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CA IPCC : Question Paper (with Answers) - ADVANCED ACCOUNTING Nov 2011

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PAPER 5: ADVANCED ACCOUNTING Question No. 1 is compulsory Answer any five questions from the remaining six questions. Working notes should form part of the answer. Wherever necessary, suitable assumption(s) should be made by the candidates. Question 1 Answer the following questions: (a) On 25th April, 2010, Neel Limited obtained a loan from the bank for ` 70 lakhs to be utilized as under: ` in lakhs Construction of factory shed 28 Purchase of machinery Working capital 21 14 Advance for purchase of truck 7 In March, 2011, construction of shed was completed and machinery installed. Delivery of truck was not received. Total interest charged by the bank for the year ending 31st March, 2011 was ` 12 lakhs. Show the treatment of interest under Accounting Standard 16. (b) An equipment having expected useful life of 5 years, is leased for 3 years. Both the cost and the fair value of the equipment are ` 6,00,000. The amount will be paid in 3 equal instalments and at the termination of lease, lessor will get back the equipment. The unguaranteed residual value at the end of 3 rd year is ` 60,000. The IRR of the investment is 10%. The present value of annuity factor of ` 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of ` 1 due at the end of 3rd year at 10% rate of interest is 0.7513. State with reason whether the lease constitutes finance lease and also compute the unearned finance income. (c) On 1st April, 2010, A Ltd. had outstanding in its books 1,00,000 Debentures of ` 100 each, interest @ 12% per annum. The interest on debentures was paid half-yearly on 30th September and 31st March of every year. On 31st May, 2010 the company purchased 30,000 Debentures of its own @ ` 98 (ex-interest) per debenture. The company cancelled the debentures so purchased on 31st March, 2011. Pass the necessary Journal Entries to record the above transactions for the year ended 31st March, 2011. The Institute of Chartered Accountants of India 2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 (d) Global Limited has a branch which closes its books of account every year on 31st March. This is an independent branch which maintains comprehensive books of account for recording their transactions. You are required to show journal entries in the books of branch on 31 st March, 2011 to rectify or adjust the following: (i) Head Office allocates ` 1,35,000 to the branch as head office expenses, which have not yet been recorded by branch. (ii) Depreciation of branch fixed assets, whose accounts are kept by head office in its books, not yet recorded in the branch books, ` 1,15,000. (iii) Branch paid ` 1,40,000 as salary to an official from head office on visit to branch and debited the amount to its Salaries Account. (iv) Head Office collected ` 1,30,000 directly from a branch customer on behalf of the branch, but no intimation was received earlier by the branch. Now the branch learns about it. (v) It is learnt that a remittance of ` 1,50,000 sent by the branch has not been received by head office till date. (4 x 5 =20 Marks) Answer (a) Treatment of Interest as per AS 16 S. Particulars No. Nature Interest amount to be capitalized Interest amount to be charged to Profit & Loss account 1 Construction Qualifying of factory asset shed 2 Purchase of Not a machinery qualifying asset 3 Working capital Not a qualifying asset ` 12 lakhs 4 Advance for Not a purchase of qualifying truck asset ` 12 lakhs ` 28 lakhs ` 70 lakhs = ` 4.80 lakhs ` 12 lakhs Total The Institute of Chartered Accountants of India ` 12 lakhs ` 21 lakhs = ` 70 lakhs ` 3.60 lakhs ` 14 lakhs ` 70 lakhs = ` 2.40 lakhs ` 7 lakhs ` 70 lakhs = ` 1.20 lakhs ` 4.80 lakhs ` 7.20 lakhs PAPER 5 : ADVANCED ACCOUNTING 3 Note: 1. 2. (b) (i) It is assumed that construction of factory shed was completed at the end of March, 2011. Accordingly, interest for the full year has been capitalized. It is assumed that machinery was ready to use at the time of purchase only and on this basis it has been treated as non-qualifying asset. Determination of Nature of Lease It is assumed that the fair value of the leased equipments is equal to the present value of minimum lease payments. Present value of residual value at the end of 3 rd year = ` 60,000 x 0.7513 = ` 45,078 Present value of lease payments = ` 6,00,000 ` 45,078 = ` 5,54,922 The percentage of present value of lease payments to fair value of the equipment is (` 5,54,922 / ` 6,00,000) x 100 = 92.487%. Since, it substantially covers the major portion of the lease payments, the lease constitutes a finance lease. (ii) Calculation of Unearned Finance Income Annual lease payment = ` 5,54,922 / 2.4868 =` 2,23,147 (approx) Gross investment in the lease = Total minimum lease payment + unguaranteed residual value = (` 2,23,147 3) + ` 60,000 = ` 6,69,441 + ` 60,000 = ` 7,29,441 Unearned finance income = Gross investment - Present value of minimum lease payments and unguaranteed residual value = ` 7,29,441 ` 6,00,000 = ` 1,29,441 (c) In the books of A Limited Journal Entries Date Particulars 31st May, Investment in own debentures A/c Dr. 2010 Debenture interest A/c Dr. To Bank A/c (Being the purchase of own 30,000 debentures @ ` 98 ex-interest) The Institute of Chartered Accountants of India Dr. (`) 29,40,000 60,000 Cr. (`) 30,00,000 4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 30th Sep., 2010 Debenture interest A/c To Bank A/c To Interest on own debentures A/c Dr. 5,40,000 4,20,000 1,20,000 (Being interest @ 12% paid on 70,000 debentures & adjustment of interest on 30,000 own debentures for 4 months) 31st March, 2011 Debenture interest A/c Dr. To Bank A/c To Interest on own debentures A/c (Being interest @ 12% paid on 70,000 debentures & adjustment of interest on 30,000 own debentures for 6 months) 31st March, 2011 12% Debentures A/c To Investment in own debentures A/c To Capital reserve A/c (Being cancellation of 30,000, 12% debentures) Dr. 6,00,000 30,00,000 own 31st March, 2011 Profit and Loss A/c Dr. To Debenture interest A/c (Being total interest transferred to Profit & Loss account) 12,00,000 31st March, 2011 Interest on own debentures A/c Dr. To Profit & Loss A/c (Being total interest on own debentures credited to Profit & Loss account) 3,00,000 (d) 4,20,000 1,80,000 29,40,000 60,000 12,00,000 3,00,000 In the books of Branch Journal Entries S.No. Particulars Dr. (`) (i) Head Office Expenses A/c Dr. To Global Limited (H.O.) A/c (Being expenses allocated to branch by head office) 1,35,000 (ii) Depreciation A/c Dr. To Global Limited (H.O.) A/c (Being depreciation on fixed assets of branch, whose account are maintained by head office) 1,15,000 The Institute of Chartered Accountants of India Cr. (`) 1,35,000 1,15,000 PAPER 5 : ADVANCED ACCOUNTING 5 (iii) Global Limited (H.O.) A/c Dr. To Salaries A/c (Being the rectification of salary paid, on behalf of the head office) 1,40,000 (iv) Global Limited (H.O.) A/c Dr. To Debtors A/c (Being adjustment of direct collection from branch debtors, by head office) 1,30,000 (v) No entry will be passed in the Branch books 1,40,000 1,30,000 Note: Cash-in-transit of ` 1,50,000 will be shown in the books of Head office. Question 2 P, Q, R and S had been carrying on business in partnership sharing profits & losses in the ratio of 4:3:2:1. They decided to dissolve the partnership on the basis of following Balance Sheet as on 30th April, 2011: Liabilities Capital Accounts P Q General reserve Capital reserve Sundry creditors Mortgage loan 1,68,000 1,08,000 Amount (`) Assets Land & building Furniture & fixtures 2,76,000 Stock 95,000 Debtors 25,000 Cash in hand 36,000 Capital overdrawn: 1,10,000 R 25,000 S 18,000 5,42,000 (i) Amount (`) 2,46,000 65,000 1,00,000 72,500 15,500 43,000 5,42,000 The assets were realized as under: ` Land & building 2,30,000 Furniture & fixtures 42,000 Stock 72,000 Debtors 65,000 (ii) Expenses of dissolution amounted to ` 7,800. (iii) Further creditors of ` 18,000 had to be met. (iv) R became insolvent and nothing was realized from his private estate. Applying the principles laid down in Garner Vs. Murray, prepare the Realisation Account, Partners Capital Accounts and Cash Account. (16 Marks) The Institute of Chartered Accountants of India 6 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Answer Realisation Account Amount (`) Particulars Particulars To To To To Land and building Furniture and fixtures Stock Debtors To Cash A/c (expenses on dissolution) Cash A/c (creditors ` 36,000 + ` 18,000) Cash A/c (Mortgage loan) To To 2,46,000 By 65,000 By 1,00,000 By 72,500 Amount (`) Sundry creditors Mortgage loan Cash account Land and building 36,000 1,10,000 2,30,000 Furniture & fixtures Stock Debtors 7,800 54,000 42,000 72,000 65,000 1,10,000 By Partners capital accounts (Loss 4:3:2:1) P = 40,120 Q = 30,090 R = 20,060 S = 10,030 1,00,300 6,55,300 6,55,300 Partners Capital Accounts Particulars Q R S Particulars P Q R S ` To Balance b/d P ` ` ` ` ` ` ` 1,68,000 1,08,000 38,000 28,500 19,000 9,500 10,000 7,500 5,000 2,500 40,120 30,090 - 10,030 - - 25,000 18,000 By Balance b/d To Realization A/c By General (Loss) 40,120 30,090 20,060 10,030 Reserve To R s Capital A/c By Capital (Deficiency) 12,636 8,424 - Reserve To Cash A/c 2,03,364 1,35,576 - By Cash A/c (realization loss) By P s Capital A/c By Q s Capital A/c By Cash A/c 2,56,120 1,74,090 45,060 28,030 12,636 8,424 2,56,120 1,74,090 45,060 6,000 28,030 Note: P, Q and S brought cash to make good, their share of the loss on realization. However, in actual practice they will not be bringing any cash, only a notional entry will be made. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 7 Cash Account Particulars To To Amount Particulars (`) Balance b/d Realization A/c: Land and building Furniture & fixtures 15,500 By Realization A/c: Expenses on dissolution Creditors (36,000+18,000) Mortgage loan 72,000 By 65,000 By To P, Q, S s capital A/cs (40,120+30,090+10,030) S s capital A/c 2,03,364 1,35,576 80,240 To 7,800 54,000 1,10,000 P s capital A/c Q s capital A/c 2,30,000 42,000 Stock Debtors Amount (`) 6,000 5,10,740 5,10,740 Working Note: As per Garner Vs. Murray rule, solvent partners have to bear the loss due to insolvency of a partner in their capital ratio. Calculation of Capital Ratio of Solvent Partners P (`) 1,08,000 (18,000) 38,000 28,500 9,500 10,000 7,500 2,500 2,16,000 Capital reserve (`) 1,68,000 Add: General reserve S (`) Opening capital Q 1,44,000 (6,000) Though S is a solvent partner yet he cannot be called upon to bear loss on account of insolvency of R because his capital account has a debit balance. Therefore, capital ratio of P & Q = 216 : 144 = 3 : 2 Deficiency of R = ` {(25,000 + 20,060) (19,000 + 5,000)} = ` 45,060 ` 24,000 = ` 21,060. Deficiency of R will be shared by P & Q in the capital ratio of 3 : 2 i.e. P = ` 21,060 X 3/5 = ` 12,636 Q = ` 21,060 X 2/5 = ` 8,424 The Institute of Chartered Accountants of India 8 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Question 3 X Ltd. and Y Ltd. were carrying on same business independently. The companies agreed to amalgamate on and from 1-4-2011 and formed a new company Z Ltd. to take over the assets and liabilities of the existing companies. The Balance Sheets of two companies as on 31-3-2011 are as follows: Liabilities X Ltd. Y Ltd. (` ) (`) 30,00,000 18,00,000 6,00,000 - 9,00,000 7,50,000 5,40,000 15,00,000 4,80,000 - - 9,00,000 7,80,000 5,10,000 73,20,000 44,40,000 X Ltd. Y Ltd. (`) (`) 27,00,000 15,00,000 13,50,000 11,40,000 2,40,000 - Stock 15,60,000 10,50,000 Debtors 12,30,000 7,80,000 90,000 1,20,000 73,20,000 44,40,000 Share capital: Equity shares of ` 10 each (fully paid up) Securities premium General reserve Profit & loss account 10% Debentures Secured loan Sundry creditors Assets Land & building Plant & machinery Investments (15,000 shares of Y Ltd.) Cash at bank Following are the additional information: (i) For the purpose of amalgamation, the shares of the existing companies are to be valued as under: X Ltd. = ` 18 per share Y Ltd. = ` 20 per share. (ii) A contingent liability of X Ltd. of ` 1,80,000 is to be treated as actual existing liability. (iii) The shareholders of X Ltd. and Y Ltd. are to be paid by issuing sufficient number of shares of Z Ltd. at a premium of ` 6 per share. (iv) The face value of shares of Z Ltd. is to be of ` 10 each. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 9 You are required to: (i) Calculate the purchase consideration (i.e. the number of shares to be issued to X Ltd. and Y Ltd.) (ii) Prepare Realisation Account and Shareholders Account in the books of X Ltd. & Y Ltd. (iii) Prepare the Balance Sheet of Z Ltd. after amalgamation. (16 Marks) Answer (i) Calculation of Purchase Consideration No. of shares Particulars X Ltd. 3,00,000 3,00,000 Existing Number of shares Less: Number of shares held by X Ltd. in Y Ltd. Net number of shares Value per share Purchase consideration Number of shares of Z Ltd. @ ` 16 per share Y Ltd. 1,80,000 (15,000) 1,65,000 ` 20 ` 18 ` 33,00,000 ` 54,00,000 3,37,500 shares 2,06,250 shares Discharge of Purchase Consideration Particulars X Ltd. In share capital X Ltd. = 3,37,500 shares ` 10 each Y Ltd. = 2,06,250 shares ` 10 each 33,75,000 Securities premium X Ltd. = 3,37,500 shares ` 6 each Y Ltd. = 2,06,250 shares ` 6 each 20,25,000 54,00,000 (ii) (a) Particulars To Sundry assets: Land and building Plant and machinery Investments Stock Debtors Y Ltd. 20,62,500 12,37,500 33,00,000 In the books of X Ltd. Realization Account Amount (`) Particulars By 10% Debentures 27,00,000 By Sundry creditors 15,00,000 (7,80,000+1,80,000) 2,40,000 By Z Ltd. (Purchase 15,60,000 consideration) 12,30,000 The Institute of Chartered Accountants of India Amount (`) 15,00,000 9,60,000 54,00,000 10 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Bank To Equity shareholders A/c (Profit) 90,000 5,40,000 78,60,000 78,60,000 Equity Shareholders Account Particulars To Shares in Z Ltd. A/c Amount (`) Particulars 54,00,000 By By By By Share capital Securities premium General reserve Profit & loss A/c (5,40,000 1,80,000) By Realization A/c 54,00,000 (b) Amount (`) 30,00,000 6,00,000 9,00,000 3,60,000 5,40,000 54,00,000 In the books of Y Ltd. Realization Account Particulars Amount (`) Particulars To Sundry assets: Land and building Plant and machinery Stock Debtors Bank To Equity shareholders A/c (Profit) By Secured loan 13,50,000 By Sundry creditors 11,40,000 By Z Ltd. (Purchase 10,50,000 consideration) 7,80,000 1,20,000 Amount (`) 9,00,000 5,10,000 33,00,000 2,70,000 47,10,000 47,10,000 Equity Shareholders Account Particulars To Shares in Z Ltd. A/c Amount (`) Particulars 33,00,000 By By By By 33,00,000 The Institute of Chartered Accountants of India Share capital General reserve Profit & loss A/c Realization A/c Amount (`) 18,00,000 7,50,000 4,80,000 2,70,000 33,00,000 PAPER 5 : ADVANCED ACCOUNTING (iii) 11 Balance Sheet of Z Ltd. (After Amalgamation) as on 01st April, 2011 Liabilities ` Share capital: 5,43,750 Equity shares of ` 10 each fully paid up (above shares are issued for consideration other than cash) 54,37,500 Securities premium 10% Debentures Secured loan Sundry creditors (7,80,000 + 1,80,000 + 5,10,000) Assets ` Goodwill Land & building Plant & machinery Stock Debtors 32,62,500 Cash at bank 15,00,000 9,00,000 14,70,000 10,50,000 40,50,000 26,40,000 26,10,000 20,10,000 2,10,000 1,25,70,000 1,25,70,000 Working Note: Calculation of Goodwill / (Capital Reserve) Particulars Purchase consideration X Ltd. ` (A) Assets taken over of X Ltd. (27,00,000+15,00,000+15,60,000+12,30,000+90,000) Y Ltd. (13,50,000+11,40,000+10,50,000+7,80,000+1,20,000) Less: Liabilities taken over of X Ltd. (15,00,000 +7,80,000+ 1,80,000) Liabilities taken over of Y Ltd. (9,00,000 + 5,10,000) Net assets (B) Goodwill (B-A) Y Ltd. ` 54,00,000 33,00,000 70,80,000 44,40,000 (24,60,000) (14,10,000) 30,30,000 46,20,000 2,70,000 7,80,000 Question 4 M/s. Access Electricity Company earned a profit of ` 75,00,000 (after tax for the year 2010-11) after paying ` 2,40,000 @ 12% as debenture interest for the year ended March 31, 2011. The following further information has been extracted from the books of company: The Institute of Chartered Accountants of India 12 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Amount (`) Share capital 3,00,00,000 Fixed assets 9,00,00,000 Depreciation reserve on fixed assets 3,00,00,000 Loan from Electricity Board 1,20,00,000 Reserve fund investments, at par, invested in 8% Government securities 50,00,000 Contingencies reserve investments, at par, 10% 24,00,000 Tariff and dividends control reserve 16,00,000 Security deposits of consumers 10,00,000 Consumer s contribution to cost of fixed assets 3,40,000 Intangible assets 7,60,000 Monthly average of current assets, including amount due from consumers, ` 7,00,000 34,60,000 Development reserve 12,00,000 Show, how the profits have to be dealt with by the company under the provisions of the Electricity Act. Assume the bank rate to be 10%. (16 Marks) Answer Calculation of Capital Base: Particulars ` Fixed assets Intangible assets 9,00,00,000 7,60,000 Average current assets (` 34,60,000 ` 7,00,000) Contingencies reserve investments 27,60,000 24,00,000 9,59,20,000 Less: Depreciation reserve on fixed assets 3,00,00,000 Loan from Electricity Board 12% Debentures (2,40,000/12%) 1,20,00,000 20,00,000 Tariff and dividend control reserve 16,00,000 Security deposits of consumers 10,00,000 Consumer s contribution to fixed assets Development reserve 3,40,000 12,00,000 (4,81,40,000) 4,77,80,000 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 13 Calculation of Reasonable Return ` 12% (Bank Rate 10% + 2 %) of Capital base 57,33,600 8% income from Reserve fund investments % of Loan from Electricity Board 4,00,000 60,000 % on 12% Debentures % on Development reserve Calculation of Surplus 10,000 6,000 62,09,600 ` Clear profit Less: Reasonable return Surplus 75,00,000 (62,09,600) 12,90,400 For disposal 20% of Reasonable return i.e. ` 12,41,920 (` 62,09,600 x 20%) or surplus whichever is less is for disposal as surplus Since, 20% of Reasonable return is less, therefore, ` 12,41,920 is for disposal as surplus. Disposal of Surplus ` (i) 1/3rd of Surplus limited to 5% of Reasonable return is at the disposal of the company 1/3 of Surplus ` 12,41,920 = ` 4,13,973 Or, 5% of Reasonable return of ` 62,09,600 = ` 3,10,480 whichever is less at the disposal of the company i.e. (ii) of the balance credited to Tariffs & Dividend Control Reserve i.e. (` 12,41,920 ` 3,10,480) (iii) Remaining of the balance credited to Consumers suspense A/c Total Surplus 3,10,480 4,65,720 4,65,720 12,41,920 Summary ` Amount to be refunded to consumers [(` 4,65,720 + ` (12,90,400 12,41,920)] 5,14,200 Amount to be credited to Tariffs and Dividend Control Reserve 4,65,720 The Institute of Chartered Accountants of India 14 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 Amounts at the disposal of the company (` 62,09,600 + ` 3,10,480) 65,20,080 Net profit 75,00,000 Question 5 (a) M/s. AM Enterprise had two departments, Cloth and Readymade Clothes. The readymade clothes were made by the firm itself out of the cloth supplied by the Cloth Department at its usual selling price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2011: Cloth Department ` Readymade Clothes Department ` Opening stock on Purchases 1st April, 2010 Sales Transfer to Readymade Clothes Department Manufacturing expenses Selling expenses 31,50,000 2,10,00,000 5,32,000 1,68,000 2,31,00,000 31,50,000 47,25,000 - 2,10,000 6,30,000 73,500 Rent & warehousing 8,40,000 5,60,000 st Stock on 31 March, 2011 21,00,000 6,72,000 In addition to the above, the following information is made available for necessary consideration: The stock in the Readymade Clothes Department may be considered as consisting of 75% cloth and 25% other expenses. The Cloth Department earned a gross profit at the rate of 15% in 2009-10. General expenses of the business as a whole amount to ` 10,85,000. (b) The following particulars are extracted from the records of M/s. Engco Bank Limited for the year ended 31st March, 2011: Amount (`) Rebate on bills discounted (not due on March 31st, 2010) 60,610 Discount received Bills discounted 6,10,800 24,42,250 An analysis of the bills discounted is a follows: Amount (`) 3,75,000 The Institute of Chartered Accountants of India Due Date April 15, 2011 PAPER 5 : ADVANCED ACCOUNTING 15 4,90,000 May 6, 2011 2,45,000 June 1, 2011 3,68,000 June 20, 2011 4,85,000 July 4, 2011 The rate of discount is 12% per annum. You are required to : (i) Calculate rebate on bills discounted as on 31st March, 2011. (ii) Determine the amount of discount to be credited to the profit and loss account for the year ended 31st March, 2011. (iii) Show the necessary journal entries in the books of M/s. Engco Bank Ltd. as on 31st March, 2011. (8 + 8 = 16 Marks) Answer (a) Departmental Trading and Profit and Loss Account for the year ended 31st March, 2011 Particulars To Opening stock To Purchases Cloth (`) Readymade Clothes (`) 31,50,000 5,32,000 2,10,00,000 Total Particulars (`) 36,82,000 By Sales 1,68,000 2,11,68,000 By Transfer to Readymade Clothes Deptt. To Transfer from Cloth Department - 31,50,000 31,50,000 To Manufacturing expenses - 6,30,000 42,00,000 9,17,000 Readymade Clothes (`) Total (`) 2,31,00,000 47,25,000 2,78,25,000 31,50,000 - 31,50,000 21,00,000 6,72,000 27,72,000 6,30,000 51,17,000 To Gross profit c/d 2,83,50,000 By Closing stock Cloth (`) 53,97,000 3,37,47,000 To Selling expenses 2,10,000 73,500 To Rent & warehousing 8,40,000 5,60,000 31,50,000 2,83,500 34,33,500 42,00,000 9,17,000 51,17,000 2,83,50,000 53,97,000 3,37,47,000 14,00,000 To Net profit By Gross 2,83,500 profit b/d The Institute of Chartered Accountants of India 42,00,000 9,17,000 51,17,000 42,00,000 9,17,000 51,17,000 16 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 General Profit and Loss Account Particulars Amount (` ) Particulars To General expenses To Unrealized profit (Refer W.N.) To General net profit (Bal.fig.) Amount (` ) 34,33,500 34,33,500 Working Note: 10,85,000 By Net profit 20,790 23,27,710 34,33,500 Calculation of Stock Reserve Rate of Gross Profit of Cloth Department, for the year 2010-11 = Gross Pr ofit x 100 Total Sales ` 42,00,000 100 100 = 16% ` ( 2,31,00,000 + 31,50,000 ) Closing Stock of cloth in Readymade Clothes Department = 75% i.e. ` 6,72,000 x 75% = ` 5,04,000 Stock Reserve required for unrealized profit @ 16% on closing stock ` 5,04,000 x 16% = ` 80,640 Stock reserve for unrealized profit included in opening stock of readymade clothes @ 15% i.e. (` 5,32,000 x 75% x 15%) = ` 59,850 Additional Stock Reserve required during the year = ` 80,640 ` 59,850 = ` 20,790. (b) (i) Calculation of Rebate on Bills Discounted as on 31st March, 2011 Amount (` ) Due date No. of days from 31st March, 2011 to due date 3,75,000 4,90,000 2,45,000 3,68,000 4,85,000 April 15, 2011 May 06, 2011 June 01, 2011 June 20, 2011 July 04, 2011 15 36 62 81 95 19,63,000 Product 56,25,000 1,76,40,000 1,51,90,000 2,98,08,000 4,60,75,000 11,43,38,000 Amount of rebate on bills = ` 11,43,38,000 12% 1/365 = ` 37,591 (approx.) Note: One can also calculate rebate on each bill individually. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 17 (ii) Determination of amount of discount to be credited to the Profit and Loss Account for the year ended 31st March, 2011 ` Transfer from Rebate on bills discounted account as on 31.03.2010 Add: Discount received during the year Less: Rebate on bills discounted as on 31.03.2011 60,610 6,10,800 6,71,410 (37,591) Amount transferred to Profit and Loss Account 6,33,819 In the books of Engco Bank Ltd. Journal Entries Date (i) Dr. (`) Rebate on bills discounted A/c To Discount on bills A/c Dr. Cr. (`) 60,610 60,610 (Being transfer of unexpired discoount on bills of 31.3.2010) (ii) Discount on bills A/c Dr. To Rebate on bills discounted A/c (Being unexpired discount of taken into account) (iii) 37,591 37,591 31.03.2011 Discount on bills A/c To Profit & Loss A/c Dr. 6,33,819 6,33,819 (Being discount earned during the year transferred to Profit and Loss account) Question 6 (a) M/s. ABC Limited has gone into liquidation on 25 th June, 2011. Certain creditors could not receive payments out of realization of assets and contributions from A list contributories. The following are the details of certain transfers which took place in the year ended 31st March, 2011: Shareholders No. of shares transferred Date of ceasing to be a member Creditors remaining unpaid and outstanding on the date of transfer (`) P 4,000 10-5-2010 9,000 Q 3,000 22-7-2010 12,000 R 2,400 15-9-2010 13,500 The Institute of Chartered Accountants of India 18 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 S 1,600 14-12-2010 14,000 T 1,000 09-03-2011 14,200 All the shares are of ` 10 each, ` 8 per share paid up. Show the amount to be realized from the persons listed above. Ignore remuneration to liquidator and other expenses. (b) From the following information of M/s. Bigfish Marine Insurance Co. Ltd., prepare the Revenue Account as per regulations of IRDA for the year ended 31st March, 2011: Particulars Premium received Premium outstanding on March 31, 2011 Premium paid on reinsurance ceded Claims paid Estimated liability in respect of outstanding claims: On April 1, 2010 On March 31, 2011 Expenses of management (includes ` 45,000 surveyor s fee and ` 65,000 legal expenses paid for settlement of claims) Interest and dividend (Gross) Income tax on the above Profit on sale of investments Commission paid Amount (`) 18,75,000 1,25,000 2,28,000 10,54,000 1,89,000 2,25,000 4,85,000 1,65,250 49,575 46,000 1,94,000 Balance of fund on 1st April, 2010 was ` 18,50,000 including additional reserve of ` 1,80,000. Additional reserve has to be maintained at 10% of net premium for the year. (8 + 8 = 16 Marks) Answer (a) Statement of Liabilities of B List Contributories Shareholder No. of Maximum shares liability transferred upto ` 2 per share Division of liability as on Total 22.07.2010 15.09.2010 14.12.2010 09.03.2011 Q R S T 3,000 2,400 1,600 1,000 6,000 4,800 3,200 2,000 4,500 3,600 2,400 1,500 720 480 300 308 192 8 4,500 4,320 3,188 2,000 8,000 16,000 12,000 1,500 500 8 14,008 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 19 Notes: 1. P transferred shares before one year preceding the date of winding up, therefore, he cannot be held liable for any liability on liquidation. 2. Liability of T has been restricted to the maximum allowable limit of ` 2,000. Therefore, amount payable by T on 09.03.2011 is ` 8 only. 3. Q will not be responsible for further debts incurred after 10 th May, 2010 (from the date when he ceases to be a member). Similarly, R & S will not be liable for the debts incurred after the date of their transfer of shares. Working Note: Calculation of Ratio for Discharge of Liabilities Date 22.07.2010 15.09.2010 14.12.2010 09.03.2011 Cumulative liability Increase in liabilities (` ) (` ) 12,000 13,500 1,500 14,000 500 14,200 200 (b) Ratio of no. of shares held by Q, R, S & T 30: 24: 16: 10 24: 16: 10 16: 10 Only T FORM B-RA Name of the Insurer: M/s Bigfish Marine Insurance Co. Ltd. Revenue Account for the year ended 31st March, 2011 Particulars Premium earned (Net) Profit on sale of investment Interest, dividend and rent (Gross) Schedule 1 Total (A) Claims incurred (Net) Commission Operating expenses related to insurance business Total (B) Profit for Marine Insurance Business (A-B) ` 16,72,800 46,000 1,65,250 18,84,050 2 3 4 12,00,000 1,94,000 3,75,000 17,69,000 1,15,050 Schedule -1 Premium Earned (Net) Premium received Add: Outstanding premium as on 31.03.2011 The Institute of Chartered Accountants of India ` 18,75,000 1,25,000 20 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 20,00,000 Less: Premium on reinsurance ceded (2,28,000) 17,72,000 Less: Adjustment for change in reserve for unexpired risk (Refer W.N. 1) Net premium earned (99,200) 16,72,800 Schedule -2 Claim Incurred (Net) Claim paid ` 10,54,000 Add: Surveyor s fee & legal expenses paid for settlement of claim (` 45,000 + ` 65,000) 1,10,000 Add: Outstanding claims as on 31.03.2011 2,25,000 13,89,000 Less: Outstanding claims as on 01.04.2010 Claim incurred (Net) (1,89,000) 12,00,000 Schedule -3 Commission Commission paid ` 1,94,000 Schedule -4 Operating expenses related to insurance business Expenses of Management Less: Surveyor s fee & legal expenses ` 4,85,000 (1,10,000) 3,75,000 Working Notes: 1. Calculation for change in Reserve for Unexpired Risk ` Unexpired risk reserve at the beginning (including additional reserve) 18,50,000 Less: Reserve for unexpired risk as on 31.03.2011 (100% of ` 17,72,000) Additional reserve as on 31.03.2011 The Institute of Chartered Accountants of India 17,72,000 PAPER 5 : ADVANCED ACCOUNTING (10% of ` 17,72,000) Change in provision for unexpired risk 2. 21 1,77,200 (19,49,200) 99,200 Income tax on interest and dividend ` 49,575 is part of Profit & Loss Account, therefore, not given effect to in the Revenue Account. Question 7 Answer any four of the following: (a) MEC Limited could not recover an amount of ` 8 lakhs from a debtor. The company is aware that the debtor is in great financial difficulty. The accounts of the company for the year ended 31-3-2011 were finalized by making a provision @ 25% of the amount due from that debtor. In May 2011, the debtor became bankrupt and nothing is recoverable from him. Do you advise the company to provide for the entire loss of ` 8 lakhs in books of account for the year ended 31-3-2011? (b) Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th February, 2011, when the exchange rate was ` 44 per US Dollar. The transaction was recorded in the books at the above mentioned rate. The payment for the transaction was made on 10th April, 2011, when the exchange rate was ` 48 per US Dollar. At the year end 31st March, 2011, the rate of exchange was ` 49 per US Dollar. The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the cost of raw material consumed for the difference between ` 48 and ` 44 per US Dollar. Discuss whether this treatment is justified as per the provisions of AS-11 (Revised). (c) A company has its share capital divided into shares of ` 10 each. On 1-4-2010, it granted 5,000 employees stock option at ` 50, when the market price was ` 140. The options were to be exercised between 1-12-2010 to 28-2-2011. The employees exercised their options for 4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year ended 31-3-2011, with regard to employees stock option. (d) Explain the treatment of refund of Government Grants as per Accounting Standard 12. (e) What are the qualitative characteristics that improve the usefulness of information provided in the financial statements? (4 4 = 16 Marks) Answer (a) As per para 8 of AS 4, Contingencies and Events Occurring after the Balance Sheet Date , adjustments to assets and liabilities are required for events occurring after the balance sheet date if such event provides/relates to additional information to the conditions existing at the balance sheet date and is also materially affecting the valuation of assets and liabilities on the balance sheet date. The Institute of Chartered Accountants of India 22 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 As per the information given in the question, the debtor was already in a great financial difficulty at the time of closing of accounts. Bankruptcy of the debtor in May 2011 is only an additional information to the condition existing on the balance sheet date. Also the effect of a debtor becoming bankrupt is material as total amount of ` 8 lakhs will be a loss to the company. Therefore, the company is advised to provide for the entire amount of ` 8 lakhs in the books of account for the year ended 31st March, 2011. (b) As per para 9 of AS 11, The Effects of Changes in Foreign Exchange Rates , initial recognition of a foreign currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction. Accordingly, on 25th February 2011, the raw material purchased and its creditors will be recorded at US dollar 9,000 ` 44 = ` 3,96,000. Also, as per para 11 of the standard, on balance sheet date such transaction is reported at closing rate of exchange, hence it will be valued at the closing rate i.e. ` 49 per US dollar (USD 9,000 x ` 49 = ` 4,41,000) at 31st March, 2011, irrespective of the payment made for the same subsequently at lower rate in the next financial year. The difference of ` 5 (49 44) per US dollar i.e. ` 45,000 (USD 9,000 x ` 5) will be shown as an exchange loss in the profit and loss account for the year ended 31st March, 2011 and will not be adjusted against the cost of raw materials. In the subsequent year on settlement date, the company would recognize or provide in the Profit and Loss account an exchange gain of ` 1 per US dollar, i.e. the difference from balance sheet date to the date of settlement between ` 49 and ` 48 per US dollar i.e. ` 9,000. Hence, the accounting treatment adopted by the Chief Accountant of the company is incorrect i.e. it is not in accordance with the provisions of AS 11. (c) In the books of Company Journal Entries Date Particulars Dr. (`) Cr. (`) April, Employees compensation expenses A/c Dr. 4,50,000 [` 5,000 x (140-50)] To Employees stock option outstanding A/c (Being grant of 5,000 ESOPs to employees @ ` 50 when market price was ` 140) 4,50,000 1st Dec. Bank A/c Dr. 2,40,000 2010 to Employees stock option outstanding A/c Dr 4,32,000 28th Feb. To Equity share capital A/c 2011 To Securities premium A/c (Being allotment to employees 4,800 shares of ` 10 each at a premium of ` 130 at an exercise price of ` 50 each) 48,000 6,24,000 1st 2010 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 23 31st Mar. Employees stock option outstanding A/c Dr 2011 To Employees compensation expenses A/c (Being reverse entry for lapse of 200 stock options) 18,000 31st Mar. Profit and Loss A/c Dr. 4,32,000 2011 To Employees compensation expenses A/c (Being transfer of employees compensation expenses) 18,000 4,32,000 Alternatively, one may pass following two entries to give effect to the exercise of options in the same year. Journal Entries Date Particulars Dr. ` Dr. Dec. Bank A/c 2010 to Employees compensation expenses A/c Dr. 28th To Equity Share Capital A/c Feb. To Securities Premium A/c 2011 (Being allotment to employees 4,800 shares of ` 10 each at a premium of ` 130 at an exercise price of ` 50 each) 2,40,000 4,32,000 Profit and Loss account Dr. To Employees compensation expenses A/c (Being transfer of employees compensation expenses) 4,32,000 1st 31st Mar. 2011 Cr. ` 48,000 6,24,000 4,32,000 (d) Para 11 of AS 12, Accounting for Government Grants , explains treatment of government grants in following situations: (i) When government grant is related to revenue (a) When deferred credit account has a balance: The amount of government grant refundable will be adjusted against unamortized deferred credit balance remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit the amount is immediately charged to profit and loss account. (b) Where no deferred credit account balance exists: The amount of government grant refundable will be charged to profit and Loss account. (ii) When government grant is related to specific fixed assets (a) Where at the time of receipt, the amount of government grant reduced the cost of asset: The amount of government grant refundable will increase the book value of the asset. The Institute of Chartered Accountants of India 24 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011 (b) Where at the time of receipt, the amount of government grant was credited to Deferred Grant Account : The amount of government grant refundable will reduce the capital reserve or unamortized balance of deferred grant account as appropriate. (iii) When government grant is in the nature of Promoter s contribution The amount of government grant refundable in part or in full on non-fulfilment of specific conditions, the relevant amount recoverable by the government will be reduced from capital reserve. A government grant that becomes refundable is treated as an extra-ordinary item. (e) The following qualitative characteristics will help in improving the usefulness of the information provided in the financial statements: 1. Understandability : Information in financial statements should be presented in a manner that the users with reasonable knowledge of business and economic activities and accounting, may readily understand it. All relevant information should be given therein. 2. Relevance : The relevance of a piece of information should be judged by its materiality i.e. whether its omission or misstatement can influence economic decisions of users or not. No relevant information should be withheld on the grounds of complexity. 3. Reliability : The information are said to be reliable when transactions and events reported are represented faithfully and also when they are reported in terms of their substance and economic reality. Prudence concept is also used whenever required. 4. Comparability : The financial statements should permit both inter-firm and intra firm comparison. One essential feature or requirement of comparability is disclosure of financial effect of change in accounting policies. The Institute of Chartered Accountants of India

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