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

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CA IPCC
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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 assumptions should be made by the candidates. Question 1 Answer the following questions: (a) The following information is available for Raja Ltd. for the accounting year 2009-10 and 2010-11: Net profit for ` Year 2009-10 25,00,000 Year 2010-11 40,00,000 No. of shares outstanding prior to right issue 12,00,000 shares. Right issue : One new share for each three outstanding i.e. 4,00,000 shares : Right issue price ` 22 : Last date to exercise rights 30-6-2010 Fair value of one equity share immediately prior to exercise of rights on 30-6-2010 = ` 28. You are required to compute the basic earnings per share for the years 2009-10 and 2010-11. * (b) Delta Ltd. issued 25,00,000 equity shares of ` 10 each at par. 7,00,000 shares were issued to the promoters and the balance offered to the public was underwritten by three underwriters P, Q & R in the ratio of 2 : 3 : 4 with firm underwriting of 50,000, 60,000 and 70,000 shares each respectively. Total subscription received 13,88,000 shares including marked application and excluding firm underwriting. Marked applications were as follows: P 3,00,000 Q 3,50,000 R 4,50,000 Unmarked and surplus applications to be distributed in gross liability ratio. Ascertain the liability of each underwriter. * The requirement of the question was missing in the question paper and has been added later. The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 (c) Brahma Limited has three departments and submits the following information for the year ending on 31st March, 2011: Particulars A B C Total (`) Purchases (units) 5,000 10,000 15,000 Purchases (Amount) 8,40,000 Sales (units) 5,200 9,800 15,300 40 45 50 Selling price (` per unit) Closing Stock (Units) 400 600 700 You are required to prepare departmental trading account of Brahma Limited assuming that the rate of profit on sales is uniform in each case. (d) A Company has its share capital divided into shares of ` 10 each. On 1st April 2010, it granted 20,000 employees stock options at ` 40, when the market price was ` 130. The options were to be exercised between 1st January 2011 to 15th March 2011. The employees exercised their options for 18,000 shares only; the remaining options lapsed. The company closes its books on 31st March every year. Pass Journal entries with regard to employees stock options. (4 x 5 = 20 Marks) Answer (a) Computation of basic earnings per share (EPS) EPS for the year 2009-10 as originally reported = = Year 2009-10 (`) Year 2010-11 (`) Net profit of the year attributable to equity shareholders Weighted average number of equity shares outstanding during the year ` 25,00,000 12,00,000 shares 2.08 EPS for the year 2009-10 restated for rights issue ` 25,00,000 * = (12,00,000 shares 1.06) 1.97 (approx.) EPS for the year 2010-11 including effects of right issue * The number of equity shares to be used in calculating basic earnings per share for periods prior to the rights issue is the number of equity shares outstanding prior to the issue, multiplied by the adjustment factor. The adjustment factor has been calculated in Working Note 2. 2 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING = 2.64 (approx.) 40,00,000 3 9 12,00,000 1.06 12 + 16,00,000 12 Working Notes: 1. Computation of theoretical ex-rights fair value per share Fair value of all outstanding shares immediately prior to exercise of rights + total amount received from exercise Number of shares outstanding prior to exercise + number of shares issued in the exercise = 2. (` 28 12,00,000 shares) + (` 22 4,00,000 shares) = ` 26.50 12,00,000 shares + 4,00,000 shares Computation of adjustment factor = Fair value per share prior to exercise of rights Theoretical ex-right value per share = ` 28 = 1.06 (approx.) ` 26.5 (b) Calculation of liability of underwriters (In shares) P Q R Total Gross liability 4,00,000 6,00,000 8,00,000 18,00,000 Less: Firm underwriting (50,000) (60,000) (70,000) (1,80,000) 3,50,000 5,40,000 7,30,000 16,20,000 (3,00,000) (3,50,000) (4,50,000) (11,00,000) 50,000 1,90,000 2,80,000 5,20,000 Less: Unmarked applications (In gross liability ratio 4:6:8) (64,000) (96,000) (1,28,000) (2,88,000) Balance (14,000) 94,000 1,52,000 2,32,000 Excess of P distributed to Q & R in ratio (3:4) 14,000 (6,000) (8,000) - Net liability (other than firm underwriting) - 88,000 1,44,000 2,32,000 50,000 60,000 70,000 1,80,000 Less: Marked applications received Add: Firm underwriting Total liability of underwriters 3 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 including firm underwriting 50,000 Total liability in amount @ ` 10 each (c) 1,48,000 2,14,000 4,12,000 ` 5,00,000 ` 14,80,000 ` 21,40,000 ` 41,20,000 Departmental Trading Account for the year ended 31st March, 2011 Particulars A C Particulars A B C ` To Opening Stock (W.N.4) B ` ` ` ` ` 14,400 10,800 By Sales 2,08,000 4,41,000 7,65,000 30,000 By Closing stock 9,600 16,200 21,000 (W.N.4) 1,20,000 2,70,000 4,50,000 83,200 1,76,400 3,06,000 2,17,600 To Purchases (W.N.2) 4,57,200 7,86,000 To Gross profit 2,17,600 4,57,200 7,86,000 Working Notes: (1) Profit Margin Ratio Selling price of units purchased: ` Department A (5,000 units ` 40) 2,00,000 Department B (10,000 units ` 45) 4,50,000 Department C (15,000 units ` 50) 7,50,000 Total selling price of purchased units 14,00,000 Less: Purchases (8,40,000) Gross profit Profit margin ratio = 5,60,000 5,60,000 Gross profit 100 = 40% 100 = 14,00,000 Selling price (2) Statement showing department-wise per unit cost and purchase cost Particulars Selling price per unit (`) Less: Profit margin @ 40% (`) Purchase price per unit (`) No. of units purchased Purchases (purchase cost per unit x units purchased) 4 The Institute of Chartered Accountants of India A 40 (16) 24 5,000 1,20,000 B 45 (18) 27 10,000 2,70,000 C 50 (20) 30 15,000 4,50,000 PAPER 5 : ADVANCED ACCOUNTING (3) Statement showing calculation of department-wise Opening Stock (in units) Particulars A 15,300 600 700 5,600 10,400 16,000 (5,000) Less: Purchases (Units) 9,800 400 Add: Closing Stock (Units) C 5,200 Sales (Units) B (10,000) (15,000) Opening Stock (Units) 600 400 1,000 (4) Statement showing department-wise cost of Opening and Closing Stock Particulars A Date 1,000 30 10,800 30,000 400 24 600 27 700 30 9,600 (d) 400 27 14,400 Cost of Closing Stock (Rs.) C 600 24 Cost of Opening Stock (Rs.) B 16,200 21,000 Journal Entries Dr. Employees compensation expense A/c Cr. ` April 1, 2010 Particulars ` Dr. 18,00,000 To Employees stock option outstanding A/c 18,00,000 (Being grant of 20,000 stock option to employees at ` 40 when market price is ` 130) Jan. 1, 2011 Bank A/c Dr. to Mar. 15, Employees stock option outstanding A/c Dr. 16,20,000 2011 7,20,000 To Equity share capital A/c 1,80,000 To Securities premium A/c 21,60,000 (Being allotment to employees 18,000 equity shares of ` 10 each at a premium of ` 120 per share in exercise of their stock options ) Mar.16, 2011 Employees stock option outstanding A/c To Employees compensation expense A/c (Being entry for lapse of stock options for 2,000 shares) 5 The Institute of Chartered Accountants of India Dr. 1,80,000 1,80,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 Mar.31,2011 Profit & Loss A/c Dr. 16,20,000 To Employees compensation expense A/c 16,20,000 (Being transfer of employees compensation expense to profit & loss account) Question 2 A and B are partners of AB & Co. sharing profits and losses in the ratio of 2:1 and C and D are partners of CD & Co. sharing profits and losses in the ratio of 3:2. On 1st April 2011, they decided to amalgamate and form a new firm M/s. AD & Co. wherein all the partners of both the firm would be partners sharing profits and losses in the ratio of 2:1:3:2 respectively to A,B,C and D. Their balance sheets on that date were as under: Liabilities Capitals A B C D Reserve AB & Co. (`) CD & Co. Assets (`) 1,50,000 Building 1,00,000 Machinery Furniture 1,20,000 AB & Co. (`) CD & Co. (`) 75,000 90,000 1,20,000 15,000 1,00,000 12,000 36,000 78,000 52,000 3,68,000 Stock Debtors 24,000 65,000 35,000 47,000 Due from CD & Co. 47,000 Cash at Bank Cash in hand Creditors Due to AB & Co. 66,000 80,000 54,000 18,000 4,000 15,000 5,000 3,68,000 3,36,000 3,36,000 The amalgamated firm took over the business on the following terms: (a) Building was taken over at ` 1,00,000 and ` 1,25,000 of AB & Co. and CD & Co. respectively. And machinery was taken over at ` 1,25,000 and ` 1,10,000 of AB & Co. and CD & Co. respectively. (b) Goodwill of AB & Co. was worth ` 75,000 and that of CD & Co. was worth ` 50,000. Goodwill account was not to be opened in the books of the new firm, the adjustments being recorded through capital accounts of the partners. (c) Provision for doubtful debts has to be carried forward at ` 5,000 in respect of debtors of AB & Co. and ` 8,000 in respect of CD & Co. 6 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING You are required : (i) Compute the adjustments necessary for goodwill. (ii) Pass the Journal Entries in the books of AD & Co. assuming that excess/deficit capital (taking D s capital as base) with reference to share in profits are to be transferred to current accounts. (16 Marks) Answer (i) Adjustment for raising & writing off of goodwill Goodwill raised in old profit sharing ratio Goodwill written off in new ratio Total AD & Co. Difference AB & Co. ` A B C D CD & Co. ` ` ` ` 30,000 20,000 50,000 50,000 Cr. 25,000 Cr. 30,000 Cr. 20,000 Cr. 1,25,000 31,250 Dr. 15,625 Dr. 46,875 Dr. 31,250 Dr. 1,25,000 18,750 Cr. 9,375 Cr. 16,875 Dr. 11,250 Dr. 50,000 25,000 75,000 (ii) In the books of AD & Co. Journal Entries Date Particulars April 1, 2011 Building A/c Machinery A/c Furniture A/c Stock A/c Debtors A/c CD & Co. A/c Cash at bank A/c Cash in hand A/c To Provision for doubtful debts A/c To Creditors A/c To A s capital A/c (W.N. 2a) To B s capital A/c (W.N.2 a) (Being the sundry assets and liabilities of AB & Co. taken over at the values stated as per the agreement) 7 The Institute of Chartered Accountants of India Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Debit ` 1,00,000 1,25,000 15,000 24,000 65,000 47,000 18,000 4,000 Credit ` 5,000 52,000 2,10,667 1,30,333 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 April 1, 2011 Building A/c Dr. 1,25,000 Machinery A/c Dr. 1,10,000 Furniture A/c Dr. 12,000 Stock A/c Debtors A/c Dr. Dr. 36,000 78,000 Cash at bank A/c Dr. 15,000 Cash in hand A/c Dr. 5,000 To Provision for doubtful debts A/c To Creditors A/c 8,000 35,000 To AB & Co. A/c 47,000 To C s capital A/c (W.N. 2b) 1,74,600 To D s capital A/c (W.N. 2b) (Being the sundry assets and liabilities of CD & Co. taken over at the values stated as per the agreement) 1,16,400 C s capital A/c Dr. 16,875 D s capital A/c To A s capital A/c Dr. 11,250 18,750 To B s capital A/c 9,375 (Being adjustment in capital accounts of the partners on account of goodwill) AB & Co. A/c Dr. 47,000 To CD & Co. A/c 47,000 (Being mutual indebtedness of AB & Co. and CD & Co. cancelled) A s Capital A/c Dr. 1,24,267 To A s Current A/c 1,24,267 (Being excess amount in A s capital A/c transferred to A s current A/c - refer W.N.3) B s Capital A/c Dr. To B s Current A/c 87,133 (Being excess amount in B s capital A/c transferred to B s current A/c - refer W.N.3) 8 The Institute of Chartered Accountants of India 87,133 PAPER 5 : ADVANCED ACCOUNTING Working Notes: (1) Profit on Revaluation AB & Co. CD & Co. ` ` Building (1,00,000 75,000) (1,25,000 90,000) Machinery 25,000 35,000 (1,25,000 1,20,000) 5,000 (1,10,000 1,00,000) 10,000 30,000 (5,000) Less: Provision for doubtful debts 45,000 (8,000) 25,000 37,000 (2) Balance of capital accounts of partners on transfer of business to AD & Co. (a) AB & Co. A s Capital ` 1,00,000 22,000 16,667 2,10,667 8,333 1,30,333 C s Capital D s Capital ` ` 1,20,000 32,400 80,000 21,600 22,200 14,800 1,74,600 Profit on revaluation in the profits and losses sharing ratio (W.N.1) ` 1,50,000 44,000 Balance as per the Balance Sheet Reserves in the profits and losses sharing ratio B s Capital 1,16,400 (b) CD & Co. Balance as per the Balance Sheet Reserves in the profits and losses sharing ratio Profit on revaluation in the profits and losses sharing ratio (W.N.1) (3) Calculation of capital of each partner in the new firm Particulars B C D ` Balance as per W.N.2 A ` ` ` 2,10,667 1,30,333 1,74,600 1,16,400 9 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 Adjustment for goodwill Transfer to Current Account 9,375 (16,875) (11,250) 2,29,417 Total capital ` 4,20,600* in the new ratio of 2:1:3:2 18,750 1,39,708 1,57,725 1,05,150 (1,05,150) 1,24,267 Cr. (52,575) (1,57,725) (1,05,150) 87,133 Cr. - - * Taking D s capital as the base which is 2/8th of total capital; total capital will be 1,05,150 8/2 i.e ` 4,20,600. Question 3 The Balance Sheet of X Limited as on 31st March 2011, was as follows: Liabilities Authorised and subscribed capital: 10,000 Equity shares of ` 100 each Amount Assets (`) 10,00,000 Fixed Assets: Machineries fully paid Unsecured loans: 15% Debentures Accrued interest Current Assets: Stock 3,00,000 Debtors 45,000 Bank Current Liabilities: Profit & loss A/c Creditors 3,50,000 2,53,000 2,30,000 20,000 5,80,000 52,000 Provision for income tax Amount (`) 36,000 14,33,000 14,33,000 It was decided to reconstruct the company for which necessary resolution was passed and sanctions were obtained from the appropriate authorities. Accordingly, it was decided that: (i) Each share be sub-divided into 10 fully paid up equity share of ` 10 each. (ii) After sub-division, each shareholder shall surrender to the company 50% of his holding for the purpose of reissue to debentureholders and creditors as necessary. (iii) Out of shares surrendered 10,000 * shares of ` 10 each shall be converted into 10% Preference shares of ` 10 each fully paid up. * In the question paper, it was wrongly printed as 1,000 shares which has been corrected in the question given above. 10 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (iv) The claims of the debentureholders shall be reduced by 50%. In consideration of the reduction, the debentureholder shall receive Preference Shares of ` 1,00,000 which are converted out of shares surrendered. (v) Creditors claim shall be reduced by 25%. Remaining creditors are to be settled by the issue of equity shares of ` 10 each of out of shares surrendered. (vi) Balance of Profit and Loss account to be written off. (vii) The shares surrendered and not re-issued shall be cancelled. Pass Journal Entries giving effect to the above and the resultant Balance Sheet. (16 Marks) Answer In the books of X Limited Journal Entries ` (i) Dr. Equity Share Capital (` 100) A/c To Share Surrender A/c ` 10,00,000 5,00,000 5,00,000 To Equity Share Capital (` 10) A/c (Sub-division of 10,000 equity shares of ` 100 each into 1,00,000 equity shares of ` 10 each and surrender of 50,000 of such sub-divided shares as per capital reduction scheme) (ii) 15% Debentures A/c Dr. 1,50,000 Accrued Interest A/c To Reconstruction A/c Dr. 22,500 1,72,500 (Transferred 50% of the claims of the debentureholders to Reconstruction A/c in consideration of which 10% Preference shares are being issued, out of share surrender A/c as per capital reduction scheme) (iii) Creditors A/c Dr. 52,000 To Reconstruction A/c 52,000 (Transferred claims of the creditors to Reconstruction A/c, 25% of which is reduction and equity shares are issued in consideration of the balance amount) (iv) Share Surrender A/c Dr. To 10% Preference Share Capital A/c To Equity Share Capital A/c 11 The Institute of Chartered Accountants of India 5,00,000 1,00,000 39,000 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 To Reconstruction A/c 3,61,000 (Issued preference and equity shares to discharge the claims of the debentureholders and the creditors respectively as per scheme and the balance in share surrender account is transferred to reconstruction account) (v) Reconstruction A/c To Profit & Loss A/c Dr. 5,85,500 5,80,000 To Capital Reserve A/c 5,500 (Adjusted debit balance of profit and loss account against reconstruction account and the balance is transferred to Capital Reserve account) X Limited (and reduced) Balance Sheet as on . Liabilities ` Assets Share capital: Fixed Assets: Issued capital: Machineries ` 53,900 Equity shares of ` 10 each 5,39,000 Current Assets: 10,000, 10% Preference shares of ` 10 each 1,00,000 Stock 3,50,000 (all the above shares are allotted as fully paid Debtors up pursuant to capital reduction scheme Bank 2,53,000 2,30,000 20,000 by conversion of equity shares without payment received in cash) Reserves and Surplus: Capital Reserve 5,500 Unsecured loans: 15% Debentures 1,50,000 Accrued interest 22,500 Current liabilities and provision: Provision for income tax 36,000 8,53,000 12 The Institute of Chartered Accountants of India 8,53,000 PAPER 5 : ADVANCED ACCOUNTING Question 4 (a) The summarized Balance Sheet of Full Stop Limited as on 31st March 2011, being the date of voluntary winding up is as under: Liabilities (`) Assets ( `) Share capital: Land & building 5,20,000 5,000, 10% Cumulative Plant & machinery 7,80,000 Preference shares of ` 100 Stock in trade 3,25,000 each fully paid up Equity share capital: 5,00,000 Book debts Profit & loss account 10,25,000 5,50,000 5,000 Equity shares of ` 100 each ` 60 per share called and paid up 3,00,000 5,000 Equity shares of ` 100 each ` 50 per share called up and paid up Securities premium 2,50,000 7,50,000 10% Debentures 2,10,000 Preferential creditors 1,05,000 Bank overdraft Trade creditors 4,85,000 6,00,000 32,00,000 32,00,000 Preference dividend is in arrears for three years. By 31-03-2011, the assets realized were as follows: ` Land & building 6,20,000 Stock in trade 3,10,000 Plant & machinery 7,10,000 Book debts 6,60,000 Expenses of liquidation are ` 86,000. The remuneration of the liquidator is 2% of the realization of assets. Income tax payable on liquidation is ` 67,000. Assuming that the final payments were made on 31-03-2011, prepare the Liquidator s Statement of Account. (8 Marks) (b) XYZ Company is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale. Branch has been instructed to send all cash daily to head office. All 13 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 expenses are paid by head office except petty expenses which are met by the Branch Manager. From the following particulars prepare branch account in the books of Head Office. ( `) 1st Stock on April 2010 (invoice price) 30,000 Sundry Debtors on 1st April, 2010 18,000 ( `) Discount allowed to debtors 160 Expenses paid by head office: Cash in hand as on 1st April, 2010 Office furniture on April, 2010 Goods invoiced from the head office (invoice price) 3,000 1,60,000 Goods return to Head Office Goods return by debtors 2,000 960 Cash received from debtors Cash Sales 60,000 1,00,000 Credit sales 60,000 Rent 1,800 Salary 1st 800 3,200 Stationery & Printing Petty expenses paid by the branch 800 600 Depreciation to be provided on branch furniture at 10% p.a. Stock on 31st March, 2011 (at invoice price) 28,000 (8 Marks) Answer (a) Liquidator s Statement of Account Receipts ` Payments ` Land & building 6,20,000 Liquidator s remuneration 46,000 Stock in trade Plant & machinery 3,10,000 Liquidation expenses 7,10,000 10% Debentures 86,000 2,10,000 Book debts 6,60,000 Preferential creditors Income tax payable 1,05,000 67,000 Bank overdraft 4,85,000 Trade creditors 6,00,000 Preference shareholders: Capital 5,00,000 Arrears of preference dividend for 3 years 14 The Institute of Chartered Accountants of India 1,50,000 PAPER 5 : ADVANCED ACCOUNTING Refund on 5,000 shares of ` 60 paid up @ ` 10.10 per share (Refer W.N.) Refund on 5,000 shares of ` 50 paid up @ ` 0.10 per share (Refer W.N.) 23,00,000 50,500 500 23,00,000 Working Note: ` Total equity capital paid up (3,00,000 + 2,50,000) 5,50,000 Less: Balance available after payment to secured, unsecured, preferential creditors and preference shareholders (51,000) (23,00,000 46,000 86,000 2,10,000 1,05,000 67,000 4,85,000 6,00,000 5,00,000 1,50,000) Loss to be borne by 10,000 equity shareholders Loss per share Hence, amount of refund on ` 50 per share paid up (` 50 ` 49.90) Amount of refund on ` 60 per share paid up (` 60 ` 49.90) (b) 4,99,000 ` 49.90 ` 0.10 ` 10.10 In the books of Head Office XYZ Company Kolkata Branch Account (at invoice) ` To Balance b/d Stock Debtors Cash in hand Furniture To Goods sent to branch To Goods returned by branch (loading) To Bank (expenses paid by H.O.) Rent 1,800 Salary 3,200 30,000 18,000 800 3,000 1,60,000 400 By Stock reserve (opening) By Remittances: Cash Sales 1,00,000 Cash from Debtors 60,000 By Goods sent to branch (loading) By Goods returned by branch (Return to H.O.) By Balance c/d Stock Debtors Cash (800-600) Furniture (3,000-300) 15 The Institute of Chartered Accountants of India ` 6,000 1,60,000 32,000 2,000 28,000 16,880 200 2,700 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 Stationary & printing 800 To Stock reserve (closing) To Profit transferred to Genenral Profit & Loss A/c 5,800 5,600 24,180 2,47,780 Working Note: 2,47,780 Debtors Account ` ` To Balance b/d 18,000 By Cash account To Sales account (credit) 60,000 By Sales return account By Discount allowed account By Balance c/d 60,000 960 160 16,880 78,000 78,000 Note: It is assumed that goods returned by branch are at invoice price. Question 5 From the following information prepare the Profit & Loss Account of Jawahar Bank Limited for the year ended 31st March, 2011. Also give necessary Schedules. Figures are in ` thousands Interest earned on term loans Interest earned on term loans classified as NPA 17.26 4.52 Interest received on term loans classified as NPA 2.04 Interest on cash credits and overdrafts 38.54 Interest earned but not received on cash credit and overdraft treated as NPA 8.39 Interest on deposits 27.20 Commission 1.97 Profit on sale of investments 11.76 Profit on revaluation of investments 2.76 Income from investments 15.53 Salaries, bonus and allowances 18.75 Rent, taxes and lighting 1.70 16 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Printing and stationary 0.75 Director s fees, allowances expenses 1.33 Law charges 0.22 Repairs and maintenance Insurance 0.18 0.30 Other information: Make necessary provision on risk assets: (i) Sub-standard (ii) Doubtful for one year 15.00 7.00 (iii) Doubtful for two years 2.40 (iv) Loss assets 0.65 Investments 3700 Bank should not keep more than 25% of its investments as held-for-maturity investment. The (16 Marks) market value of its best 75% investments is ` 9,00,000 as on 31st March, 2011. Answer Jawahar Bank Limited Profit & Loss Account for the year ended 31st March, 2011 I. II. Schedule Income Interest earned Other income ` 000s Expenditure Interest expended Operating expenses Provisions & contingencies (Refer W.N.) Total III. Profit/Loss IV. Appropriations 60.46 16.49 76.95 15 16 Total 13 14 27.20 23.23 1879.27 1929.70 (1852.75) Nil Schedule 13 Interest Earned ` 000s Interest / discount on advances bills Interest on term loans [17.26- (4.52-2.04)] Interest on cash credits and overdrafts (38.54-8.39) 17 The Institute of Chartered Accountants of India 14.78 30.15 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 Income on investments Note : Interest on non-performing assets is recognized on receipt basis. 15.53 60.46 Schedule 14 Other Income ` 000s 1.97 11.76 2.76 16.49 Commission, exchange and brokerage Profit on sale of investments Profit on revaluation of investments Schedule 15 Interest Expended ` 000s Interest on deposits 27.20 Schedule 16 Operating Expenses Payments to and provision for employees - salaries, bonus and allowances Rent, taxes and lighting Printing & stationery Director s fee, allowances and expenses Law charges Repairs & maintenance Insurance ` 000s 18.75 1.70 0.75 1.33 0.22 0.18 0.30 23.23 Working Note: Provisions & Contingencies Provision for non-performing assets * Sub-standard (15 x 10%) ` 000s 1.50 * RBI vide its notification RBI 2010-11/529 DBOD.No.BP.BC. 94/21.04.048/2011-12 dated May 18, 2011 has revised provisioning requirements for different categories of non-performing advances. Accordingly, advances classified as sub-standard will attract a provision of 15 per cent (as against the existing 10 per cent) and the unsecured exposures classified as sub-standard assets will attract an additional provision of 10 per cent, i.e., a total of 25 per cent (as against the existing 20 per cent). The secured portion of advances which have remained in doubtful category up to one year will attract a provision of 25 per cent (as against the existing 20 per cent) and the secured portion of advances which have remained in doubtful category for more than one year but upto 3 years will attract a provision of 40 per cent (as against the existing 30 per cent). 18 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Doubtful for one year (7 x 20%) Doubtful for two years (2.40 x 30%) Loss assets (0.65 x 100%) Diminution in the value of current Investments: Cost 75% of ` 3,700 thousands ** Less: Market value 1.40 0.72 0.65 4.27 27,75 (900) 1875.00 1879.27 Note: It is assumed that all sub-standard and doubtful assets are fully secured. Question 6 (a) Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being ` 7,00,000. The economic life of machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays ` 3,00,000. The Lessee has guaranteed a residual value of ` 22,000 on expiry of the lease to the Lessor. However Lessor Ltd., estimates that the residual value of the machinery will be only ` 15,000. The implicit rate of return is 15% p.a. and present value factors at 15% are 0.869, 0.756 and 0.657 at the end of first, second and third years respectively. Calculate the value of machinery to be considered by Lessee Ltd. and the finance charges in each year. (8 Marks) (b) Modern Insurance Company s Fire Insurance division provide the following information, show the amount of claim as it would appear in the Revenue Account for the year ended 31st March, 2011. Direct Business ` ` 35,30,000 Claim paid during the year Re-insurance 8,20,000 Claim received 3,20,000 Claim payable 1st April, 2010 8,23,000 58,000 8,75,000 87,000 1st April, 2010 - 85,000 31st March, 2011 - 1,42,000 31st March, 2011 Claim receivable: ** 25% of investments classified as held for maturity need not be marked to market as per RBI Guidelines. However, the remaining 75% investments have been marked to market according to RBI Guidelines. 19 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 Expenses of management 3,45,000 (Includes ` 38,000 Surveyor s fee and ` 42,000 Legal expenses for settlement of claims) (8 Marks) Answer (a) As per para 11 of AS 19 Leases , the lessee should recognize the lease as an asset and a liability at the inception of a finance lease. Such recognision should be at an amount equal to the fair value of the leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the present value of minimum lease payment from the standpoint of the lessee, the amount recorded as an asset and liability should be the present value of minimum lease payments from the standpoint of the lessee. Value of machinery In the given case, fair value of the machinery is ` 7,00,000 and the net present value of minimum lease payments is ` 6,99,054 *. As the present value of the machine is less than the fair value of the machine, the machine will be recorded at value of ` 6,99,054. Calculation of finance charges for each year Year Finance charge Payment Reduction in outstanding liability Outstanding liability ` ` ` ` - - - 6,99,054 1,04,858 3,00,000 1,95,142 5,03,912 year 75,587 3,00,000 2,24,413 2,79,499 End of 3rd year 41,925 3,00,000 2,58,075 21,424 ** 1st year beginning End of 1st year End of * 2nd Present value of minimum lease payments: Annual lease rental x PV factor + Present value of guaranteed residual value = ` 3,00,000 x (0.869 + 0.756 + 0.657) + ` 22,000 x (0.657) = ` 6,84,600 + ` 14,454 = ` 6,99,054. ** The difference between this figure and guaranteed residual value (` 22,000) is due to approximation in computing the interest rate implicit in the lease. 20 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (b) Modern Insurance Company (Abstract showing the amount of claims) Net Claims incurred ` Claims paid on direct business (35,30,000 + 38,000 + 42,000) Add: Re-insurance 36,10,000 8,20,000 Add: Outstanding as on 31.3.2011 87,000 Less: Outstanding as on 1.4.2010 (58,000) 8,49,000 44,59,000 Less : Claims received from re-insurance 3,20,000 Add: Outstanding as on 31.3.2011 1,42,000 Less: Outstanding as on 1.4.2010 (85,000) (3,77,000) 40,82,000 Add : Outstanding direct claims at the end of the year 8,75,000 49,57,000 Less : Outstanding claims at the beginning of the year (8,23,000) Net claims incurred 41,34,000 Question 7 Answer any four of the following: (a) XYZ Ltd. had issued 30,000, 15% convertible debentures of ` 100 each on 1st April, 2008. The debentures are due for redemption on 1 st March, 2011. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debentureholders to convert 20% of their holding into equity shares (Nominal Value ` 10) at a price of ` 15 per share. Debentureholders holding 2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the Debentureholders exercising the option to the maximum. (b) Siva Limited received a grant of ` 1,500 lakhs during the last accounting year (2009-10) from Government for welfare activities to be carried on by the company for its employees. The grant prescribed conditions for its utilization. However during the year 2010-11, it was found that the conditions of the grant were not complied with and the grant had to be refunded to the Government in full. Elucidate the current accounting treatment with reference to the provisions of AS-12. (c) Carrying amount of a machine is ` 1,00,000 (Historical cost less depreciation). The machine is expected to generate ` 25,000 net cash flow for 5 years. The net realizable 21 The Institute of Chartered Accountants of India INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011 value (or net selling price) of the machine on current date is ` 85,000. The enterprises required rate of earning is 10% p.a. State the value at which the enterprise should carry its machine. The present value factors at 10% are 0.909, 0.826, 0.751, 0.683 and 0.621 at the end of first, second, third, fourth and fifth year respectively. (d) A company signed an agreement with the employees union on 01-09-2010 for revision of wages with retrospective effect from 01-04-2009. This would cost the company an additional liability of ` 10 lakhs per annum. Is a disclosure necessary for the amount paid in 2010-11. (e) Why goods are marked on invoice price by the head office while sending goods to the branch? (4 4 =16 Marks) Answer (a) Calculation of number of equity shares allotted to be debentureholders No. of debenture Total number of debentures 30,000 Less: Debentureholders not opted for conversion (2,500) 27,500 Option for conversion 20% Number of debentures for conversion (27,500 x 20 ) 100 Redemption value at a premium of 5% (5,500 x ` 105) Number of equity shares to be allotted ` 5,77,500 ` 15 5,500 ` 5,77,500 38,500 shares (b) As per para 11 of AS 12 Accounting for Government Grants , Government Grant may, sometimes, become refundable if certain conditions are not fulfilled. A government grant that becomes refundable is treated as extra-ordinary item as per AS, 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement. In the given case, the amount of refund of grant of ` 1,500 lakhs should be charged to the profit and loss account in the year 2010-2011 as an extraordinary item. 22 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING (c) Value in use * = ` 25,000 x (0.909+0.826+0.751+0.683+0.621) = ` 94,750 Net selling price = ` 85,000 Recoverable amount is the higher of an asset s value in use and its net selling price i.e. ` 94,750. Carrying value of a machine = ` 1,00,000 (recorded in the books) Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon. In the given case, carrying amount of machine will be lower of its recoverable amount ` 94,750 and its book value i.e. ` 1,00,000. Therefore, the enterprise should carry its machine at value of ` 94,750. (d) It is given that revision of wages took place on 1st September, 2010 with retrospective effect from 1.4.2009. The arrear of wages payable for the period 01.4.2009 to 31.3.2010, cannot be taken as an error or omission in the preparation of financial statement and hence this expenditure cannot be taken as a prior period item. Additional wages liability of ` 20 lakhs should be included in current years wages. It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. Although abnormal in amount, such an expense does not qualify as an extra- ordinary item. However, as per AS 5 (Revised), Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies , when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Therefore, necessary disclosure should be made for the additional liability amounting ` 20 lakhs. (e) Goods are marked on invoice price to achieve the following objectives: (i) To keep secret from the branch manager, the cost price of the goods and profit made, so that the branch manager may not start a rival and competitive business with the concern; and (ii) To have effective control on stock i.e stock at any time must be equal to opening stock plus goods received from head office minus sales made at branch. (iii) To dictate pricing policy to its branches, as well as save work at branch because prices have already been decided. * Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset. 23 The Institute of Chartered Accountants of India

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