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CA IPCC : Revision Test Paper (with Answers) - ADVANCED ACCOUNTING May 2014

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PAPER 5 : ADVANCED ACCOUNTING PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR MAY, 2014 EXAMINATION A. Applicable for May, 2014 examination (i) Revision in the Criteria for classifying Level II Non-Corporate Entities Due to recent changes in the enhancement of tax audit limit, the Council of the ICAI has recently decided to change the 1st criteria of Level II Non-Corporate Entities i.e. determination of SME on turnover basis from ` 40 lakhs to ` 1 Crore vide announcement Revision in the Criteria for classifying Level II Non-Corporate Entities issued by ICAI on 7th March, 2013. This revision is applicable with effect from the accounting year commencing on or after April 1, 2012. (ii) Presentation of Foreign Currency Monetary Item Translation Difference Account (FCMITDA) In the Revised Schedule VI format, no line item has been specified for the presentation of Foreign Currency Monetary Item Translation Difference Account (FCMITDA) . Therefore, the Council of the Institute at its 324th meeting held on March 24-26, 2013 at New Delhi, decided that debit or credit balance in FCMITDA should be shown on the Equity and Liabilities side of the balance sheet under the head Reserves and Surplus as a separate line item. (iii) Review of the Prudential Guidelines on Restructuring of Advances by Banks/Financial Institutions Reserve Bank of India has reviewed the prudential guidelines on restructuring of vide circular no. advances by banks/ financial institutions DBOD.No.BP.BC.63/21.04.048/2012-13 applicable for all scheduled commercial banks excluding RRBs dated November 26, 2012. As per paragraph 81 of the Monetary Policy Statement 2013-14 announced on May 3, 2013, Prudential guidelines on restructuring of advances by banks / financial institutions have been revised taking into account the recommendations of the Working Group (Chairman: Shri B. Mahapatra) vide notification no. DBOD.BP.BC.No. /21.04.132/2012-13 dated January 31, 2013. The Major decisions are as follows: i) To enhance the provisioning requirement for restructured accounts classified as standard advances from the existing 2.00 per cent to 2.75 per cent in the first two years from the date of restructuring. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract a provision of 2.75 per cent for the period covering moratorium and two years thereafter; and that ii) Restructured accounts classified as non-performing advances, when upgraded to standard category will attract a provision of 2.75 per cent in the first year The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 from the date of upgradation instead of the existing 2.00 per cent. In accordance with the above, loans to projects under implementation, when restructured due to change in the date of commencement of commercial operations (DCCO) beyond the original DCCO as envisaged at the time of financial closure and classified as standard advances would attract higher provisioning at 2.75 per cent as against the present requirement of 2.00 per cent as per the details given below: Infrastructure projects Particulars Provisioning Requirement If the revised DCCO is within two years from 0.40 per cent the original DCCO prescribed at the time of financial closure If the DCCO is extended beyond two years and upto four years or three years from the original DCCO, as the case may be, depending upon the reasons for such delay (Ref.: DBOD.No.BP.BC.85 /21.04.048/2009-10 dated March 31, 2010) 2.75 per cent From the date of such restructuring till the revised DCCO or 2 years from the date of restructuring, whichever is later. Non-infrastructure projects Particulars Provisioning Requirement If the revised DCCO is within six months from 0.40 per cent the original DCCO prescribed at the time of financial closure If the DCCO is extended beyond six months 2.75 per cent From the date of and upto one year from the original DCCO such restructuring for 2 years. prescribed at the time of financial closure (Ref.: DBOD.No.BP.BC.85 /21.04.048/200910 dated March 31, 2010) All other extant guidelines on Income Recognition, Asset Classification and Provisioning pertaining to advances will remain unchanged. (iv) Clarification on Debenture Redemption Reserve (DRR) Ministry of Corporate Affairs vide Circular no. 04/2013 dated 11 February, 2013 has clarified the adequacy of DRR for various institutions/companies as follows: All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as The Institute of Chartered Accountants of India Nil PAPER 5 : ADVANCED ACCOUNTING 3 privately placed debentures Other Financial Institutions and NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment) Act, 1997 if debentures issued through public issue 25% if privately placed debentures Nil Other companies including manufacturing and infrastructure 25% companies (including listed and unlisted companies) Every company required to create/maintain DRR shall before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending on the 31st day of March next following year. (v) Amendment to para 46 of Accounting Standard 11 of the Companies (Accounting Standards) Rules, 2006 Ministry of Corporate Affairs vide its notification number G.S.R 913(E), dated 29th December, 2011, has amended the para 46 of AS 11 of the Companies (Accounting Standards) Amendment Rules, 2011. Through this notification, the MCA has extended the option (for the enterprises) to capitalize the exchange differences arising on reporting of long term foreign currency monetary items till 31st March, 2020 instead of 31st March, 2012. (vi) Insertion of para 46A in Accounting Standard 11 of the Companies (Accounting Standards) Rules, 2006 Ministry of Corporate Affairs vide its notification number G.S.R 914(E), dated 29th December, 2011, inserted under-mentioned para 46A in AS 11 of the Companies (Accounting Standards) Rules, 2006, now known as Companies (Accounting Standards) (Second Amendment) Rules, 2011. 46A. (1) In respect of accounting periods commencing on or after the 1st April, 2011, for an enterprise which had earlier exercised the option under paragraph 46 and at the option of any other enterprise (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital assets, can be added to or deducted from the cost of the assets and shall be depreciated over the balance life of the assets, and in other cases, can be accumulated in a Foreign Currency Monetary Item Translation Difference Account in the enterprise s financial statements and amortized over the balance period of such long term assets or liability, by recognition as income or expense in The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15 of the said rules. (2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be designated as long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of twelve months or more at the date of origination of the asset or the liability. Provided that the option exercised by the enterprise shall disclose the fact of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized. Note: The principal regulations were published in the Gazette of India Extraordinary, Part II, Section 3, Sub Section (i) vide G.S.R 739(E), dated the 7th December, 2006 and amended vide notification number G.S.R. 212(E), dated the 27th March, 2008 and subsequently amended by No. G.S.R. 225(E) dated 31st March, 2009 and No. G.S.R. 378(E), dated 11th May, 2011. (vii) Clarification on Para 46A of notification number G.S.R. 914(E) dated 29.12.2011 on Accounting Standard 11 relating to "The effects of Changes in Foreign Exchange Rates" The Ministry has received several representations from industry associations that Para 6 of AS 11 and Para 4(e) of AS 16 are posing problems in proper implementation of Para 46A of AS 11 inserted vide notification 914(E) dated 29.12.2011. In order to resolve the problems faced by industry, MCA had further clarified vide Circular No. 25/2012 dated 09.08.2012 that Para 6 of AS 11 and Para 4(e) of the AS 16 shall not apply to a company which is applying clause Para 46A of AS 11. (viii) Section 24 of the Banking Regulation Act, 1949 Maintenance of Statutory Liquidity Ratio (SLR) - Local Area Banks In exercise of the powers conferred by sub-section (2A) of Section 24 of Banking Regulation Act, 1949 (10 of 1949) as amended from time to time, RBI vide notification DBOD.No.Ret.BC.48 /12.02.001/2012-13 dated September 28, 2012 has decided that Statutory Liquidity Ratio for Local Area Banks be reduced from 25 per cent to 23 per cent of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning August 11, 2012. (ix) Maintenance of Cash Reserve Ratio (CRR) Reserve Bank of India has decided to reduce the Cash Reserve Ratio (CRR) of Scheduled Commercial Banks by 25 basis points from 4.25 per cent to 4.00 per cent of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning February 09, 2013 vide circular DBOD.No.Ret.BC.76 /12.01.001/2012-13 dated January 29, 2013. The Local Area Banks shall also maintain CRR at 3.00 per The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 5 cent of its net demand and time liabilities up to February 08, 2013 and 4.00 per cent of its net demand and time liabilities from the fortnight beginning from February 09, 2013. (x) Buy Back of Securities (Amendment) Regulations, 2013 In exercise of the powers conferred under section 30 of the Securities and Exchange Board of India Act, 1992 read with clause (f) of sub-section (2) of Section 77A of the Companies Act, 1956 SEBI made Securities and Exchange Board of India (Buy-back of Securities) (Amendment) Regulations, 2013 to amend the Securities and Exchange Board of India (Buy back of Securities) Regulations, 1998. The important provisions of the new regulations are: (i) No offer of buy-back for fifteen per cent or more of the paid up capital and free reserves of the company shall be made from the open market. (ii)A company shall not make any offer of buyback within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any. (iii)The company shall ensure that at least fifty per cent of the amount earmarked for buy-back is utilized for buying-back shares or other specified securities. Source: http://www.sebi.gov.in/sebiweb/home/list/1/3/0/0/Regulations B. Not applicable for May, 2014 examination Ind ASs issued by the Ministry of Corporate Affairs The MCA has hosted on its website 35 converged Indian Accounting Standards (Ind AS) without announcing the applicability date. These are the standards which are being converged by eliminating the differences of the Indian Accounting Standards vis- -vis IFRS. These standards shall be applied for all companies falling under Phase I to Phase III as prescribed under the roadmap issued by the core group. These Ind ASs are not applicable for the students appearing in May, 2014 Examination. PART II : QUESTIONS AND ANSWERS QUESTIONS Partnership Accounts Dissolution of a partnership firm 1. A, V, R and S are partners in a firm sharing profits and losses in the ratio of 4 : 1 : 2 : 3. The following is their Balance Sheet as at 31st March, 2014 : Liabilities Sundry Creditors Capital A/cs : A ` 6,00,000 14,00,000 The Institute of Chartered Accountants of India Assets Sundry Debtors Less: Doubtful Debts ` 7,00,000 (1,00,000) 6,00,000 6 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 S 6,00,000 20,00,000 Cash in hand Stocks Other Assets Capital A/cs: V R 26,00,000 2,80,000 4,00,000 6,20,000 4,00,000 3,00,000 26,00,000 On 31st March, 2014, the firm is dissolved and the following points are agreed upon: (a) A is to takeover sundry debtors at 80% of book value. (b) S is to takeover the stocks at 95% of the value. (c) R is to discharge sundry creditors. (d) Other assets realise ` 6,00,000 and the expenses of realisation come to ` 60,000. (e) V is found insolvent and ` 43,800 is realised from his estate. You are required to prepare Realisation Account and Capital Accounts of the partners. Show also the Cash A/c. The loss arising out of capital deficiency may be distributed following the decision in Garner vs Murray. Amalgamation of firms 2. Ketan Kumar acquires the business of M/s Shiv and Nath on payment of ` 1,20,000 on 31st March 2013. The book value of assets and liabilities taken over by him as follows: ` Debtors 52,500 Furniture 4,500 Stock 69,000 Creditors 15,000 There was no change between 1st January, 2013 and 31st March, 2013 in the book value of the assets and liabilities not taken over. The same set of books has been continued after the acquisition and no entries of the acquisition have been passed except for the payment of ` 1,20,000 made by Ketan Kumar. From the following balance sheet and trial balance prepare Business Purchase Account, Profit and Loss Account for the year ended 31st December, 2013 and Balance Sheet at that date. Balance Sheet as at December, 2012 Liabilities Capital Accounts The Institute of Chartered Accountants of India ` Assets Furniture ` 4,500 PAPER 5 : ADVANCED ACCOUNTING Shiv Nath Bank Loan Creditors 45,000 30,000 7 Investments 75,000 Insurance Policy 27,000 Stock 18,000 Debtors 1,20,000 7,500 3,000 60,000 45,000 1,20,000 On 31st December 2013 the trial balance is: ` Stock ` 60,000 Furniture 4,500 Investment 7,500 Insurance Policy 3,000 Business Purchase Account 1,20,000 Bank Loan 27,000 Capital : Shiv Nath 45,000 30,000 Ketan 45,000 Bank 4,500 Debtors 72,000 Creditors Purchases 22,500 4,80,000 Expenses 18,000 Sales 6,00,000 7,69,500 7,69,500 Closing Stock ` 75,000 Conversion of partnership firm 3. Aman, Baal and Chand share profits and losses of a business as to 3:2:1 respectively. Their balance sheet as at 31st March, 2014 was as follows: Liabilities ` Capital Accounts: Aman Assets ` Goodwill 70,000 The Institute of Chartered Accountants of India 10,000 Land 20,000 8 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Baal 80,000 Buildings Chand 10,000 Machinery 50,000 General Reserve 18,000 Motor Car 28,000 4,000 Furniture 12,000 Investment Fluctuation Fund 1,10,000 Chand s Loan 33,000 Investments 18,000 Mrs. Aman s loan 15,000 Loose tools 7,000 Creditors 96,000 Stock 18,000 Bills Payable 14,000 Bills receivable 20,000 Bank overdraft 60,000 Debtors: Less: Provision 40,000 2,000 Cash 38,000 1,000 Chand s current A/c 56,000 Profit and Loss A/c 12,000 4,00,000 4,00,000 The partners decide to convert their firm into a Joint Stock Company. For this purpose ABC Ltd. was formed with an authorized capital of ` 10,00,000 divided into ` 100 equity Shares. The business of the firm was sold to the company as at the date of balance sheet given above on the following terms: (i) Motor car, furniture, investments, loose tools, debtors and cash are not to be taken over by the company. (ii) Liabilities for bills payable and bank overdraft are to be taken over by the company. (iii) The purchase price is settled at ` 1,95,500 payable as to ` 75,500 in cash and the balance in company s fully paid shares of ` 100 each. (iv) The remaining assets and liabilities of the firm are directly disposed of by the firm as per details given below: Investments are taken over by Aman for ` 13,000; debtors realize in all ` 20,000; Motor Car, furniture and loose tools fetch ` 24,000, ` 4,000, and ` 1,000 respectively. Aman agrees to pay his wife s loan. The creditors were paid ` 94,000 in final settlement of their claims. The realization expenses amount to ` 500. (v) The equity share received from the vendor company are to be divided among the partners in profit-sharing ratio. You are required to prepare the necessary ledger accounts. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 9 Sale of Partnership firm 4. M, N and O were Partners sharing Profits and Losses in the ratio of 5:3:2 respectively. The Trial Balance of the Firm 31st March, 2014 was the following: Particulars ` Machinery at Cost 2,00,000 Inventory 1,37,400 Trade receivables ` 1,24,000 Trade payables 1,69,400 Capital A/c: M 1,36,000 N 90,000 O 46,000 Drawing A/c: M 50,000 N 46,000 O 34,000 Depreciation on Machinery 80,000 Profit for the year ended 31st March Cash at Bank 2,48,600 1,78,600 7,70,000 7,70,000 Interest on Capital Accounts at 10% p.a. on the amount standing to the credit of Partners' Capital Account at the beginning of the year, was not provided before preparing the above Trial Balance. On the above date, they formed a MNO Private Limited Company with an Authorized Share Capital of 2,00,000 in shares of ` 10 each to be divided in different classes to take over the business of Partnership firm. You are required as under: 1. Machinery is to be transferred at ` 1,40,000. 2. Shares in the Company are to be issued to the partners, at par, in such numbers, and in such classes as will give the partners, by reason of their shareholdings alone, the same rights as regards interest on capital and the sharing of profit and losses as they had in the partnership. 3. Before transferring the business, the partners wish to draw from the partnership profits to such an extent that the bank balance is reduced to ` 1,00,000. For this purpose, sufficient profits of the year are to be retained in profit-sharing ratio. The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 4. Assets and liabilities except Machinery and Bank, are to be transferred at their book value as on the above date. You are required to prepare: (a) Statement showing the workings of the Number of Shares of each class to be issued by the company, to each partner. (b) Capital Accounts showing all adjustments required to dissolve the Partnership. (c) Balance Sheet of the Company immediately after acquiring the business of the Partnership and Issuing of Shares. Employee Stock Option Plans 5. Siya Ltd. provides you the following information: No. of employees 2,500 No. of option to be granted to each employee 500 Vesting period 4 Years No. of employees not expected to fulfill the vesting conditions other than market conditions 1st Year 20% 2nd Year 15% 3rd Year 10% 4th 10% Year Fair value of the option per share ` 5 Exercise Price ` 50 Exercise Period 3 Years Face value of each share ` 10 At the end of third year it has been re-estimated that all vesting conditions have been fulfilled and no other further conditions are required for options to vest and 600 employees exercise their option at the end of 4th year, 800 employees exercise their option at the end of 5th year and 100 employees exercise their option at the end of 6th year. Rights of 30 employees expire unexercised at the end of the 6th year. You are required to pass necessary journal entries for first 3 years. Buy Back of Shares 6. The following was the Balance Sheet of C Ltd. as on 31st March ,2014. Equity & Liabilities Share Capital: The Institute of Chartered Accountants of India ` Lakhs Assets Fixed Assets ` Lakhs 14,000 PAPER 5 : ADVANCED ACCOUNTING 11 Equity shares of ` 10 each Fully Paid Up 8,000 Investments 3,000 10% Redeemable Pref. Shares of ` 10 each Fully Paid Up 2,500 Cash at Bank 1,650 Other Current Assets 8,250 Reserves & Surplus Capital Redemption Reserve 1,000 Securities Premium 800 General Reserve 6,000 Profit & Loss Account 300 Secured Loans: 9% Debentures 5,000 Current Liabilities: Trade payables 2,300 Sundry Provisions 1,000 26,900 26,900 On 1st April, 2014 the Company redeemed all its Preference Shares at a Premium of 10% and bought back 15% of its Equity Shares at ` 20 per Share. In order to make cash available, the Company sold all the Investments for ` 3,150 lakhs and raised a Bank Loan amounting to ` 400 lakh on the Security of the Company s Plant. You are required to (i) pass journal entries for the above and (ii) prepare the Company s Balance sheet immediately thereafter. Underwriting of Shares 7. X Ltd. issued 1,20,000 Equity Shares which were underwritten as follows: A & Co 72,000 Equity Shares B & Co. 30,000 Equity Shares C& Co. 18,000 Equity Shares The above mentioned underwriters made applications for firm underwritings as follows: A & Co 9,600 Equity Shares B & Co 12,000 Equity Shares C& Co. 3,600 Equity Shares The total applications excluding firm underwriting, but including marked applications were for 60,000 Equity Shares. The Institute of Chartered Accountants of India 12 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 The marked Applications were as under: A & Co 12,000 Equity Shares B & Co. 15,000 Equity Shares C& Co. 6,000 Equity Shares The underwriting contracts provide that underwriters be given credit for firm applications and that credit for unmarked applications be given in proportion to the shares underwritten. You are required to show the allocation of liability. Workings will be considered as a part of your answer. Redemption of Debentures 8. On 1st January, 2004 Shyam Ltd. allotted 10,000 9% Debentures of ` 100 each at par, the total amount having been received along with applications. (i) On 1st January, 2006 the Company purchased in the open market 1,000 of its own debentures @ ` 101 each and cancelled them immediately. (ii) On 1st January, 2009 the company redeemed at par debentures for ` 3,00,000 by draw of a lot. (iii) On 1st January, 2010 the company purchased debentures of the face value of ` 2,00,000 for 1,97,800 in the open market, held them as investments for one year and then cancelled them. (iv) Finally, as per resolution of the board of directors, the remaining debentures were redeemed at a premium of 2% on 1st January, 2014 when Securities Premium Account in the company's ledger showed a balance of ` 30,000. Pass journal entries for the abovementioned transactions ignoring debenture redemption reserve, debenture - interest and interest on own' debentures. Amalgamation of companies 9. Hari Ltd. and Narayan Ltd. are to be amalgamated into Hari Narayan Ltd. The new company is to take over all the assets and liabilities of the amalgamating companies. Assets and Liabilities of Hari Ltd. are to be taken over at book values in exchange of shares in Hari Narayan Ltd. Three shares in the new company are to be issued at a premium of 20% for every two shares of Hari Ltd. The approved scheme for Narayan Ltd. is as follows: 1. 10% Preference shareholders are to be allowed two 15% Preference shares of ` 100 each in Hari Narayan Ltd. for three Preference shares held in Narayan Ltd. 2. The Debentures of Narayan Ltd. are to be paid off at 5% discount by the issue of debentures of Hari Narayan Ltd. at par. 3. The Equity shareholders of Narayan Ltd. are to be allowed as many shares at par in Hari Narayan Ltd. as will cover the balance on their account and for this purpose, The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 13 plant and machinery is to be valued less by 15% and obsolete stock forming 10% of the overall stock value is to be treated as worthless. The summarised Balance Sheets of the two companies prior to amalgamation are as follows: Liabilities Hari Ltd. Narayan Ltd. ` Equity Shares of ` 10 each Assets Hari Ltd. ` ` 6,40,000 12,50,000 Plant and Machinery 10% Preference Shares of ` 100 each 8,80,000 ` 12,80,000 20,00,000 - General Reserves Narayan Ltd. Secured Debentures Trade payables 7,50,000 Trade receivables 1,52,000 1,25,000 - Inventory 1,00,000 1,50,000 1,08,000 1,00,000 - 3,50,000 - 5,00,000 Cash and Balance Bank 1,20,000 2,25,000 Profit and Account Loss 16,40,000 27,25,000 16,40,000 27,25,000 You are required to show the Journal Entries and the Balance Sheet of the amalgamated company immediately after amalgamation. Internal Reconstruction of a Company 10. The Balance Sheet of Moon Limited as on 31st March, 2013 was as follows: Liabilities Amount (` ) 25,00,000 Assets Goodwill 2,50,000 Equity Shares of ` 10 each fully paid Patent 9% 10,000 Preference shares 10,00,000 Land and Building of ` 100 each fully paid Plant and Machinery 10% First debentures 3,00,000 Furniture and Fixtures 10% Second debentures 5,00,000 Computers Debentures interest outstanding 80,000 Trade Investment Trade payables 2,50,000 Trade receivables Directors loan 50,000 Inventory Bank O/D 50,000 Profit and Loss Account Outstanding liabilities 20,000 (Loss) Provision for Tax 50,000 48,00,000 The Institute of Chartered Accountants of India Amount (` ) 5,00,000 2,50,000 15,00,000 5,00,000 1,00,000 1,50,000 2,50,000 2,50,000 5,00,000 8,00,000 48,00,000 14 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Note: Preference dividend is in arrears for last three years. A ` ` ` holds 10% first debentures for ` 2,00,000 and 10% second debentures for 3,00,000. He is also creditors for ` 50,000. B holds 10% first debentures for 1,00,000 and 10% second debentures for ` 2,00,000 and is also creditors for 25,000. The following scheme of reconstruction has been agreed upon and duly approved by the court. (i) All the equity shares be converted into fully paid equity shares of ` 5 each. (ii) The preference shares be reduced to ` 50 each and the preference shareholders agree to forego their arrears of preference dividends in consideration of which 9% preference shares are to be converted into 10% preference shares. (iii) Mr. A is to cancel ` 3,00,000 of his total debt including interest on debentures and to pay ` 50,000 to the company and to receive new 12% debentures for the Balance amount. (iv) Mr. B is to cancel ` 1,50,000 of his total debt including interest on debentures and to accept new 12% debentures for the balance amount. (v) Trade creditors (other than A and B) agreed to forego 50% of their claim. (vi) Directors to accept settlement of their loans as to 60% thereof by allotment of equity shares and balance being waived. (vii) There were capital commitments totalling ` 1,50,000. These contracts are to be cancelled on payment of 5% of the contract price as a penalty. (viii) The Directors refund ` 55,000 of the fees previously received by them. (ix) Reconstruction expenses paid ` 5,000. (x) The taxation liability of the company is settled at ` 40,000 and the same is paid immediately. (xi) The assets are revalued as under: ` Land and Building 14,00,000 Plant and Machinery 2,00,000 Inventory 3,50,000 Trade receivables 1,50,000 Computers 90,000 Furniture and Fixtures 50,000 Trade Investment The Institute of Chartered Accountants of India 2,00,000 PAPER 5 : ADVANCED ACCOUNTING 15 Pass Journal entries for all the above mentioned transactions including amounts to be written off of Goodwill, Patents, Loss in Profit & Loss Account. Prepare Bank Account and working of allocation of Interest on Debentures between A and B. Liquidation of a company 11. The following particulars relate to V Limited Company which has gone into voluntary liquidation. Share capital issued: 5,000 Preference shares of ` 100 each fully paid up. 25,000 Equity shares of ` 10 each fully paid up. 15,000 Equity shares of ` 10 each, ` 8 paid up. Assets realized ` 10,00,000 excluding the amount realized by sale of securities held by partly secured creditors. ` Preferential creditors Unsecured creditors Partly secured creditors (Assets realized ` 1,60,000) Debentureholders having floating charge on all assets of the company Expenses of liquidation 25,000 9,00,000 1,75,000 3,00,000 5,000 A call of ` 2 per share on the partly paid equity shares was duly received except in case of one shareholder owning 500 shares. You are required to prepare the Liquidator s Statement of Account allowing for his remuneration @ 2 % on all assets realized excluding call money received and 2% on the amount paid to unsecured creditors including preferential creditors. Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured creditors. Financial Statements of Insurance Companies 12. From the following balances extracted from the books of Priya General Insurance Company Limited as on 31.3.2013, you are required to prepare Revenue Accounts in respect of Fire and marine Insurance business for the year ended 31.3.2013 and a Profit and Loss Account for the same period : Directors Fee Dividend received Provision for Taxation (as on 1.4. 2012) The Institute of Chartered Accountants of India ` 40,000 50,000 42,500 Interest received Fixed Assets (1.4.2012) Income-tax paid during the year ` 9,500 45,000 30,000 16 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Fire Marine ` ` Outstanding Claims on 1.4.2012 14,000 3,500 Claims paid 50,000 40,000 Reserve for Unexpired Risk on 1.4.2012 1,00,000 70,000 Premiums Received 2,25,000 1,65,000 Agent s Commission 20,000 10,000 Expenses of Management 30,000 22,500 Re-insurance Premium (Dr.) 12,500 7,500 The following additional points are also to be taken into account: (a) Depreciation on Fixed Assets to be provided at 10% p.a. (b) Interest accrued on investments ` 5,000. (c) Closing provision for taxation on 31.3.2013 to be maintained at ` 62,069. (d) Claims outstanding on 31.3.2013 were Fire Insurance ` 5,000; Marine Insurance ` 7,500. (e) Premium outstanding on 31.3.2013 were Fire Insurance ` 15,000; Marine Insurance ` 10,000. (f) Reserve for unexpired risk to be maintained at 50% and 100% of net premium in respect of Fire and Marine Insurance respectively. (g) Expenses of management due on 31.3.2013 were ` 5,000 for Fire Insurance and ` 2,500 in respect of marine Insurance. Financial Statements of Banking Companies 13. The following facts have been taken out from the records of City Bank Ltd. as on 31st March, 2013: ` Rebate on bill discounted (not due on March 31st, 2012) ` 91,600 Discount received 4,05,000 Bill discounted 24,50,000 An analysis of the bills discounted is as follows: Amount ` (i) Due date 2013 7,50,000 April 8 The Institute of Chartered Accountants of India Rate of discount 12% PAPER 5 : ADVANCED ACCOUNTING 17 (ii) 3,00,000 May 5 14% (iii) 4,40,000 June 12 14% (iv) 9,60,000 July 15 15% You are required to:(i) Calculate Rebate on Bill Discounted as on 31st March, 2013. (ii) The amount of discount to be credited to the profit and loss account. Financial Statements of Electricity Company 14. The trial balance of Jyoti Electric Supply Ltd. for the year ended 31st March, 2013 is as below: Particulars Share Capital : 7,50,000 Equity Shares of ` 10 each Patents and trademark 14% Debentures 11% Term Loan Land Building Power Plant Electrical Instruments Capital reserve Contingency reserves Transformers Net revenue account Inventories Trade receivables Contingency reserve investments Bank balance Public lamps Depreciation fund Trade payables Proposed dividend (` 000) Cr. Dr. 75,00 2,50 30,00 17,50 15,50 42,50 75,00 7,00 9,00 15,00 20,50 14,50 8,00 15,00 3,00 4,00 8,50 20,750 30,00 7,50 15,00 20,750 Prepare Balance Sheet of Jyoti Electric Supply Ltd as on 31st March, 2013 as per Revised Schedule VI. The Institute of Chartered Accountants of India 18 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Departmental Accounts 15. M/s P and Co., had four departments A,B,C and D. Each department being managed by manager whose commission was 10% of the respective departmental profit, subject to a minimum of ` 6,000 in each case. Interdepartmental transfers took place at a 'loaded' price as follows: From Department A to Department B 10% above cost From Department A to Department D 20% above cost From Department C to Department D 20% above cost From Department C to Department B 20% above cost 31st For the year ending on March, 2014 the firm had already prepared and closed the departmental Trading and Profit and Loss Account. Subsequently, it was discovered that the closing stocks of departments had included interdepartmentally transferred goods at loaded price instead of cost price. From the following information prepare a statement recomputing the departmental profit or loss: Dept. A Dept. C Dept D ` Final Profit (Loss) Dept. B ` ` ` (38,000) 50,400 72,000 1,08,000 70,000 - 4,800 Inter departmental transfers included at loaded price in the departmental stock (` 22,000 from Dept. A and ` 48,000 from Dept. C (` 3,600 from Dept. C and ` 1,200 from Dept. A) Branch Accounting 16. From the following particulars relating to Pune branch for the year ending December 31, 2013, prepare Branch Account in the books of Head office. ` Stock at Branch on January1, 2013 10,000 Branch Debtors on January 1, 2013 4,000 Branch Debtors on Dec. 31, 2013 4,900 Petty cash at branch on January 1, 2013 500 Furniture at branch on January 1, 2013 2000 Prepaid fire insurance premium on January 1, 2013 The Institute of Chartered Accountants of India 150 PAPER 5 : ADVANCED ACCOUNTING 19 Salaries outstanding at branch on January 1, 2013 100 Good sent to Branch during the year 80,000 Cash Sales during the year 1,30,000 Credit Sales during the year 40,000 Cash received form debtors 35,000 Cash paid by the branch debtors directly to the Head Office 2,000 Discount allowed to debtors 100 Cash sent to branch for Expenses: Rent 2,000 Salaries 2,400 Petty Cash 1,000 Insurance up to March 31, 2014 600 6,000 Goods returned by the Branch 1,000 Goods returned by the debtors 2,000 Stock on December 31,2013 5000 Petty Cash spent by branch 850 Provide depreciation on furniture 10% p.a. Goods costing ` 1,200 were destroyed on account of fire and a sum of ` 1,000 was received from the Insurance Company. AS 5 17. (a) X Limited was making provisions up to 31-3-2012 for non-moving inventories based on no issues for the last 12 months. Based on a technical evaluation the company wants to make provisions during the year 31-03-2013 in the following manner: Total value of inventory ` 3 crores. Provision required based on 12 months ` 8 lakhs. Provision required based on technical evaluation ` 7.50 lakhs. Does this amount to change in accounting policy? Can the company change the method of provision? The Institute of Chartered Accountants of India 20 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 AS 11 (b) Aman Ltd. borrowed US $ 5,00,000 on 31-12-2012 which will be repaid (settled) as on 30-6-2013. Aman Ltd. prepares its financial statements ending on 31-3-2013. Rate of exchange between reporting currency (Rupee) and foreign currency (US $) on different dates are as under: 31-12-2012 1 US $ = ` 44.00 31-3-2013 1 US $ = ` 44.50 30-6-2013 1 US $ = ` 44.75 Calculate borrowings in reporting currency to be recognised in the books on above mentioned dates & also show journal entries for the same. AS 12 18. (a) Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs during 2010-11 having useful life of 10 years. The grant received was credited to deferred income in the balance sheet. During 2013-14, due to non-compliance of conditions laid down for the grant, the company had to refund the whole grant to the Government. Balance in the deferred income on that date was ` 21 lakhs and written down value of plant was ` 105 lakhs. (i) What should be the treatment of the refund of the grant and the effect on cost of the fixed asset and the amount of depreciation to be charged during the year 2013-14 in profit and loss account? (ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant during 2010-11 assuming plant account showed the balance of ` 84 lakhs as on 1.4.2013? AS-16 (b) A company capitalizes interest cost of holding investments and adds to cost of investment every year, thereby understating interest cost in profit and loss account. Comment on the accounting treatment done by the company in context of the relevant AS. AS 19 19. (a) WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect of Fitness Equipments costing ` 16,99,999.50. The annual lease payments to be made at the end of each year are structured in such a way that the sum of the Present Values of the lease payments and that of the residual value together equal the cost of the equipments leased out. The unguaranteed residual value of the equipment at the expiry of the lease is estimated to be ` 1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate of interest is 10%. You are required to compute the amount of the annual lease The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 21 payment and the unearned finance income. Discounting Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively. AS 20 (b) No. of equity shares outstanding 30,00,000 Basic earnings per share ` 5.00 No. of 12% convertible debentures of ` 100 each 50,000 Each debenture is convertible into 10 equity shares. Tax Rate 30% Compute Diluted Earnings per Share. Working note should form part of the answer. AS 26 20. (a) K. International Ltd. is developing a new production process. During the financial year ending 31st March, 2012, the total expenditure incurred was ` 50 lakhs. This process met the criteria for recognition as an intangible asset on 1st December, 2011. Expenditure incurred till this date was ` 22 lakhs. Further expenditure incurred on the process for the financial year ending 31st March, 2013 was ` 80 lakhs. As at 31st March, 2013, the recoverable amount of know-how embodied in the process is estimated to be ` 72 lakhs. This includes estimates of future cash outflows as well as inflows. You are required to calculate: (i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2012 and carrying value of intangible as on that date. (ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March, 2013. Ignore depreciation. AS 29 (b) EXOX Ltd. is in the process of finalizing its accounts for the year ended 31 st March, 2013. The company seeks your advice on the following: The Company s sales tax assessment for assessment year 2010-11 has been completed on 14th February, 2013 with a demand of ` 2.76 crore. The company paid the entire due under protest without prejudice to its right of appeal. The Company files its appeal before the appellate authority wherein the grounds of appeal cover tax on additions made in the assessment order for a sum of 2.10 crore. The Institute of Chartered Accountants of India 22 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 SUGGESTED ANSWERS/HINTS 1. Realisation A/c ` ` To Sundry Debtors 7,00,000 By Sundry Creditors 6,00,000 To Stock 4,00,000 By Provision for Doubtful Debts 1,00,000 To Other assets 6,20,000 By A s Capital A/c(Debtors) 5,60,000 To R s Capital A/c (Creditors) 6,00,000 To Cash By S s Capital A/c(stock) 3,80,000 By Cash (Other assets) Expenses on realization 60,000 6,00,000 By A s Capital A/c 56,000 By V s Capital A/c 14,000 By R s Capital A/c 28,000 By S s Capital A/c 42,000 (Loss on realisation) 23,80,000 1,40,000 23,80,000 Partners Capital A/cs A V R S A V R S ` ` ` ` ` ` ` ` By Balance b/f 14,00,000 6,00,000 To Balance b/f To Realisation (Debtors) 4,00,000 3,00,000 5,60,000 By Realisation 6,00,000 (Creditors) Balance c/d 4,14,000 By To Realisation (Stock) To Realisation (loss) 3,80,000 56,000 14,000 28,000 42,000 To Balance c/d 7,84,000 2,72,000 1,78,000 14,00,000 4,14,000 6,00,000 6,00,000 By To Balance b/d 4,14,000 To V s A/c 2,59,140 To Cash 5,24,860 2,72,000 14,00,000 4,14,000 6,00,000 6,00,000 Balance b/d 2,72,000 1,78,000 7,84,000 1,11,060 By Cash 43,800 66,940 By A 2,59,140 By S 1,11,060 7,84,000 4,14,000 2,72,000 1,78,000 The Institute of Chartered Accountants of India 7,84,000 4,14,000 2,72,000 1,78,000 PAPER 5 : ADVANCED ACCOUNTING 23 Cash A/c ` To Balance b/d 60,000 2,80,000 By Realisation A/c (expenses) To Realisation A/c ` ` 6,00,000 By Capital A/c To V s Capital A/c 43,800 A R 2,72,000 S 5,24,860 66,940 8,63,800 9,23,800 9,23,800 Note: 1. Since creditors are taken over by R as per Balance Sheet figures, a direct entry for the same in R s Capital A/c is also correct. 2. A takes over Debtors at 80% of ` 7,00,000 i.e. ` 5,60,000. 3. V s deficiency will be borne by A and S in the ratio of 7 : 3 i.e. on opening capitals of ` 14,00,000 and ` 6,00,000. R will not bear any portion of the loss since at the time of dissolution he had a debit balance in his capital account. 2. Business Purchase Account 2013 ` 2013 To Balance b/d 1,20,000 To Investments To Insurance Policy ` By Bank Loan 27,000 7,500 By Shiv s Capital A/c 45,000 3,000 By Nath s Capital A/c 30,000 By Goodwill By Profit & Loss A/c 9,000 19,500 (Balancing figure, profit upto 31st March, 2013) 1,30,500 1,30,500 Profit & Loss Account of Ketan for the year ended 31st December, 2013 ` To Opening Stock To Purchases To Expenses To Business Purchase (Profit upto 31st March) 60,000 By Sales 4,80,000 By Closing Stock 18,000 19,500 The Institute of Chartered Accountants of India ` 6,00,000 75,000 24 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 To Net Profit Ketan s Capital A/c 97,500 6,75,000 6,75,000 Balance Sheet of Ketan as on 31st December, 2013 Liabilities ` Assets Ketan s Capital A/c 45,000 Add : Profit 97,500 Sundry Creditors ` Goodwill 1,42,500 22,500 9,000 Furniture 4,500 Stock in trade 75,000 Sundry Debtors 72,000 Cash at Bank 4,500 1,65,000 1,65,000 Working Notes : (1) Goodwill ` Value of Assets taken over Stock 69,000 Debtors 52,500 Furniture 4,500 1,26,000 Less : Creditors (15,000) Net assets 1,11,000 Goodwill (Balancing figure) 9,000 Purchase Consideration (2) 1,20,000 Increase in net assets upto 31st March 2013 : as on 1st January as on 31st March ` ` Debtors 45,000 52,500 Stock 60,000 69,000 4,500 4,500 1,09,500 1,26,000 Furniture The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Less : Creditors 25 (18,000) (15,000) 91,500 1,11,000 19,500 1,11,000 1,11,000 Profit, equal to net increase 3. Realisation Account Particulars ` Particulars ` To Goodwill 10,000 By To land 20,000 By Trade creditors To Buildings provision Debts to ` doubtful ` 2,000 96,000 1,10,000 By Bills Payable 14,000 To Machinery 50,000 By Bank overdraft 60,000 To Motor Car 28,000 By Mrs. Aman s loan 15,000 To Furniture 12,000 By To Investments 18,000 By Aman s Capital A/c (Investme To Loose tools ABC price) Ltd. (Purchase 1,95,500 13,000 7,000 By Cash A/c: To Stock 18,000 Debtors 20,000 To Bill receivable 20,000 Motor Car 24,000 To Debtors 40,000 Furniture 4,000 To Aman s Capital A/c (Mrs. Aman s Loan) 15,000 Loose tools 1,000 49,000 To Cash A/c: Creditors Realisation expenses 94,000 500 94,500 To Profit on Realisation t/f to: Aman s Capital A/c 1,000 Baal s Capital A/c 667 Chand s Capital A/c 333 2,000 4,44,500 4,44,500 ABC Ltd. Account Particulars To Realisation A/c ` Particulars ` 1,95,500 By Cash A/c 75,500 By Shares in ABC Ltd. 1,95,500 The Institute of Chartered Accountants of India 1,20,000 1,95,500 26 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Partners Capital Accounts Particulars Baal ` To Profit and Loss A/c To Realisation A/c To Chand s Current A/c To shares in ABC Ltd. To Cash A/c Aman ` 6,000 4,000 13,000 - - - 60,000 40,000 18,000 44,000 97,000 88,000 Chand Particulars Aman Baal ` ` ` 70,000 80,000 10,000 - - 33,000 9,000 6,000 3,000 2,000 1,000 15,000 1,333 667 - 667 333 - 97,000 88,000 31,000 78,000 ` 2,000 By Balance b/d - By Chand s Loan A/c 56,000 By General reserve 20,000 By Investment Fluctuation Fund - By Realization A/c By Realisation A/c (Mrs. Aman s loan A/c) By Cash A/c 78,000 Chand Chand s Current Account Particulars To Balance b/d ` 56,000 Particulars By Chand s Capital A/c-transfer 56,000 ` 56,000 56,000 Shares in ABC Ltd. Account Particulars To ABC Ltd. Account ` 1,20,000 Particulars ` By Aman s Capital A/c 60,000 By Baal s Capital A/c 40,000 By Chand s Capital A/c 20,000 1,20,000 1,20,000 Cash Account Particulars To Balance b/d To ABC Ltd. To Realisation A/c (sale of assets) To Chand s Capital A/c Particulars By Realisation A/c (Liabilities and expenses) 75,500 By Aman s Capital A/c 49,000 By Baal s Capital A/c ` 1,000 31,000 1,56,500 ` 94,500 18,000 44,000 1,56,500 Note : Investment Fluctuation Fund Account may be transferred to Realisation Account. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 4. 27 (a) Number of Shares to be issued to Partners ` 5,01,400 Assets: Machinery ` 1,40,000 + Inventory ` 1,37,400 +Trade Receivable `1,24,000 + Bank ` 1,00,000 Less: Liabilities taken over Net Assets taken over (Purchase Consideration) Classes of Shares to be issued : (1,69,400) 3,32,000 M Total 1,36,000 90,000 46,000 2,72,000 18,000 12,000 60,000 1,66,000 Balance in Equity Shares of ` 10 each O 30,000 10% Preference Shares of ` 10 each (to retain rights as to Interest on Capital) N 1,08,000 58,000 3,32,000 (3,32,000 -2,72,000) (issued in profit sharing ratio) (b) Partners Capital Account Particulars M To Drawings 50,000 N O Particulars M 46,000 34,000 By balance b/d N O 1,36,000 90,000 46,000 To 10% Preference 1,36,000 share capital 90,000 46,000 By Interest on Capital 13,600 9,000 4,600 To Equity Shares 30,000 18,000 12,000 By profit for the 1,10,700 year 5:3:2 (W.N. 1) 66,420 44,280 To Bank Additional 54,300 17,420 6,000 4,000 2,70,300 1,71,420 98,880 6,880 By Machinery* A/c 10,000 drawings (W.N. 2) Total 2,70,300 1,71,420 98,880 * Gain on Transfer of Machinery = ` 1,40,000 (` 2,00,000-` 80,000) = ` 20,000 in 5:3:2 ratio. (c) Balance sheet of MNO Ltd. as on 31st March, 2014 (after Takeover of Firm) Note no. I ` Equity and Liabilities: (1) Shareholders Funds Share Capital 1 3,32,000 (2) Current Liabilities Trade Payables 1,69,400 Total The Institute of Chartered Accountants of India 5,01,400 28 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 II Assets (1) Non-Current Assets Fixed Assets Tangible Assets- Machinery 1,40,000 (2) Current Assets: (a) Inventories 1,37,400 (b) Trade Receivables 1,24,000 (c) Cash and Cash Equivalents 1,00,000 Total 5,01,400 Notes to Accounts Particulars 1. ` Shares capital Authorised shares capital 20,00,000 Issued, Subscribed & paid up 60,000 6,000 Equity Shares of ` 10 each 27,200 10% Preference Shares capital of ` 10 each (All above shares issued for consideration other than cash, in takeover of partnership firm) Working Note: 1. 2,72,000 3,32,000 Profit & Loss Appropriation Account for the year ended 31st March Particulars ` ` To Interest on Capital: M [` 1,36,000 x 10%] Particulars By Net Profit 13,600 N [` 90,000 x 10%] 4,600 2,48,600 (given) 9,000 O [` 46,000 x 10%] ` 27,200 To Profits transferred to Capital M 1,10,700 N 66,420 O 44,280 Total The Institute of Chartered Accountants of India 2,21,400 2,48,600 2,48,600 PAPER 5 : ADVANCED ACCOUNTING 2. 29 Statement showing Additional Drawings in Cash (a) Funds available for Drawings Total Drawing of Partners (given) Add: 1,30,000 Further Funds available for Drawings (1,78,600-1,00,000) 78,600 2,08,600 Less: Interest on Capital (27,200) Amount available for Additional Drawings 1,81,400 (b) Ascertainment of Additional Drawings Particulars M N O As per above statement ` 1,81,400(in profit sharing ratio) 90,700 54,420 36,280 Add: Interest 13,600 9,000 4,600 1,04,300 63,420 40,880 (50,000) (46,000) (34,000) 54,300 17,420 6,880 Dr. (` ) Cr. (` ) Less: Already drawn Additional Drawings 5. Journal Entries in the books of Siya ltd. Particulars At the end of 1 year Employees Compensation Expense A/c Dr . To Employee Stock Options Outstanding A/c (Being the compensation expenses recognized in respect of the ESOP) 8,60,625 Profit and Loss A/c 8,60,625 Dr 8,60,625 To Employee Compensation Expense A/c 8,60,625 (Being Expenses of the year transferred to P & L A/c) At the end of Year 2 Employees Compensation Expense A/c Dr To Employee Stock Options Outstanding A/c . (Being expense in respect of ESOP recognized for the year 2) 8,60,625 Profit and Loss A/c 8,60,625 To Employee Compensation Expense A/c (Being Expenses of the year transferred to P & L A/c) The Institute of Chartered Accountants of India Dr 8,60,625 8,60,625 30 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 At the end of Year 3 Employees Compensation Expense A/c Dr To Employee Stock Options Outstanding A/c . (Being expense in respect of ESOP recognized for the year 3) 21,03,750 Profit and Loss A/c 21,03,750 Dr 21,03,750 To Employee Compensation Expense A/c 21,03,750 (Being Expenses of the year transferred to P & L A/c) Working Note: A. No. of Employees expected to take options = 2,500 x .80 x .85 x .90 x .90 = 1377 B. No. of Options to be granted to each employee = 500 C. Fair Value of each option = ` 5 D. Total Fair Value of Options expected to vest (A x B x C) = ` 34,42,500 E. Amount of Fair Value of Options to be recognized as an expense 1st year (34,42,500/4) = ` 8,60,625 2nd Year (34,42,500 x (2/4)- 8,60,625) ` 8,60,625 = ` 8,60,625 3rd Year [(1530 employees x 500 options x ` 5) - (8,60,625+8,60,625)] = ` 21,03,750 Since vesting period has been revised in 3rd year all the remaining liabilities in respect of employees stock option plan has been recognized at the end of 3rd year and data for the 4th year has been ignored. 6. (i) Journal Entries in the books of C Ltd. (` in lakhs) Particulars 1 Bank A/c To Investments A/c Dr. 3,150 3,000 150 To Profit and Loss A/c (Being investment sold on profit for the purpose of buyback) 2 10% Redeemable Preference Share Capital A/c Premium on Redemption of Preference Shares A/c To Preference Shareholders A/c (Being redemption of preference share capital at premium of 10%) The Institute of Chartered Accountants of India Dr. Dr. 2,500 250 2,750 PAPER 5 : ADVANCED ACCOUNTING 3 4 5 6 7 8 31 Securities Premium A/c To Premium on Redemption of Preference Shares A/c (Being premium on redemption of preference shares adjusted through securities premium) Dr Equity Share Capital A/c Premium on buyback To Equity buy-back A/c (Being Equity Share bought back, Share Capital cancelled, and Premium on Buyback accounted for) Dr. Dr. Securities Premium A/c (800-250) General Reserve A/c To Premium on Buyback A/c (Being premium on buyback provided first out of securities premium and the balance out of general reserves.) Dr 250 1,200 1,200 2,400 550 650 1,200 Bank A/c To Bank Loan A/c (Being loan taken from bank to finance buyback and redemption of shares) 400 Preference Shareholders A/c Equity buy-back A/c To Bank A/c (Being payment made to preference shareholders and equity shareholders) 2,750 2,400 General Reserve Account To Capital Redemption Reserve Account (Being amount transferred to capital redemption reserve account towards face value of preference shares redeemed and equity shares bought back) 3,700 (ii) 400 5,150 3,700 Balance Sheet of C Ltd. (after Redemption and Buyback) (` Lakhs) Particulars Note No EQUITY AND LIABILITIES (I) 250 Amount ` Shareholders Funds: (a) Share Capital 6,800 (b) Reserves and Surplus (2) 1 2 6,800 3 5,400 Non-Current Liabilities: (a) Long Term Borrowings The Institute of Chartered Accountants of India 32 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 (3) Current Liabilities: (a) Trade payables 2,300 (b) Short Term Provisions 1,000 Total 22,300 (II) ASSETS (1) Non-Current Assets Fixed Assets 14,000 Current Assets: (a) Cash and Cash equivalents (W N) 50 (b) Other Current Assets 8,250 22,300 Notes to Accounts ` in Lakhs 1. Share Capital 680 lakh Equity Shares of ` 10 each Fully Paid up (120 lakh Equity Shares bought back) 2. 6,800 Reserves and Surplus General Reserve Less: Adjustment for premium paid on buy back 6,000 (650) Less: Transfer to CRR (3,700) Capital Redemption Reserve 1,000 Add: Transfer due to buy-back of shares from Gen. res. 3,700 Securities premium Less: Adjustment for premium paid on redemption of preference shares Less: Adjustment for premium paid on buy back Profit & Loss A/c Add: Profit on sale of investment 3. 1,650 4,700 800 (250) (550) - 300 150 450 6,800 Long-term borrowings Secured 9 % Debentures Term Loans From Banks The Institute of Chartered Accountants of India 5,000 400 5,400 PAPER 5 : ADVANCED ACCOUNTING 33 Working Note Bank Account Receipts 7. Amount Payments Amount (` Lakhs) (` Lakhs) 2,750 To balance b/d 1,650 By Preference Sharesholders A/c To Investment A/c (sale Proceeds) 3,150 By Equity Shareholders A/c 2,400 To Bank Loan A/c (Loan received) 400 By Balance c/d (Balancing figure) 50 5,200 5,200 Computation of liabilities of underwriters (No. of shares): A & Co. B & Co. Gross liability 72,000 30,000 Less: Marked applications (excluding firm (12,000) (15,000) underwriting) 60,000 15,000 Less: Unmarked Applications*(Ratio 72:30:18) (16,200) (6,750) 43,800 8,250 Less: Firm underwriting (9,600) (12,000) 34,200 (3,750) Credit for excess of B & Co. (ratio 72:18) (3,000) 3,750 Net liability (excluding firm underwriting) 31,200 Add: Firm underwriting 9,600 12,000 Total liability (No. of shares) 40,800 12,000 C & Co. Total 18,000 1,20,000 (6,000) (33,000) 12,000 87,000 (4,050) (27,000) 7,950 60,000 (3,600) (25,200) 4,350 34,800 (750) 3,600 3,600 7,200 Working Note: * Total Applications 60,000 Shares Less: Marked Applications 33,000 Shares Unmarked applications 27,000 Shares 8. Journal (`) Dr. 2004 Jan 1 Bank Dr. To 9% Debenture Applications & Allotment Account (Being application money on 10,000 debentures @ ` 100 per debenture received) The Institute of Chartered Accountants of India (`) Cr. 10,00,000 10,00,000 34 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 (i) 2006 Jan. 1 (ii) 2009 Jan. 1 (iii) 2010 Jan. 1 2011 (iv) 2014 Jan. 9% Debentures Applications & Allotment Account Dr. 10,00,000 To 9% Debentures Account 10,00,000 (Being allotment of 10,000 9% Debentures of ` 100 each at par) 9% Debenture Account Dr. 1,00,000 1,000 Loss on Redemption of Debentures Account Dr. To Bank 1,01,000 (Being redemption of 1,000 9% Debentures of ` 100 each by purchase in the open market @ ` 101 each) Profit & Loss Account/Securities Premium Account Dr. To Loss on Redemption of Debentures Account (Being loss on redemption of debentures being written off by transfer to Profit and Loss Account or Securities Premium Account) 9% Debentures Account Dr. To Sundry Debentureholders (Being Amount payable to debentureholders on redemption debentures for ` 3,00,000 at par by draw of a lot) Sundry Debentureholders Dr. To Bank (Being Payment made to sundry debentureholders for redeeming debentures of ` 3,00,000 at par) Own Debentures Dr. To Bank (Being purchase of own debentures of the face value of ` 2,00,000 for ` 1,97,800) 9% Debentures Dr. To Own Debentures To Profit on Cancellation of Own Debentures Account (Being Cancellation of own debentures of the face value of ` 2,00,000 purchased last year for ` 1,97,800) Profit on Cancellation of Own Debentures Account Dr. To Capital Reserve Account (Being transfer of profit on cancellation of own debentures to capital reserve) 9% Debentures Account Dr. Premium on Redemption of Debentures Account Dr. To Sundry Debentureholders (Being amount payable to holders of debentures of the face value of ` 4,00,000 on redemption at a premium of 2% as per resolution of the board of directors) Sundry Debentureholders Dr. The Institute of Chartered Accountants of India 1,000 1,000 3,00,000 3,00,000 3,00,000 3,00,000 1,97,800 1,97,800 2,00,000 1,97,800 2,200 2,200 2,200 4,00,000 8,000 4,08,000 4,08,000 PAPER 5 : ADVANCED ACCOUNTING 9. 35 To Bank Account (Being payment to sundry debentureholders) Securities Premium Account Dr. To Premium on Redemption of Debentures Account (Being utilisation of a part of the balance in Securities Premium Account to write off premium paid on redemption of debentures) 4,08,000 8,000 8,000 In the books of Hari Narayan Ltd. (Amalgamated Company) Journal Entries Particulars Business Purchase A/c Dr. Credit ` 1. Debit ` 25,12,000 To Liquidators of Hari Ltd. 11,52,000 To Liquidators of Narayan Ltd. 13,60,000 (Being purchase of business of Hari Ltd. and Narayan Ltd.- Refer Working Note) 2. Plant and Machinery A/c Dr. 12,80,000 Trade receivables A/c Dr. 1,52,000 Inventory A/c Dr. 1,00,000 Cash and Bank A/c Dr. 1,08,000 To Trade payables A/c To General Reserve A/c 1,20,000 (8,80,000 5,12,000) 3,68,000 To Business Purchase A/c 11,52,000 (Being assets and liabilities of Hari Ltd. taken over) 3. Plant and Machinery A/c Dr. 17,00,000 Trade receivables A/c Dr. 1,25,000 Inventory A/c Dr. 1,35,000 Cash and Bank A/c Dr. 1,00,000 To Debentureholders A/c (95% of 5,00,000) 4,75,000 To Trade payables A/c 2,25,000 To Business Purchase A/c 13,60,000 (Being assets and liabilities of Narayan Ltd. taken over) 4. Liquidator of Hari Ltd. A/c Dr. 11,52,000 To Equity Share Capital A/c 9,60,000 To Securities Premium A/c 1,92,000 (Being equity shares issued at 20% premium to shareholders of Hari Ltd.) The Institute of Chartered Accountants of India 36 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 5. Liquidators of Narayan Ltd. A/c Dr. 13,60,000 To Equity Share Capital A/c 8,60,000 To 15% Preference Share Capital A/c 5,00,000 (Being issue consideration) 6. of shares to discharge purchase Debentureholders of Narayan Ltd. A/c Dr. 4,75,000 To Debentures A/c 4,75,000 (Being own debentures issued against debentures of Narayan Ltd.) Balance Sheet of Hari Narayan Ltd. after amalgamation Particulars I. Note No. ` Equity and Liabilities (1) Shareholder's Funds (a) Share Capital 1 23,20,000 (b) Reserves and Surplus 2 5,60,000 3 4,75,000 (2) Non-current Liabilities Long-term borrowings (3) Current Liabilities Trade payables 3,45,000 Total II. 37,00,000 Assets (1) Non-current assets Fixed assets Tangible assets 4 29,80,000 (2) Current assets (a) Inventories 2,35,000 (b) Trade receivables 2,77,000 (c) Cash and cash equivalents 2,08,000 Total 1. 37,00,000 Notes to Accounts ` 1. Share Capital Equity shares of ` 10 each The Institute of Chartered Accountants of India 18,20,000 PAPER 5 : ADVANCED ACCOUNTING Preference shares of ` 10 each 37 5,00,000 23,20,000 2. Reserves and surplus General Reserve 3,68,000 Securities Premium 1,92,000 5,60,000 3. Long-term Borrowings Secured Debentures 4. 4,75,000 Tangible Assets Plant and Machinery 29,80,000 Working Notes: Computation of Purchase Consideration 1. For Hari Ltd., the Payment Method is applied for determining the Purchase Consideration. Hence, the amalgamation is accounted under Pooling of Interests method. Number of shares to be issued by Hari Narayan Ltd. for Hari Ltd. s shareholders = 64,000 x 3/2 = 96,000 shares. Since, the issue price is ` 12 per share, the Purchase Consideration is 96,000 x 12 = ` 11,52,000. 2. For Narayan Ltd. the Net Assets Method is applied for determining the Purchase Consideration. Since, the assets are not taken over at book value, the amalgamation is accounted under Purchase method. ` Assets taken over: Plant and Machinery (20,00,000 less 15%) Trade receivables Inventory Cash and Bank balance Total Assets 17,00,000 1,25,000 (1,50,000 less 10%) 1,35,000 1,00,000 20,60,000 Less: Liabilities Trade payables (2,25,000) Secured Debentures (4,75,000) Net Purchase Consideration The Institute of Chartered Accountants of India 13,60,000 38 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Discharge: Preference Shareholders (7,50,000 x 2/3) 5,00,000 Equity Shareholders (bal. fig.) (13,60,000-5,00,000) 8,60,000 13,60,000 10. Journal Entries in the Books of Moon Ltd. Dr. ` (i) Equity Share Capital (` 10 each) A/c Dr. Cr. ` 25,00,000 To Equity Share Capital (` 5 each) A/c 12,50,000 To Reconstruction A/c 12,50,000 (Being conversion of 2,50,000 equity shares of ` 10 each fully paid into same number of fully paid equity shares of ` 5 each as per scheme of reconstruction.) (ii) 9% Preference Share Capital (` 100 each) A/c Dr. 10,00,000 To 10% Preference Share Capital (` 50 each) A/c 5,00,000 To Reconstruction A/c 5,00,000 (Being conversion of 9% preference share of ` 100 each into same number of 10% preference share of ` 50 each and claims of preference dividends settled as per scheme of reconstruction.) (iii) 10% First Debentures A/c Dr. 2,00,000 10% Second Debentures A/c Dr. 3,00,000 Trade payables A/c Dr. 50,000 Interest on Debentures Outstanding A/c Dr. 50,000 Bank A/c Dr. 50,000 To 12% New Debentures A/c 3,50,000 To Reconstruction A/c 3,00,000 (Being ` 3,00,000 due to A (including creditors) cancelled and 12% new debentures allotted for balance amount as per scheme of reconstruction.) (iv) 10% First Debentures A/c Dr. 1,00,000 10% Second Debentures A/c Dr. 2,00,000 Trade Payable A/c Dr. 25,000 Interest on Debentures Outstanding A/c Dr. 30,000 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 39 To 12% New Debentures A/c 2,05,000 To Reconstruction A/c 1,50,000 (Being ` 1,50,000 due to B (including creditors) cancelled and 12% new debentures allotted for balance amount as per scheme of reconstruction.) (v) Trade Payables A/c Dr. 87,500 To Reconstruction A/c 87,500 (Being remaining trade payable sacrificed 50% of their claim) (vi) Directors' Loan A/c Dr. 50,000 To Equity Share Capital (` 5) A/c 30,000 To Reconstruction A/c 20,000 (Being Directors' loan claim settled by issuing 6,000 equity shares of ` 5 each as per scheme of reconstruction.) (vii) Reconstruction A/c Dr. 7,500 To Bank A/c 7,500 (Being payment made for cancellation of capital commitments.) (viii) Bank A/c Dr. 55,000 To Reconstruction A/c 55,000 (Being refund of fees by directors credited to reconstruction A/c.) (ix) Reconstruction A/c Dr. 5,000 To Bank A/c 5,000 (Being payment of reconstruction expenses.) (x) Provision for Tax A/c Dr. 50,000 To Bank A/c 40,000 To Reconstruction A/c 10,000 (Being payment of tax for 80% of liability in full settlement) (xi) Reconstruction A/c Dr. 23,60,000 To Goodwill A/c 5,00,000 To Patent A/c 2,50,000 To Profit and Loss A/c 8,00,000 The Institute of Chartered Accountants of India 40 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 To Land and Building A/c 1,00,000 To Plant and Machinery A/c 3,00,000 To Furniture & Fixture A/c 50,000 To Computers A/c 60,000 To Trade Investment A/c 50,000 To Inventory A/c 1,50,000 To Trade receivables A/c 1,00,000 (Being writing off of losses and reduction in the value of assets as per scheme of reconstruction.) Working Notes: (1) Outstanding interest on debentures have been allocated between A and B as follows: A's Share ` 10% First Debentures 10% Second Debentures 10% on ` 5,00,000 i.e. B's Share 10% First Debentures 10% Second Debentures 10% on ` 3,00,000 i.e. Total (2) 2,00,000 3,00,000 5,00,000 50,000 1,00,000 2,00,000 3,00,000 30,000 80,000 Bank Account ` To A (reconstruction) 50,000 To Reconstruction A/c (paid by directors) ` By Balance b/d By Reconstruction A/c 55,000 50,000 7,500 (capital commitment penalty paid) By Reconstruction A/c (reconstruction expenses paid) 5,000 By Provision for tax A/c (tax paid) 40,000 _______ 1,05,000 The Institute of Chartered Accountants of India By Balance c/d 2,500 1,05,000 PAPER 5 : ADVANCED ACCOUNTING 11. (i) 41 Liquidator s Statement of Account ` To Assets Realised To Receipt of call money on 14,500 equity shares @ 2 per share ` 10,00,000 By Liquidator s remuneration 2.5% on 11,60,000 29,000 500 2% on 25,000 29,000 2% on 6,56,373 (W.N.3) 13,127 42,627 By Liquidation Expenses By Debenture holders having a floating charge on all assets 5,000 3,00,000 By Preferential creditors 25,000 By Unsecured creditors 6,56,373 10,29,000 10,29,000 (ii) Percentage of amount paid to unsecured creditors to total unsecured creditors = 6,56,373 100= 71.73% 9,15,000 Working Notes: 1. Unsecured portion in partly secured creditors=` 1,75,000 -` 1,60,000 = ` 15,000 2. Total unsecured creditors = 9,00,000 + 15,000 (W.N.1) = ` 9,15,000 3. Liquidator s remuneration on payment to unsecured creditors Cash available for unsecured creditors after all payments including payment to preferential creditors & liquidator s remuneration on it = ` 6,69,500 Liquidator s remuneration on unsecured creditors = ` 6,69,500 x 2/102 ` 13,127 or on ` 6,56,373 x 2/100 = ` 13,127 Total assets realised = ` 10,00,000 + ` 1,60,000 = ` 11,60,000 The Institute of Chartered Accountants of India 42 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 12. Form B RA (Prescribed by IRDA) Priya General Insurance Co. Ltd Revenue Account for the year ended 31st March, 2013 Fire and Marine Insurance Businesses Fire Current Year Marine Current Year ` ` 2,13,750 70,000 Interest, Dividends and Rent Gross Double Income Tax refund Profit on sale of motor car 2,13,750 70,000 Schedule Premiums earned (net) 1 Total (A) Claims incurred (net) 2 41,000 44,000 Commission 3 20,000 10,000 Operating expenses related to Insurance business 4 35,000 25,000 Bad debts Indian and Foreign taxes 96,000 79,000 1,17,750 (9,000) Total (B) Profit from Marine Insurance business (A-B) Schedules forming part of Revenue Account Schedule 1 Premiums earned (net) Fire Current Year Marine Current Year ` ` Premiums from direct business written 2,40,000 1,75,000 Less: Premium on reinsurance ceded (12,500) (7,500) Total Premium earned 2,27,500 1,67,500 Less: Change in provision for unexpired risk (13,750) (97,500) 2,13,750 70,000 41,000 44,000 Schedule 2 Claims incurred (net) The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 43 Schedule 4 Operating expenses related to insurance business 35,000 Expenses of Management 25,000 Form B-PL Priya General Insurance Co. Ltd. Profit and Loss Account for the year 31st March, 2013 Schedule Current Year Previous Year ` Particulars ` Operating Profit/(Loss) (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance 1,17,750 (9,000) Income From Investments (a) (b) Interest, Dividend & Rent Gross Profit on sale of investments Less : Loss on sale of investments 64,500 Other Income (To be specified) Total (A) Provisions (Other than taxation) Depreciation 1,73,250 4,500 Other Expenses Director s Fee 40,000 Total (B) 44,500 Profit Before Tax 1,28,750 Provision for Taxation 49,569 Profit After Tax 79,181 Working Notes: Fire ` 1. Claims under policies less reinsurance Claims paid during the year Add: Outstanding on 31st March, 2013 The Institute of Chartered Accountants of India Marine ` 50,000 5,000 40,000 7,500 44 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 55,000 (14,000) 41,000 2. 3. Premiums less reinsurance Premiums received during the year Add: Outstanding on 31st March, 2013 Less : Reinsurance premiums 4. 22,500 2,500 25,000 2,25,000 15,000 2,40,000 (12,500) 2,27,500 Expenses of management Expenses paid during the year Add: Outstanding on 31st March, 2013 (3,500) 44,000 30,000 5,000 35,000 Less : Outstanding on 1st April, 2012 4,7500 1,65,000 10,000 1,75,000 (7,500) 1,67,500 Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net premium for marine insurance. 5. Provision for taxation account ` 31.3.2013 To Bank A/c (taxes paid) 31.3.2013 To Balance c/d ` 1.4.2012 30,000 By Balance b/d 42,500 31.3.2013 By P & L A/c 49,569 62,069 92,069 13. (i) 92,069 Calculation of Rebate on bills discounted S.No. Amount (` ) Due date 2013 Unexpired portion Rate of discount Rebate on bill discounted ` (i) 7,50,000 April 8 8 days 12% 1,972 (ii) 3,00,000 May 5 35 days 14% 4,028 (iii) 4,40,000 June 12 73 days 14% 12,320 (iv) 9,60,000 July 15 106 days 15% 4,1820 60,140 (ii) Amount of discount to be credited to the Profit and Loss Account ` Transfer from Rebate on bills discount as on 31st March, 2012 Add: Discount received during the year ended The Institute of Chartered Accountants of India 31st March, 2013 91,600 4,05,000 PAPER 5 : ADVANCED ACCOUNTING 45 4,96,600 Less:Rebate on bills discounted as on 31st March, 2013 60,140 Discount credited to the Profit and Loss Account 4,36,460 14. Balance Sheet of Jyoti Electric Supply Ltd. as on March 31, 2013 Particulars 1 a b 2 a 3 a b 1 a i ii b 2 a b c Note No. Equity and Liabilities Shareholders' funds Share capital Reserves and Surplus Non-current liabilities Long-term borrowings Current liabilities Trade Payables Other current liabilities Total Assets Non-current assets Fixed assets Tangible assets Intangible assets Other non-current assets Current assets Inventories Trade receivables Cash and cash equivalents Total ` ('000) 1 2 75,00 32,50 3 4,750 7,50 15,00 17,750 13,450 2,50 15,00 14,50 8,00 3,00 17,750 4 5 6 Notes to financial statements ` ('000) 1 Share Capital Issued & subscribed Equity share capital 75,00 7,50,000 Equity shares of ` 10 each 2 Reserves and Surplus Capital reserve 9,00 Contingency Reserve 15,00 The Institute of Chartered Accountants of India 46 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 Balance of net revenue account 850 Total 3 3,250 Long-term borrowings Secured 14% Debentures 30,00 11% Term Loan (considered secured) 17,50 47,50 Other Current liabilities - Proposed dividend 15,00 15,00 Total 4 Total 5 Tangible assets Land 15,50 Building 42,50 Plant & Machinery Power Plant 75,00 Transformers 20,50 Public Lamps 4,00 99,50 Electrical Instruments 7,00 Total 6 16,450 Less: Depreciation fund (30,00) 13,450 Other non-current assets Contingency Reserve Investment (assumed as noncurrent item) 15,00 15. Statement showing the recomputation of Departmental Profit or Loss Particulars A Final Profit/(Loss) (Computed earlier) B Add: Departmental Manager s Commission @ 10% of Deptt. Profit subject to a minimum of ` 6,000 [Working Note (i)] A ` B ` C ` D ` (38,000) 50,400 72,000 1,08,000 6,000 6,000 8,000 12,000 C Profit before Deptt. Manager s commission (32,000) 56,400 80,000 1,20,000 (A+B) The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING D Less: Profit earned through transfer of goods at loaded price remaining in stock at transfer department (W.N. 2) E Correct Departmental Profit manager s commission)(C-D) after - (8,600) - (before (34,200) 56,400 71,400 1,20,000 F Less: Manager s commission @ 10% of profit subject to a minimum of ` 6,000 G Departmental Profit commission (E-F) (2,200) 47 (6,000) (6,000) (7,140) (12,000) Manager s (40,200) 50,400 64,260 1,08,000 Working Note: 1. Manager s Commission: Deptt. Profit/Loss Commission A 6,000 B 50,400 6,000 i.e. (50,400 x 1/9 = ` 5,600 less than ` 6,000 C 72,000 8,000 i.e. (72,000 x 1/9 = ` 8,000) D 2. (-) 38,000 1,08,000 12,000 i.e. (1,08,000 x 1/9 = ` 12,000) Unrealised Profit on stock transfer: ` Dept. A: ` 22,000 to Deptt. B @ 110%, Profit thereon 22,000 x 10/110 ` 1,200 to Deptt. D @ 120% Profit thereon 1,200 x 20/120 2,000 200 2,200 Dept. C ` 48,000 to Deptt. B 120% Profit thereon 48,000 x 20/120 ` 3,600 to Deptt. D @ 120 % Profit thereon 3,600 x 20/120 8,000 600 8,600 The Institute of Chartered Accountants of India 48 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 16. Pune Branch Account Particulars ` Particulars To Opening Balance ` ` By Opening Balance: Stock 10,000 Debtors Salaries outstanding 100 4,000 By Remittances: Petty Cash 500 Cash sales 1,30,000 2,000 Cash received from debtors 35,000 Prepaid Insurance 150 Cash paid by debtors directly to H.O. 2,000 To Goods sent to Branch Account 80,000 Received from Insurance Company 1,000 Furniture By Goods sent to branch (return of goods by the branch to H.O.) To Bank (expenses) Rent 2,000 Salaries 2,400 Stock Petty Cash 1,000 Petty Cash Insurance 600 To Net Profit 1,68,000 1,000 By Closing Balances: 6,000 78,950 5,000 650 Debtors 4,900 Furniture (2,000 10% depreciation) 1,800 Prepaid insurance (1/4 x ` 600) 1,81,600 150 1,81,600 *Alternatively, the amount of liabilities could have been deducted from assets. Working Note: Calculation of petty cash balance at the end: Opening balance ` 500 Add: Cash received form the Head Office 1,000 Total Cash with branch 1,500 Less : Spent by the branch 850 Closing balance 650 The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 49 17. (a) Basis of provisioning whether on no issues or on technical evaluation is the basis of making estimates and cannot be considered as Accounting Policy. As per AS 5, due to uncertainties inherent in business activities, many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based, or as a result of new information, more experience or subsequent developments. The basis of change in provisioning is a guideline and the better way of estimating the provision for non-moving inventory on account of change. Hence, it is not a change in accounting policy. Accounting policy is the valuation of inventory on cost or on net realizable value or on lower of cost or net realizable value. Any interchange of this valuation base would have constituted change in accounting policy. Further, the company should be able to demonstrate satisfactorily that having regard to circumstances provision made on the basis of technical evaluation provides more satisfactory results than provision based on 12 months issue. If that is the case, then the company can change the method of provision. (b) (i) As per para 9 of AS 11 Changes in Foreign Exchange Rates , a foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Accordingly, on 31.12.2012, borrowings will be recorded at ` 2,20,00,000 (i.e $ 5,00,000 ` 44.00) X As per para 11(a) of the standard, at each balance sheet date, foreign currency monetary items should be reported using the closing rate. Accordingly, on 31.03.2013, borrowings (monetary items) will be recorded at ` 2,22,50,000 (i.e. $ 5,00,000 ` 44.50). In the books of Aman Ltd. Journal Entries Date 1. Particulars 31-12-2012 Bank A/c ` Dr. 2,20,00,000 To Borrowings 2. 31.03.2013 P/L A/c (Difference exchange) (W.N.1) To Borrowings The Institute of Chartered Accountants of India ` 2,20,00,000 in Dr. 2,50,000 2,50,000 50 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 3. 30.06.2013 Borrowings A/c Dr. 2,22,50,000 P/L A/c (Difference in Dr. exchange) (W.N.2) 1,25,000 To Bank A/c 2,23,75,000 Working Notes: 1. The exchange difference of ` 2,50,000 is arising because the transaction has been reported at different rate (` 44.50 =1 US $) from the rate initially recorded (i.e. ` 44 =1 US $). 2. The exchange difference of ` 1,25,000 is arising because the transaction has been settled at an exchange rate (` 44.75 =1 US $) different from the rate at which reported in the last financial statement (` 44.50= 1 US $). 18. (a) As per para 21 of AS-12, Accounting for Government Grants , the amount refundable in respect of a grant related to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the amount refundable exceeds any such deferred credit, the amount should be charged to profit and loss statement. (i) In this case the grant refunded is ` 30 lakhs and balance in deferred income is ` 21 lakhs, ` 9 lakhs shall be charged to the profit and loss account for the year 2013-14. There will be no effect on the cost of the fixed asset and depreciation charged will be on the same basis as charged in the earlier years. (ii) If the grant was deducted from the cost of the plant in the year 2010-11 then, para 21 of AS-12 states that the amount refundable in respect of grant which relates to specific fixed assets should be recorded by increasing the book value of the assets, by the amount refundable. Where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. Therefore, in this case, the book value of the plant shall be increased by ` 30 lakhs. The increased cost of ` 30 lakhs of the plant should be amortized over 7 years (residual life). Depreciation charged during the year 2013-14 shall be (84 + 30)/7 years = ` 16.286 lakhs presuming the depreciation is charged on SLM. (b) Investments other than investment properties are not qualifying assets as per AS-16 Borrowing Costs. Therefore, interest cost of holding such investments cannot be capitalized. Further, even interest in respect of investment properties can only be capitalized if such properties meet the definition of qualifying asset, namely, that it necessarily takes a substantial period of time to get ready for its intended use or sale. Also, where the investment properties meet the definition of qualifying asset , for the capitalization of borrowing costs, the other requirements of the standard such as that borrowing costs should be directly attributable to the acquisition or The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 51 construction of the investment property and suspension of capitalization as per paragraphs 17 and 18 of AS-16 have to be complied with. 19. (a) (i) Computation of annual lease payment to the lessor ` Cost of equipment 16,99,999.50 Unguaranteed residual value 1,33,500.00 Present value of residual value after third year @ 10% (` 1,33,500 0.751) 1,00,258.50 Fair value to be recovered from (` 16,99,999.5 ` 1,00,258.5) lease payments 15,99,741.00 Present value of annuity for three years is 2.486 Annual lease payment = ` 15,99,741/ 2.486 6,43,500.00 (ii) Computation of Unearned Finance Income ` Total lease payments (` 6,43,500 x 3) 19,30,500 Add: Unguaranteed residual value Gross investment in the lease Less: Present value of investment (lease payments and residual value) (` 1,00,258.5+ ` 15,99,741) Unearned finance income 1,33,500 20,64,000.00 (16,99,999.50) 3,64,000.50 (b) Earnings for the year = No. of Shares x Basic EPS = 30,00,000 shares x ` 5 per share = `1,50,00,000 Adjusted net profit for the current year = Earnings for the year + Interest on debentures net of tax = 1,50,00,000 + (6,00,000 1,80,000) = ` 1,54,20,000 No. of equity shares resulting from conversion of debentures = 50,000 x 10 shares = 5,00,000 shares Total No. of equity shares for diluted EPS= 30,00,000 + 5,00,000 = 35,00,000 shares Diluted earnings per share = ` 1,54,20,000/ 35,00,000 shares = ` 4.4 per share. 20. (a) As per AS 26 Intangible Assets (i) For the year ending 31.03.2012 (1) Carrying value of intangible as on 31.03.2012: At the end of financial year 31st March 2012, the production process will be recognized (i.e. carrying amount) as an intangible asset at a cost of The Institute of Chartered Accountants of India 52 INTERMEDIATE (IPC) EXAMINATION: MAY 2014 ` 28 lakhs (expenditure incurred since the date the recognition criteria were met, i.e., from 1st December 2011). (2) Expenditure to be charged to Profit and Loss account: The ` 22 lakhs is recognized as an expense because the recognition criteria were not met until 1st December 2012. This expenditure will not form part of the cost of the production process recognized in the balance sheet. (ii) For the year ending 31.03.2013 (1) Expenditure to be charged to Profit and Loss account: (` in lakhs) Carrying Amount as on 31.03.2012 28 Expenditure during 2012 2013 80 Total book cost 108 Recoverable Amount (72) Impairment loss 36 ` 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2013. (2) Carrying value of intangible as on 31.03.2013: (` in lakhs) Total Book Cost 108 Less: Impairment loss (36) Carrying amount as on 31.03.2013 72 (b) Since the company is not appealing against the addition of ` 0.66 crore the same should be provided for in its accounts for the year ended on 31st March, 13. The amount paid under protest can be kept in the books as an advance and disclosed along with the contingent liability of ` 2.10 crore. The Institute of Chartered Accountants of India

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