance. For example, A cannot insure the life of B who is a total stranger. But if B. happens to be his wife or his debtor or business manager, A has insurable interest i.e. vested interest and therefore he can insure the life of B. For every type of policy insurable interest is insisted upon. In the absence of such interest the contract will amount to a wagering contract. (iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive duty to tell the whole truth in relation to the subject-matter of the contract. There is only the negative obligation to tell nothing but the truth. In a contract of insurance, however there is an implied condition that each party must disclose every material fact known to him. All contracts of insurance are contracts of uberrima fidei, i.e., contracts of utmost good faith. This is because the assessment of the risk and the determination of the premium by the insurer depend on the full and frank disclosure of all material facts in the proposal form. (iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes severe consequences such as bankruptcy to a family, organization, or insurer. The Institute of Chartered Accountants of India

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