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

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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. Attempt any five questions from the remaining six questions. Working notes should form part of the answer. Wherever necessary suitable assumption(s) may be made by the candidates. Question 1 Answer the following questions: (i) Rama Limited issued 8% Debentures of ` 3,00,000 in earlier year on which interest is payable half yearly on 31st March and 30th September. The company has power to purchase its own debentures in the open market for cancellation thereof. The following purchases were made during the financial year 2009-10 and cancellation made on 31st March, 2010: (a) On 1st April, ` 50,000 nominal value debentures purchased for ` 49,450, exinterest. (b) On 1st September, ` 30,000 nominal value debentures purchased for ` 30,250 cum interest. Show the Journal Entries (without narrations) for the transactions held in the year 200910. (ii) From the following information of details of advances of Zenith Bank Ltd., calculate the amount of provisions to be made in Profit and Loss Account for the year ended on 31-3-2010: Assets classification Standard Sub-standard Doubtful: (`in lakhs) 10,000 6,400 for one year 3,200 for two years 1,800 For three years For more than three years 900 1,100 Loss assets 3,000 st (iii) While preparing its final accounts for the year ended 31 March 2010, a company made a provision for bad debts @ 4% of its total debtors (as per trend follows from the previous years). In the first week of March 2010, a debtor for ` 3,00,000 had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2010 the debtor became a bankrupt. Can the company provide for the full loss The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2010. (iv) Recognizing the need to harmonize the diverse accounting policies and practices, accounting standards are framed. Give examples of areas in which different accounting policies may be adopted by the enterprise. (4 5 = 20 Marks) Answer (i) In the books of Rama Limited Journal Entries Dr. (`) 1st April, 2009 Own debentures A/c Dr. 49,450 To Bank A/c 1st September 2009 49,450 Own debentures A/c Dr. 29,250 Interest on own debentures A/c Dr. 1,000 [30,000 x 8% x 5 ] 12 To Bank A/c 30th Sept. 2009 Cr. (`) 30,250 Interest on debentures A/c Dr. 12,000 To Bank A/c To Interest on own debentures A/c 31st March, 2010 8,800 3,200 Interest on debentures A/c Dr. 12,000 To Bank A/c To Interest on own debentures A/c 31st March, 2010 8,800 3,200 8% Debentures A/c Dr. 80,000 To Own debentures A/c 78,700 To Profit on cancellation of Debentures A/c 31st March, 2010 Interest on own debentures A/c Dr. 1,300 5,400 To Profit and Loss A/c ( 3,200+3,200-1,000) 31st March, 2010 Profit and Loss A/c (1,000+12,000) Dr. 5,400 24,000 To Interest on debentures A/c 31st March, 2010 Profit on cancellation of debentures A/c Dr. To Capital reserve A/c 2 The Institute of Chartered Accountants of India 24,000 1,300 1,300 PAPER 5 : ADVANCED ACCOUNTING (ii) Statement showing provisions on various performing and non performing assets of Zenith Bank Ltd. Assets classification Amount (` in lakhs) Provision (%) Amount of provision (` in lakhs) 10,000 0.40 40 6,400 10 640 for one year 3,200 20 640 for two years 1,800 30 540 900 30 270 1,100 100 1,100 3,000 100 3,000 Total 6,230 Standard Sub-standard Doubtful: for three years for more than 3 years Loss assets Note: It is assumed that sub-standard assets and all doubtful assets are fully secured. (iii) As per para 8 of AS 4 Contingencies and Events Occurring After the Balance Sheet Date , adjustment to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the Balance Sheet date. A debtor for ` 3,00,000 suffered heavy loss due to earthquake in the first week of March, 2010 and he became bankrupt in April, 2010 (after the balance sheet date). The loss was also not covered by any insurance policy. Accordingly, full provision for bad debts amounting ` 3,00,000 should be made, to cover the loss arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2010. (iv) The following are examples * of the areas in which different accounting policies may be adopted by different enterprise: - Methods of depreciation, depletion and amortization; - Valuation of inventories; - Recognition of profit on long-term contracts; - Valuation of fixed assets. * The list of examples given here is not exhaustive. 3 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Question 2 A, B, C and D are sharing profits and losses in the ratio 5 : 5 : 4 : 2. Frauds committed by C during the year were found out and it was decided to dissolve the partnership on 31st March, 2010 when their Balance Sheet was as under : Liabilities Amount (`) Assets Capital Building Amount (`) 1,20,000 A B 90,000 Stock 90,000 Investments 85,500 29,000 C D - Debtors 35,000 Cash 42,000 14,500 General reserve Trade creditors 24,000 C 47,000 15,000 Bills payable 20,000 3,06,000 3,06,000 Following information is given to you: (i) A cheque for ` 4,300 received from debtor was not recorded in the books and was misappropriated by C. (ii) Investments costing ` 5,400 were sold by C at ` 7,900 and the funds transferred to his personal account. This sale was omitted from the firm s books. (iii) A creditor agreed to take over investments of the book value of ` 5,400 at ` 8,400. The rest of the creditors were paid off at a discount of 2%. (iv) The other assets realized as follows: Building 105% of book value Stock ` 78,000 Investments The rest of investments were sold at a profit of ` 4,800 Debtors The rest of the debtors were realized at a discount of 12% (v) The bills payable were settled at a discount of ` 400. (vi) The expenses of dissolution amounted to ` 4,900 (vii) It was found out that realization from C s private assets would only be ` 4,000. Prepare the necessary Ledger Accounts. (16 Marks) 4 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Answer Realisation account Particulars To Building To Stock To Investment To Debtors To Cash-creditors paid (W. N. 1) To Cash-expenses To Cash-bills payable (20,000-400) To Partners Capital A/cs A 171 B C D 171 137 69 ` Particulars 1,20,000 By Trade creditors 85,500 By Bills payable 29,000 By Cash 42,000 Building 37,828 Stock 4,900 19,600 ` 47,000 20,000 1,26,000 78,000 Investments(W.N.2) Debtors (W.N. 3) 23,000 33,176 2,60,176 By Debtors-unrecorded 4,300 By Investmentsunrecorded 7,900 548 3,39,376 3,39,376 Cash account Particulars Amount Particulars ` To Balance b/d Building Stock ` 14,500 By Realisation-creditors paid To Realisation - assets realised By Realisation-bills payable 1,26,000 By Realisation-expenses 78,000 33,176 To C s capital A/c. 37,828 19,600 4,900 By Capital account Investments 23,000 Debtors Amount A 90,528 2,60,176 B 90,528 4,000 D 35,292 2,78,676 2,78,676 5 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Partners Capital Accounts Particulars A B C D Particulars A B C D ` ` ` ` ` ` ` ` 90,000 90,000 7,500 171 7,500 171 To Balance b/d 15,000 To Debtors-misappropriation To Investment-misappropriation To C s capital A/c (W.N. 4) By Balance b/d 4,300 7,900 7,143 By General reserve By Realisation profit 7,143 3,000 69 4,000 7,143 7,143 2,777 90,528 90,528 By B s capital A/c 35,292 By D s capital A/c 97,671 27,200 38,069 6 The Institute of Chartered Accountants of India 6,000 137 2,777 By Cash A/c By A s capital A/c 97,671 To Cash A/c - 35,000 97,671 97,671 27,200 38,069 PAPER 5 : ADVANCED ACCOUNTING Working Notes: 1. Amount paid to creditors ` Book value Less: Creditors taking over investments 47,000 ( 8,400) 38,600 (772) 37,828 Less: Discount @ 2% 2. Amount received from sale of investments Book value Less: Misappropriated by C 29,000 (5,400) 23,600 (5,400) 18,200 4,800 23,000 Less: Taken over by a creditor Add: Profit on sale of investments 3. Amount received from debtors ` Book value Less: Unrecorded receipt 42,000 (4,300) 37,700 (4,524) 33,176 Less: Discount @ 12% 4. ` Deficiency of C ` Balance of capital as on 31st March, 2010 Debtors-misappropriation Investment-misappropriation 15,000 4,300 7,900 27,200 Less: Realisation Profit (137) General reserve (6,000) Contribution from private assets (4,000) Net deficiency of capital 17,063 This deficiency of ` 17,063 in C s capital account will be shared by other partners A, B and D in their capital ratio of 90 : 90 : 35by Accordingly, A s share of deficiency =[17,063 x (90/215)] = ` 7,143 B s share of deficiency =[17,063 x (90/215)] = ` 7,143 D s share of deficiency =[17,063 x (35/215)] = ` 2,777 7 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Question 3 Extra Ltd. furnishes you with the following Balance Sheet as on 31st March, 2010: (` in lakhs) Liabilities Amount Assets Fixed assets depreciation Share capital Equity shares of ` 10 each fully paid A Amount less 50 100 Investments at cost 120 Current assets 142 9% Redeemable preference shares of ` 100 each fully paid Capital reserves 20 8 Revenue reserves 50 Securities premium 60 10% Debentures 4 Current liabilities 70 (i) 312 312 The company redeemed the preference shares at a premium of 10% on 1st April, 2010. (ii) It also bought back 3 lakhs equity shares of ` 10 each at ` 30 per share. The payment for the above were made out of huge bank balances, which appeared as a part of the current assets. (iii) Included in its investment were investments in own debentures costing ` 2 lakhs (face value ` 2.20 lakhs). These debentures were cancelled on 1st April, 2010. (iv) The company had 1,00,000 equity stock options outstanding on the above mentioned date, to the employees at ` 20 when the market price was ` 30. (This was included under current liabilities). On 1.04.2010 employees exercised their options for 50,000 shares. (v) Pass the journal entries to record the above. (vi) Prepare Balance Sheet as at 01.04.2010. (16 Marks) 8 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Answer (` in lakhs) Date Particulars Debit 01.04.2010 9% Redeemable preference share capital A/c Premium on redemption of preference shares A/c ` Dr. Dr. Credit ` 20.00 2.00 To Preference shareholders A/c 22.00 (Being preference share capital transferred to shareholders account) 01.04.2010 Preference shareholders A/c Dr. 22.00 To Bank A/c (Being payment made to shareholders) 01.04.2010 01.04.2010 Equity shares buy back A/c To Bank A/c Dr. 90.00 90.00 (Being 3 lakhs equity shares of ` 10 each bought back @ ` 30 per share) Equity share capital A/c Securities premium A/c To Equity Shares buy back A/c 01.04.2010 22.00 (Being cancellation of shares bought back) Revenue reserve A/c (20 + 30) Dr. 30.00 Dr. 60.00 90.00 Dr. 50.00 To Capital redemption reserve A/c 50.00 (Being creation of capital redemption reserve account to the extent of the face value of preference shares redeemed and equity shares bought back as per the law) 01.04.2010 10% Debentures A/c Dr. 2.20 To Investment (own debentures) A/c 2.00 To Profit on cancellation of own debentures A/c 0.20 (Being cancellation of own debentures costing ` 2 lakhs, face value being ` 2.20 lakhs and the balance being profit on cancellation of debentures) 9 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 1.04.2010 Profit on cancellation of debentures A/c Dr. 0.20 To Capital reserve A/c 0.20 (Being profit on cancellation of debentures transferred to capital reserve account) 01.04.2010 Bank A/c Dr. 10.00 Employees stock option outstanding (Current liabilities) A/c Dr. 5.00 To Equity share capital A/c To Securities premium A/c 01.04.2010 5.00 10.00 (Being the allotment to employees, of 50,000 shares of ` 10 each at a premium of 20 per share in exercise of stock options by employees) Securities premium A/c Dr. 2.00 To Premium on redemption of preference shares A/c 2.00 (Being premium on redemption of preference shares adjusted through securities premium) Balance Sheet of Extra Ltd. as on 01.04.2010 (` in lakhs) Liabilities Amount Assets Share capital Fixed assets less depreciation Equity shares of ` 10 each fully paid Capital reserve (W.N. 2) 75.00 Investments at cost (W.N. 7) Securities premium (W.N. 4) Capital redemption reserve 50.00 8.00 50.00 10% Debentures (W.N. 5) Current liabilities (W.N. 6) Amount 1.80 65.00 Working Notes: 1. 8.20 Current assets (W.N.8) 208.00 Equity share capital Opening balance 100.00 Less : Cancellation of bought back shares (30.00) 5.00 75.00 10 The Institute of Chartered Accountants of India 40.00 208.00 (` in lakhs) Add : Shares issued against ESOP 118.00 PAPER 5 : ADVANCED ACCOUNTING 2. Capital Reserve Opening balance 8.00 Add: Profit on cancellation of debentures 0.20 8.20 3. Revenue reserves (` iin lakhs) Opening balance 50.00 Less: Creation of Capital Redemption Reserve (50.00) 0 4. Securities Premium in Opening balance 60.00 Less : Adjustment for cancellation of (60.00) equity shares Less: Adjustment for premium on redemption of (2.00) preference shares Add: Shares issued against ESOP shares at premium 10.00 8.00 5. 10% Debentures Opening balance 4.00 Less: Cancellation of own debentures (2.20) 1.80 6. Current liabilities Opening balance 70.00 Less: Adjustment for ESOP outstanding (5.00) 65.00 7. Investments at cost Opening balance 120.00 Less: Investment in own debentures (2.00) 118.00 8. Current assets Opening balance 142.00 Less : Payment to preference shareholders (22.00) 11 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Less : Payment to equity shareholders (90.00) Add : Share price received against ESOP 10.00 40.00 Question 4 (a) Department R sells goods to Department S at a profit of 25% on cost and Department T at 10% profit on cost. Department S sells goods to R and T at a profit of 15% and 20% on sales respectively. Department T charges 20% and 25% profit on cost to Department R and S respectively. Department 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 R 54,000 Department S 40,500 Department T 27,000 Stock lying at different departments at the end of the year are as under: Deptt. R Transfer from Department R Transfer from Department S Deptt. S Deptt. T ` 21,000 ` 22,500 - ` 16,500 18,000 9,000 7,500 Transfer from Department T Find out the correct departmental profits after charging manager s commission. (8 Marks) (b) From the following information of Reliable Marine Insurance Ltd. for the year ending 31st March, 2010 find out the (i) Net premiums earned (ii) Net claims incurred (`) Direct Business (`) Re-insurance Premium: Received 88,00,000 7,52,000 Receivable 01.04.2009 4,39,000 36,000 Receivable 31.03.2010 3,77,000 32,000 Paid 6,09,000 12 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Payable 01.04.2009 27,000 Payable 31.03.2010 18,000 Claims: Paid 69,00,000 5,54,000 Payable 01.04.2009 89,000 15,000 Payable 31.03.2010 95,000 12,000 Received 2,01,000 Receivable 01.04.2009 40,000 Receivable 31.03.2010 38,000 (8 Marks) Answer (a) Departments R S T ` ` ` Profit 54,000 40,500 27,000 Add : Managerial commission (1/9) 6,000 60,000 4,500 45,000 3,000 30,000 Less: Unrealised profit on stock (Refer W.N.) 6,000 54,000 6,750 38,250 3,000 27,000 Less: Managers commission @ 10% 5,400 48,600 3,825 34,425 2,700 24,300 Working Notes: Value of unrealised profit ` Transfer by department R to S department (22,500 25/125) = 4,500 T department (16,500 10/110) = 1,500 6,000 Transfer by department S to R department (21,000 15/100) = 3,150 T department (18,000 20/100) = 3,600 13 The Institute of Chartered Accountants of India 6,750 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Transfer by department T to R department (9,000 20/120) = 1,500 3,000 S department (7,500 25/125) = 1,500 (b) (i) Net Premium earned ` Premium from direct business received 88,00,000 Add : Receivable as 31.03.2010 3,77,000 Less : Receivable as on 01.04.2009 (4,39,000) Add : Premium on re-insurance accepted 7,52,000 Add : Receivable as on 31.03.2010 32,000 Less : Receivable as on 01.04.2009 (36,000) 87,38,000 7,48,000 94,86,000 Less : Premium on re-insurance ceded 6,09,000 Add : Payable as on 31.03.2010 18,000 Less : Payable as on 01.04.2009 (27,000) Net Premium earned (ii) Net Claims incurred (6,00,000) 88,86,000 ` Claims paid on direct business 69,00,000 Add: Re-insurance 5,54,000 Add: Outstanding as on 31.3.2010 12,000 Less: Outstanding as on 1.4.2009 (15,000) 5,51,000 74,51,000 Less : Claims received from re-insurance 2,01,000 Add: Outstanding as on 31.3.2010 38,000 Less: Outstanding as on 1.4.2009 (40,000) (1,99,000) 72,52,000 Add : Outstanding direct claims at the end of the year 95,000 73,47,000 Less : Outstanding claims at the beginning of the year Net claims incurred 72,58,000 14 The Institute of Chartered Accountants of India (89,000) PAPER 5 : ADVANCED ACCOUNTING Question 5 Following is the Balance Sheet of Y Ltd., as at 31st March, 2010: Liabilities ` Assets ` Share Capital: Fixed Assets: Issued & paid up: Goodwill 8,00,000 20,00,000 Building 7,00,000 2,50,000 Equity shares of ` 10 each, ` 8 per share paid up Plant and machinery 1,00,000 (10%) Preference shares of ` 10 each fully paid up 13,00,000 10,00,000 Current Assets: Stock Sundry debtors Reserves & Surplus: General reserve Profit & Loss A/c 6,00,000 Bank balance 8,00,000 Current Liabilities: Miscellaneous expenditure 4,00,000 Preliminary expense Creditors 7,00,000 9,00,000 6,60,000 40,000 3,00,000 51,00,000 51,00,000 X Ltd. decided to absorb the business of Y Ltd., at the respective book value of assets and trade liabilities except building which was valued at ` 12,00,000 and plant & machinery at `10,00,000. Workmen s profit sharing fund The purchase consideration was payable as follows: (i) Payment of liquidation expenses ` 5,000 and workmen s profit sharing fund at 10% premium; (ii) Issue of equity share of ` 10 each fully paid at ` 11 per share for every preference share and every equity share of Y Ltd., and a payment of ` 4 per equity share in cash. Calculate the purchase consideration, show the necessary ledger accounts in the books of Y Ltd., and opening journal entries in the books of X Ltd. (16 Marks) Answer (i) Calculation of purchase consideration Cash payment for: Liquidation expenses Workmen s profit sharing fund Cash to equity shareholders (2,50,000 x 4) 15 The Institute of Chartered Accountants of India ` in lakhs ` in lakhs 5,000 3,30,000 10,00,000 13,35,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Payment by Equity shares to Preference shareholders (1,00,000 x 11) Equity shareholders (2,50,000 x 11) Purchase consideration (ii) In the books of Y Ltd. 11,00,000 27,50,000 38,50,000 51,85,000 Realisation A/c ` ` To Goodwill 8,00,000 By Creditors To Building 7,00,000 By X Ltd. To Plant & machinery 4,00,000 51,85,000 13,00,000 To Stock 7,00,000 To Sundry debtors To Bank 9,00,000 6,60,000 To Workmen s profit sharing fund 30,000 To Preference shareholders 1,00,000 To Bank (Expenses) To Profit 5,000 3,90,000 55,85,000 X Ltd. A/c ` To Realisation A/c 51,85,000 55,85,000 ` By Bank 13,35,000 By Equity shares in X Ltd. 38,50,000 51,85,000 51,85,000 Bank A/c ` To X Ltd. 13,35,000 ` By Realisation (Expenses) By Workmen s profit sharing fund By Equity shareholders 13,35,000 16 The Institute of Chartered Accountants of India 5,000 3,30,000 10,00,000 13,35,000 PAPER 5 : ADVANCED ACCOUNTING Preference Shareholders A/c ` To Equity Shares in X Ltd. 11,00,000 ` By Preference shares capital 10,00,000 By Realisation A/c (Bal. fig.) 1,00,000 11,00,000 11,00,000 Equity Shareholders A/c ` To Preliminary expenses 40,000 To Bank To Equity shares in Y Ltd. 10,00,000 27,50,000 ` By Equity share capital 20,00,000 By General reserve By Profit & Loss A/c 6,00,000 8,00,000 By Profit on realisation (Bal.fig.) 3,90,000 37,90,000 37,90,000 Equity Shares in X Ltd. A/c ` To X Ltd. ` 38,50,000 By shareholders ________ By Equity shareholders Preference 38,50,000 11,00,000 27,50,000 38,50,000 Workmen s Profit Sharing Fund A/c ` To Bank (iii) 3,30,000 ________ ` By Balance b/d By Realisation (Bal. Fig.)) 3,30,000 In the books of X Ltd. 3,00,000 30,000 3,30,000 Journal Entries Dr. (`) 1. Business purchase A/c To Liquidators of Y Ltd. Dr. 51,85,000 51,85,000 (Being business purchased of Y Ltd.) 17 The Institute of Chartered Accountants of India Cr. (`) INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 2. Building A/c Dr. 12,00,000 Plant & machinery A/c Dr. 10,00,000 Stock A/c Dr. 7,00,000 Debtors A/c Dr. 9,00,000 Bank A/c Dr. 6,60,000 Goodwill A/c (Bal. fig.) Dr. 11,25,000 To Creditors 4,00,000 To Business purchase A/c 51,85,000 (Being assets and liabilities taken over and purchase consideration due) 2. Liquidators of Y Ltd. Dr. 51,85,000 To Bank To Equity share capital 13,35,000 35,00,000 To Securities premium (Being payment of purchase consideration) 3,50,000 Question 6 (a) A Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted assets ratio. Equity share capital Statutory Reserve Capital reserve (of which ` 16 crores were due to revaluation of assets and the balance due to sale of capital asset) Assets: Cash balance with RBI Balance with other banks Other investments Loans and advances: (i) Guaranteed by the Government (ii) Others Premises, furniture and fixtures Off-Balance Sheet items: (i) Guarantee and other obligations (ii) Acceptances, endorsements and letter of credit 18 The Institute of Chartered Accountants of India (` in crores) 500.00 270.00 78.00 10.00 18.00 36.00 16.50 5,675.00 78.00 800.00 4,800.00 (8 Marks) PAPER 5 : ADVANCED ACCOUNTING (b) The Super Electricity Company maintains accounts under the Double Accounts System. It decides to replace one of its old plant with a technologically advanced plant with a larger capacity. The plant when installed in 2000, cost the company ` 90,00,000, the components of materials, labour and overheads being in the ratio 5 : 3 : 2. It is ascertained that the costs of materials has gone up by 200% and the cost of labour has gone up by 300%. The proportion of material, labour and overheads has changed to 10 : 9 : 6. The cost of the new plant is ` 2,80,00,000 and in addition, goods worth ` 12,60,000 have been used in the construction of the new plant. The old plant was scrapped and sold for ` 19,00,000. Find out the amount to be capitalized and also the amount to be charged to revenue. Draw the necessary Ledger Accounts. (8 Marks) Answer (a) (i) ` in crores ` in crores Capital funds Tier I Equity share capital Statutory reserve 500 270 Capital reserve (arising out of sale of assets) (78-16) 62 832 Capital funds Tier II Capital reserve (arising revaluation of assets) out of Less: Discount to the extent of 55% 16 (8.8) 7.2 824.8 ` in crores % of weight ` in crores Funded Risk Assets Cash balance with RBI 10 0 0 Balance with other banks Other investments 18 36 20 100 3.60 36 16.5 0 0 (ii) Risk Adjusted Assets Loans and advances: (i) Guaranteed by the government 19 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 (ii) Others 5,675 5,675 78 Premises, furniture and fixtures 100 100 78 5,792.60 ` in crores Credit conversion factor 800 100 800 4,800 100 4,800 Off-Balance Sheet items: Guarantees and other obligations Acceptances, endorsements letters of credit and 11,392.60 Risk Weighted Assets Ratio: Capital fund 100 Risk adjusted assets (824.8/11,392.60) x 100 = 7.24% (b) Table showing calculation of current cost of old plant Old Cost of % ratio existing plant increase Current cost ` Material 5 Labour 3 Overhead 2 Total Amount to be capitalized New Ratio ` 45,00,000 27,00,000 18,00,000 90,00,000 200 300 90,00,000 81,00,000 54,00,000 * 2,25,00,000 10 9 6 25 ` Cost of new plant (cash) Add: Cost of old material used Less: Estimated current cost of replacing old plant Amount to be capitalized * Current cost of overhead = (90,00,000 + 81,00,000) 6 x = ` 54,00,000 25 10 + 9 10 + 9 + 6 20 The Institute of Chartered Accountants of India 2,80,00,000 12,60,000 2,92,60,000 (2,25,00,000) 67,60,000 PAPER 5 : ADVANCED ACCOUNTING Amount to be charged to Revenue A/c Estimated current cost of replacement Less : Cash on sale of scrap Less : Old material reused Amount to be charged to revenue 19,00,000 12,60,000 2,25,00,000 (31,60,000) 1,93,40,000 Super Electricity Company Plant Account Particulars Amount Particulars Amount ` To Balance b/d 90,00,000 To Bank A/c To Replacement A/c ` By Balance c/d 55,00,000 12,60,000 1,57,60,000 To Bank A/c 1,57,60,000 1,57,60,000 Replacement Account 2,25,00,000 By Bank A/c By Plant A/c By Revenue A/c 2,25,00,000 19,00,000 12,60,000 1,93,40,000 2,25,00,000 Question 7 Answer any four of the followings: (a) Following is the information of the Jammu branch of Best Ltd., New Delhi for the year ending 31st March, 2010 from the following: (1) Goods are invoiced to the branch at cost plus 20%. (2) The sale price is cost plus 50%. (3) Other informations: ` Stock as on 01.04.2009 2,20,000 Goods sent during the year 11,00,000 Sales during the year 12,00,000 Expenses incurred at the branch 45,000 21 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Ascertain (i) the profit earned by the branch during the year (ii) branch stock reserve in respect of unrealized profit. (b) Ram Ltd. had 12,00,000 equity shares on April 1, 2009. The company earned a profit of ` 30,00,000 during the year 2009-10. The average fair value per share during 2009-10 was ` 25. The company has given share option to its employees of 2,00,000 equity shares at option price of ` 15. Calculate basic E.P.S. and diluted E.P.S. (c) On 1st April, 2009, Amazing Construction Ltd. obtained a loan of ` 32 crores to be utilized as under: (i) Construction of sealink across two cities: (work was held up totally for a month during the year due to : ` 25 crores high water levels) (ii) Purchase of equipments and machineries (iii) Working capital (iv) Purchase of vehicles (v) Advance for tools/cranes etc. : ` 3 crores : ` 2 crores : ` 50,00,000 : ` 50,00,000 : ` 1 crores (vi) Purchase of technical know-hor (vii) Total interest charged by the bank for the year ending 31st March, 2010 Show the treatment of interest by Amazing Construction Ltd. : ` 80,00,000 (d) A company went into liquidation whose creditors are ` 36,000 includes ` 6,000 on account of wages of 15 men at ` 100 per month for 4 months immediately before the date of winding up; ` 9,000 being the salaries of 5 employees at ` 300 per month for the previous 6 months, Rent for godown for the last six months amounting to ` 3,000; Income-tax deducted out of salaries of employees ` 1,000 and Directors fees ` 500; in addition it is estimated that the company would have to pay ` 5,000 as compensation to an employee for injuries suffered by him, which was contingent liability not accepted by the company and not included in above said creditors figure. Find the amount of Preferential Creditors. (e) M Ltd. launched a project for producing product A in Nov. 2008. The company incurred ` 30 lakhs towards Research and Development expenses upto 31st March, 2010. Due to unfavourable market conditions the management feels that it is not possible to manufacture and sold the product in the market for next so many years. The management hence wants to defer the expenditure write off to future years. Advise the company as per the applicable Accounting Standard. 22 The Institute of Chartered Accountants of India (4 x 4 = 16 Marks) PAPER 5 : ADVANCED ACCOUNTING Answer (a) (i) Calculation of profit earned by the branch In the books of Jammu Branch Trading Account Particulars Amount Particulars ` 2,20,000 By Sales To Opening stock To Goods received by Head office Amount ` 12,00,000 11,00,000 By Closing stock (Refer W.N.) To Expenses To Gross profit 45,000 1,95,000 ________ 15,60,000 Stock reserve in respect of unrealised profit (ii) 3,60,000 15,60,000 = ` 3,60,000 x (20/120) = `60,000 Working Note: Cost Price 100 Invoice Price 120 Sale Price 150 Calculation of closing stock at invoice price ` 2,20,000 Opening stock at invoice price Goods received during the year at invoice price 11,00,000 13,20,000 Less : Cost of goods sold at invoice price Closing stock Note : (9,60,000) [12,00,000 x (120/150)] 3,60,000 It is assumed that all figures given in the questions is at invoice price. (b) Computation of Earnings Per Share Earnings Net Profit for the year 2009-10 ` 30,00,000 Weighted average number of shares outstanding during the year 2009-10 Earnings per share ` 12,00,000 23 The Institute of Chartered Accountants of India Shares INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010 Basic Earning Per Share = 2.50 30,00,000 12,00,000 Number of shares under option 2,00,000 Number of shares that would have been issued at fair value (As indicated in Working Note) 15 25 Diluted Earnings Per Share 30,00,000 ] [ 12,80,000 (1,20,000) 2,00,000 x 30,00,000 12,80,000 2.34 Working Note: The earnings have not been increased as the total number of shares has been increased only by the number of shares (80,000) deemed for the purpose of the computation to have been issued for no consideration. (c) According to para 3 of AS 16 Borrowing costs , qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use. As per para 6 of the standard, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in which they are incurred The treatment of interest by Amazing Construction Ltd. can be shown as: Qualifying Asset Interest to be capitalized ` Construction of sea-link Yes Purchase of equipments and machineries No Working capital No Purchase of vehicles No Advance for tools, cranes etc. No. Purchase of technical know-how No Total 62,50,000 62,50,000 24 The Institute of Chartered Accountants of India Interest to be charged to Profit & Loss A/c ` 7,50,000 5,00,000 1,25,000 1,25,000 2,50,000 17,50,000 (80,00,000*(25/32) (80,00,000*(3/32) (80,00,000*(2/32) (80,00,000*(.5/32) (80,00,000*(.5/32) (80,00,000*(1/32) PAPER 5 : ADVANCED ACCOUNTING (d) Calculation of Preferential Creditors ` Tax deducted at source on salaries 1,000 6,000 Wages (15 men for 4 months at ` 100 each) 6,000 Salaries ( 5 men for 4 months at ` 300 each) (Refer Note 1) Workmen s compensation Total Note : (i) 5,000 18,000 Salaries payable to any employee due for the period not exceeding 4 months within the twelve months next before commencement of winding up subject to maximum ` 20,000 per person. (ii) Directors fees, rent for godown are not included in preferential creditors. (e) As per para 41 of AS 26 Intangible Assets , expenditure on research should be recognised as an expense when it is incurred. An intangible asset arising from development (or from the development phase of an internal project) should be recognized if and only if, an enterprise can demonstrate all of the conditions specified in para 44 of the standard. An intangible asset (arising from development) should be derecognised when no future economic benefits are expected from its use according to the provisions of AS 26. Therefore, the management can not defer the expenditure write off to future years and the company is required to expense the entire amount of ` 30 lakhs in the Profit and Loss account of the year ended 31 st March, 2010. 25 The Institute of Chartered Accountants of India

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