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CA IPCC : Revision Test Paper (with Answers) - ADVANCED ACCOUNTING May 2015

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PAPER 5: ADVANCED ACCOUNTING PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR MAY, 2015 EXAMINATION A. Applicable for May, 15 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) Paragraphs 46 for entities other than Companies In line with para 46 inserted by the MCA for corporate entities, the Council of the ICAI has also inserted Paragraph 46 in AS 11 for entities other than Companies in the month of February, 2014: 46(1) In respect of accounting periods commencing on or after 7th December, 2006 (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 asset, can be added to or deducted from the cost of the asset and should be depreciated over the balance life of the asset, 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 asset or liability, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15. (2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be designated as a 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 should 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. The Institute of Chartered Accountants of India 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (iii) Companies Act, 2013 The relevant Sections of the Companies Act, 2013 notified up to 30th September 2014 will be applicable for May, 2015 Examination. (iv) Maintenance of Statutory Liquidity Ratio (SLR) 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 /12.02.001/2014-15 dated August 5, 2014 has decided that Statutory Liquidity Ratio for every Scheduled Commercial Bank and Local Area Banks be reduced to 22 per cent of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning August 9, 2014. RBI vide notification No. RBI/2014-15/166RPCD.RCB.BC.No.22/07.51.020/2014-15, dated August 06, 2014, has decided to reduce the Statutory Liquidity Ratio (SLR) of State/Central Cooperative Banks from 22.5 percent of their Net Demand and Time Liabilities (NDTL) to 22.0 per cent with effect from the fortnight beginning August 9, 2014. (v) 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 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. (vi) SLR Holdings under Held to Maturity Category In terms of para 1.2 of the circular RPCD.CO.RRB.BC.No. 74/03.05.33/2013-14 dated January 07, 2014 on Guidelines for Classification, Valuation and Provisioning , RRBs were permitted to exceed the limit of 25.00 percent of total investments under the HTM category provided the excess comprised only SLR securities and the total SLR securities held in the HTM category was not more than 24.50 per cent of their NDTL as on last Friday of the second preceding fortnight. In consonance with the calibrated reduction in the SLR and in order to enable RRBs greater participation in financial markets, the RBI vide Notification No. RBI/2014-15/168 RPCD.CO.RRB. BC.No.25/03.05.33/2014-15, dated August 7, 2014 has permitted RRBs to exceed the limit of 25 per cent of total investments under HTM category provided the excess comprises only SLR securities, and the total SLR securities held in the HTM category is not more than 24.00 per cent of their NDTL as on the last Friday of the second preceding fortnight with effect from August 9, 2014. (Source: rbi.org.in) The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 3 (vii) 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, 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 buy-back 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. (viii) Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 SEBI vide Circular No. LAD-NRO/GN/2014-15/16/1729 dated 28th October, 2014 has formulated the SEBI (Share Based Employee Benefits) Regulations, 2014 which replaces the SEBI (Employees Stock Option Plan) Guidelines, 1999. The said Regulations deal with various provisions relating to employee stock option schemes, employee stock purchase schemes, stock appreciation rights schemes, general employee benefits schemes and retirement benefit schemes formulated by listed companies. The regulations deal with definition of eligible employees, formation of compensation committee, shareholders approvals variation of terms of issue, listing, compliances etc. For the complete text of this notification please refer to the link: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1414568485252.pdf [Source: www.sebi.gov.in] B. Not applicable for May, 15 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 Ind ASs are not applicable for the students appearing in May, 15 Examination. The Institute of Chartered Accountants of India 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 PART II : QUESTIONS AND ANSWERS QUESTIONS Sale of Partnership firm to a Company 1. X and Y carrying on business in partnership sharing Profit and Losses equally, wished to dissolve the firm and sell the business to X Limited Company on 31-3-2015, when the firm s position was as follows: Liabilities ` Assets X s Capital 1,50,000 Land and Building Y s Capital 1,00,000 Furniture Creditors 60,000 Stock Debtors Cash 3,10,000 ` 1,00,000 40,000 1,00,000 66,000 4,000 3,10,000 The arrangement with X Limited Company was as follows: (i) Land and Building was purchased at 20% more than the book value. (ii) Furniture and stock were purchased at book values less 15%. (iii) The goodwill of the firm was valued at ` 40,000. (iv) The firm s debtors, cash and creditors were not to be taken over, but the company agreed to collect the book debts of the firm and discharge the creditors of the firm as an agent, for which services, the company was to be paid 5% on all collections from the firm s debtors and 3% on cash paid to firm s creditors. (v) The purchase price was to be discharged by the company in fully paid equity shares of ` 10 each at a premium of ` 2 per share. The shares received from the company were distributed between the partners in the ratio of their final claims. The company collected all the amounts from debtors. The creditors were paid off less by ` 1,000 allowed by them as discount. The company paid the balance due to the vendors in cash. Prepare the Realisation account, the Capital accounts of the partners and the Cash account in the books of partnership firm. Dissolution of partnership firm 2. (a) The partners P, Q & R have called you to assist them in winding up the affairs of their partnership on 31.12.2014. Their balance sheet as on that date is given below: The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING Liabilities Amount ` Capital Accounts: Assets 5 Amount ` Land & Building 50,000 P 65,000 Plant & Machinery 46,000 Q 50,500 Furniture & Fixture 10,000 R 32,000 Stock 14,500 16,000 Debtors 14,000 Creditors Cash at Bank 9,000 Loan P Loan Q Total 1,63,500 13,000 7,000 Total 1,63,500 (a) The partners share profit and losses in the ratio of 4:3:2. (b) Cash is distributed to the partners at the end of each month. (c) A summary of liquidation transactions are as follows: January 2015 ` 9,000 - collected from debtors; balance is uncollectable. ` 8,000 - received from the sale of entire furniture ` 1,000 - Liquidation expenses paid. ` 6,000 - Cash retained in the business at the end of month February 2015 ` 1,000 - Liquidation expenses paid. As part payment of his capital, R accepted a machinery for ` 9,000 (book value ` 3,500) ` 2,000 - Cash retained in the business at the end of month March 2015 ` 38,000 - received on the sale of remaining plant and machinery. ` 10,000 - received from the sale of entire stock. ` 1,700 - Liquidation expenses paid. ` 41,000 - Received on sale of land & building. No Cash is retained in the business. You are required to prepare a schedule of cash payments amongst the partners by "Higher Relative Capital Method". The Institute of Chartered Accountants of India 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Issues related to Accounting in LLPs (b) What are the liabilities of designated partners in a LLP. Explain in brief. Employees Stock Option Plan 3. The following particulars in respect of stock options granted by a company are available: Grant date Number of employees covered Number options granted per employee Fair value of option per share on grant date (`) April 1, 2011 50 1,000 9 The options will vest to employees serving continuously for 3 years from vesting date, provided the share price is ` 70 or above at the end of 2013-14. The estimates of number of employees satisfying the condition of continuous employment were 48 on 31/03/12, 47 on 31/03/13. The number of employees actually satisfying the condition of continuous employment was 45. The share price at the end of 2013-14 was ` 68. Compute expenses to recognise in each year and show important accounts in books of the company. Redemption of Debentures 4. Malik Ltd. have authorized capital of 8,00,000 equity shares of ` 10 each. But out of these 2,40,000 shares have been issued as fully paid. The company has an outstanding 14% Debentures loan of ` 24,00,000 redeemable at 102 per cent and interest has been paid up to date on December 31, 2012. On that date, the balance of the Debenture Redemption Reserve Account is ` 20,00,000 and corresponding Investment Account ` 20,00,000 (at cost) of which the market value is ` 18,00,000. The directors resolved to redeem the Debentures on January 1, 2013 and the holders are given an option to receive payment either wholly in cash or wholly in fully paid equity shares @ 8 shares for every ` 100 of debentures. 75% of the holders decided to exercise the option for taking shares in repayment and cash for the rest is procured by realizing an adequate amount of investment at the prevailing market value. Draw up journal entries (including Cash Book Entries) to give effect to the above transactions. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 7 Buy Back of Securities 5. The following was the summarized balance sheet of Gamma (an unlisted company) Ltd. as on 31st March, 2014: Equity & liabilities (` in lakhs) Authorised capital: Equity shares of ` 10 each Assets (` in lakhs) Fixed assets Issued capital: Investments 12,000 Cash at Bank 40,000 56,000 6,600 Trade receivables Equity Shares of ` 10 each Fully Paid Up 10% Redeemable Preference Shares of 10 each, Fully Paid Up 33,000 32,000 10,000 Reserves & Surplus: Capital Redemption Reserve 4,000 Securities Premium 3,200 General Reserve Profit & Loss Account 24,000 1,200 9% Debentures 20,000 Trade payables 13,200 1,07,600 1,07,600 On 1st April, 2014, the Company redeemed all its Preference Shares at a Premium of 10% and bought back 25% of its Equity Shares at ` 20 per Share. In order to make Cash available, the Company sold all the Investments for ` 12,600 Lakhs and raised a Bank Loan amounting to ` 8,000 lakh on the security of the Company's Plant. Give the necessary Journal Entries considering that the buy back is authorised by the articles of company and necessary resolution is passed by the company for this. The amount of Securities premium will be utilized to the maximum extent as allowed by the law. Underwriting of Securities 6. A company made a public issue of 2,00,000 equity shares of ` 10 each at a premium of ` 2 per share. The entire issue was underwritten by the underwriters L, M, N and O in the ratio of 4:3:2:1 respectively with the provision of firm underwriting of 5,000, 4,000, 2,000 and 2,000 shares respectively. The company received application for 1,50,000 shares (excluding firm underwriting) from public, out of which applications for 55,000, 40,000, 42,000 and 8,000 shares were marked in favour of L, M, N and O respectively. The Institute of Chartered Accountants of India 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Calculate the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit of underwriting is not given to the individual underwriter. Internal Reconsturction of a Company 7. The summarized Balance Sheet of Vaibhav Ltd. as on 31st March 2014 is as follows: Liabilities Equity Shares of ` 100 each 6%, Cumulative Preference Shares of ` 100 each 5% Debentures of ` 100 each Trade Payables Provision for taxation TOTAL ` Assets ` 2,00,00,000 Fixed Assets Investments (Market 1,00,00,000 Value ` 19,00,000 80,00,000 Current Assets 1,00,00,000 P & L A/c 2,00,000 4,82,00,000 TOTAL 2,50,00,000 20,00,000 2,00,00,000 12,00,000 4,82,00,000 The following scheme of Internal Reconstruction is sanctioned: (i) All the existing equity shares are reduced to ` 40 each. (ii) All preference shares are reduced to ` 60 each. (iii) The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing debentures of ` 100 each and exchange the same for fresh debentures of ` 70 each for every debenture held by them. (iv) Fixed assets are to be written down by 20%. (v) Current assets are to be revalued at ` 90,00,000. (vi) Investments are to be brought to their market value. (vii) One of the creditors of the company (included under trade payales in the above balance sheet) to whom the company owes ` 40,00,000 decides to forgo 40% of his claim. The creditor is allotted with 60000 equity shares of ` 40 each in full and final settlement of his claim. (viii) The taxation liability is to be settled at ` 3,00,000. (ix) It is decided to write off the debit balance of Profit & Loss A/c. Pass necessary journal entries and show the Balance Sheet of the company after giving effect to the above. Amalgamation of Companies 8. The following are the summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2014: Liabilities P Ltd. Q Ltd. Assets ` Share Capital The Institute of Chartered Accountants of India Fixed Assets Q Ltd. ` ` P Ltd. ` 7,00,000 2,50,000 PAPER 5 : ADVANCED ACCOUNTING 6,00,000 Investment 3,00,000 Current Assets: 10% Pref. Shares of ` 100 each 2,00,000 Inventory 1,00,000 Trade receivables Reserves Surplus 3,00,000 2,00,000 2,00,000 1,50,000 2,50,000 1,50,000 9 Equity Shares ` 10 each of and Cash at Bank 80,000 80,000 2,40,000 4,20,000 3,20,000 2,10,000 1,10,000 40,000 Secured Loans: 12% Debentures Current Liabilities: Trade payables 15,50,000 9,00,000 15,50,000 9,00,000 Details of Trade receivables and trade payables are as under: P Ltd. (`) Q Ltd. (`) 3,60,000 1,90,000 60,000 20,000 4,20,000 2,10,000 2,20,000 1,25,000 30,000 25,000 2,50,000 1,50,000 Trade receivables Debtors Bills Receivable Trade payables Sundry Creditors Bills Payable Fixed Assets of both the companies are to be revalued at 15% above book value. Inventory in Trade and Debtors are taken over at 5% lesser than their book value. Both the companies are to pay 10% Equity dividend, Preference dividend having been already paid. After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms: (i) 8 Equity Shares of ` 10 each will be issued by P Ltd. at par against 6 shares of Q Ltd. (ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of 10% Preference Shares of ` 100 each at par in P Ltd. (iii) 12% Debentureholders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued at a discount of 10%. (iv) ` 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry Creditors of Q Ltd. include ` 10,000 due to P Ltd. The Institute of Chartered Accountants of India 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Prepare: (a) Journal entries in the books of P Ltd. (b) Statement of consideration payable by P Ltd. Liquidation of Company 9. The following is the summarized Balance Sheet of Shah Ltd. Co. which is in the hands of the liquidator: Balance Sheet as at 31.3.2015 Liabilities ` Assets Share Capital: ` Fixed assets 2,00,000 1,000, 6% Preference Shares of ` 100 each, fully paid 1,00,000 Inventory Book debts 1,20,000 2,40,000 2,000 Equity shares of ` 100 each, fully paid 2,00,000 Cash in hand Profit and loss A/c 40,000 3,00,000 2,000 Equity shares of ` 100 each ` 75 paid up 1,50,000 Loan from bank (on security of stock) 1,00,000 Trade Payables 3,50,000 9,00,000 9,00,000 The assets realized the following amounts (after all costs of realization and liquidator s commission amounting to ` 5,000 paid out of cash in hand). ` Fixed assets 1,68,000 Inventory 1,10,000 Trade Receivables 2,30,000 Calls on partly paid shares were made but the amounts due on 200 shares were found to be irrecoverable. You are required to prepare Liquidator s Final Statement of Receipts and Payments. Financial Statements of a Banking Company 10. A commercial bank has the allowing capital funds and assets. Segregate the capital funds into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted asset ratio. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 11 Particulars Amount (` in crores) Equity Share Capital 400.000 Statutory Reserve 250.000 86.000 Capital Reserve (of which Statutory Reserve ` 18 crores were due to revaluation of assets and the balance due to sale of capital assets) Assets Cash Balance with RBI 12.00 Balance with other Banks 20.00 Other Investments 40.00 Loans & Advances (i) Guaranteed by Government (ii) 14.50 Others 5,465.00 Premises Furniture & Fixtures 74.00 Off Balance Sheet Items (i) Guarantees and other obligations 700 (ii) Acceptances, endorsements and letter of credit 4,900.00 11. The following facts have been taken out from the records of City Bank Ltd. as on 31st March, 2015: ` Rebate on bill discounted (not due on March 31st, ` 2014) 91,600 Discount received 4,05,000 Bill discounted 24,50,000 An analysis of the bills discounted is as follows: Amount Due date ` 2015 (i) 7,50,000 April 8 12% (ii) 3,00,000 May 5 14% (iii) 4,40,000 June 12 14% (iv) 9,60,000 July 15 15% The Institute of Chartered Accountants of India Rate of discount 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 You are required to:(i) Calculate Rebate on Bill Discounted as on 31st March, 2015. (ii) The amount of discount to be credited to the profit and loss account. Financial Statements of Insurance Companies 12. From the following information of XYZ Marine Insurance Ltd. for the year ending 31st March, 2014, find out the (i) Net Premium earned (ii) Net Claims Incurred Particulars Direct Business (`) Re-insurance (`) 92,00,000 7,86,000 Premium Receivable as on 01.04.2013 4,59,000 37,000 Premium Receivable as on 31.03.2014 3,94,000 33,000 Premium Received Premium Paid 6,36,000 Premium Payable as on 01.04.2013 28,000 Premium payable as on 31.03.2014 20,000 Claims Paid 73,00,000 5,80,000 Claims payable as on 01.04.2013 94,000 16,000 Claims payable as on 31.03.2014 1,01,000 12,000 Claims received 2,10,000 Claims receivable as on 01.04.2013 42,000 Claims receivable as on 31.03.2014 39,000 Financial Statements of Electricity Companies 13. Following information has been provided in respect of Watson Power Generation Project: 1. Date of commercial operation/work completed date : 1st April, 1995 2. Capital Cost at the beginning of the year 2010-11 : ` 135.39 Crore 3. Useful Life : 35 years 4. Details of allowed capital expenditure, details of actual repayment of loan and weighted average rate of interest on loan is as follows: 2010-11 (` in Crore) Additional Capital Expenditure (allowed above) The Institute of Chartered Accountants of India 2011-12 (` in Crore) 2012-13 (` in Crore) 1.63 0.98 0.52 PAPER 5 : ADVANCED ACCOUNTING Repayment of Loan during the year (net) Weighted Average Rate of Interest on Loan Value of Land 13 0.96 0.87 0.68 7.35% 7.48% 7.50% 0.00 0.00 0.00 5. Depreciation recovered upto 2008-09 = ` 49.05 Crore 6. Depreciation recovered in 2009-10 = ` 3.26 Crore 7. Cumulative Repayment of Loan upto 2009-10 = ` 14,00 Crore From the above information, calculate (a) Interest on Loans considering loan amount as 70% of total capital cost; (b) Depreciation as per the Central Electricity Commission (Terms and Conditions of Tariff) Regulations, 2009: Departmental Accounts 14. The following balances were extracted from the books of M/s Division. You are required to prepare Departmental Trading Account and Profit and Loss account for the year ended 31st December, 2014 after adjusting the unrealized department profits if any. Deptt. A ` Purchases Sales ` 50,000 40,000 6,50,000 9,10,000 10,00,000 Opening Stock Deptt. B 15,00,000 General expenses incurred for both the departments were ` 1,25,000 and you are also supplied with the following information: (a) Closing stock of Department A ` 1,00,000 including goods from Department B for ` 20,000 at cost of Department A. (b) Closing stock of Department B ` 2,00,000 including goods from Department A for ` 30,000 at cost to Department B. (c) Opening stock of Department A and Department B include goods of the value of ` 10,000 and ` 15,000 taken from Department B and Department A respectively at cost to transferee departments. (d) The rate of gross profit is uniform from year to year. Branch Accounting 15. (a) Pass necessary Journal entries in the books of an independent Branch of a Company, wherever required, to rectify or adjust the following: (i) Expenses of ` 2,800 allocated to the Branch by Head Office but not recorded in the Branch books. (ii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided earlier for ` 1,000. The Institute of Chartered Accountants of India 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (iii) Branch paid ` 3,000 as salary to a Head Office Manager, but the amount paid has been debited by the Branch to Salaries Account. (iv) Branch incurred travelling expenses of ` 5,000 on behalf of other Branches, but not recorded in the books of Branch. (v) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on the date of reconciliation of Accounts. (vi) Head Office allocates ` 75,000 to the Branch as Head Office expenses, which has not yet been recorded by the Branch. (vii) Head Office collected ` 30,000 directly from a Branch Customer. The intimation of the fact has been received by the Branch only now. (viii) Goods dispatched by the Head office amounting to ` 10,000, but not received by the Branch till date of reconciliation. The Goods have been received subsequently. Foreign Branch (b) ABC Ltd. has head office at Delhi (India) and branch at New York (U.S.A). New York branch is an integral foreign operation of ABC Ltd. New York branch furnishes you with its trial balance as on 31st March, 2015 and the additional information given thereafter: Stock on 1st April, 2014 Purchases and sales Sundry Debtors and creditors Bills of exchange Sundry expenses Bank balance Delhi head office A/c Dr.( $) 150 400 200 60 540 210 1,560 Cr.( $) 750 150 120 540 1,560 The rates of exchange may be taken as follows: on 1.4.2014 @ ` 40 per US $ on 31.3.2015 @ ` 42 per US $ average exchange rate for the year @ ` 41 per US $. New York branch account showed a debit balance of ` 22,190 on 31.3.2015 in Delhi books and there were no items pending reconciliation. You are asked to prepare trial balance of New York branch in ` in the books of ABC Ltd. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 15 Framework for Preparation and Presentation of Financial Statements 16. Mohan started a business on 1st April 2014 with ` 12,00,000 represented by 60,000 units of ` 20 each. During the financial year ending on 31st March, 2015, he sold the entire stock for ` 30 each. In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the year 2014-15 if Financial Capital is maintained at historical cost. Problems based on Accounting Standards AS 20 17. (a) The following information is available for AB Ltd. for the accounting year 2012-13 and 2013-14: Net profit for ` Year 2012-13 22,00,000 Year 2013-14 30,00,000 No of shares outstanding prior to right issue 10,00,000 shares. Right issue: One new share for each five shares outstanding i.e. 2,00,000 shares. : Right Issue price ` 25 : Last date to exercise right 31st July, 2013 Fair value of one equity share immediately prior to exercise of rights on 31.07.2013 is ` 32. You are required to compute: (i) Basic earnings per share for the year 2012-13. (ii) Restated basic earnings per share for the year 2012-13 for right issue. (iii) Basic earnings per share for the year 2013-14. AS 19 (b) X Ltd. has leased equipment over its useful life that costs ` 7,46,55,100 for a three year lease period. After the lease term the asset would revert to the Lessor. You are informed that: (i) The estimated unguaranteed residual value would be ` 1 lakh only. (ii) The annual lease payments have been structured in such a way that the sum of their present values together with that of the residual value of the asset will equal the cost thereof. The Institute of Chartered Accountants of India 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (iii) Implicit interest rate is 10%. You are required to ascertain the annual lease payment and the unearned finance income. Annual lease payments are made at the end of each accounting year. P.V. factor @ 10% for years 1 to 3 are 0.909, 0.826 and 0.751 respectively. AS 16 18. (a) Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2013, to be utilized as under: Particulars Amount (` in lakhs) Construction of factory building 40 Purchase of Machinery 35 Working Capital 25 In March 2014, construction of the factory building was completed and machinery was installed and ready for it's intended use. Total interest on debentures for the financial year ended 31.03.2014 was ` 11,00,000. During the year 2013-14, the company had invested idle fund out of money raised from debentures in banks' fixed deposit and had earned an interest of ` 2,00,000. Show the treatment of interest under Accounting Standard 16 and also explain nature of assets. AS 5 (b) Explain whether the following will constitute a change in accounting policy or not as per AS 5. (i) Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement. (ii) Management decided to pay pension to those employees who have retired after completing 5 years of service in the organistaion. Such employees will get pension of ` 20,000 per month. Earlier there was no such scheme of pension in the organization. AS 11 19. (a) Explain briefly the accounting treatment needed in the following cases as per AS 11: (i) Trade Receivables include amount receivable from Ted of U.S., ` 5,00,000 recorded at the prevailing exchange rate on the date of sales, transaction recorded at $1 = ` 38.70. (ii) Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at $1 = ` 35.60, taking exchange rate prevailing at the date of transactions. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 17 Exchange rates at the end of the year were as under: $1 Receivable = ` 45.80 $ 1 Payable = ` 45.90 AS 12 (b) On 1.4.2011, ABC Ltd. received Government grant of ` 300 lakhs for acquisition of machinery costing ` 1,500 lakhs. The grant was credited to the cost of the asset. The life of the machinery is 5 years. The machinery is depreciated at 20% on WDV basis. The Company had to refund the grant in May 2014 due to non-fulfillment of certain conditions. How you would deal with the refund of grant in the books of ABC Ltd.? AS 26 20. (a) During 2014-15, an enterprise incurred costs to develop and produce a routine, low risk computer software product, as follows: Amount (`) Completion of detailed programme and design 25,000 Coding and Testing 20,000 Other coding costs 42,000 Testing costs 12,000 Product masters for training materials 13,000 Packing the product (1,000 units) 11,000 What amount should be capitalized as software costs in the books of the company, on Balance Sheet date? AS 29 (b) Shyam Ltd. (a Public Sector Company) provides consultancy and engineering services to its clients. In the year 2014-15, the Government has set up a commission to decide about the pay revision. The pay will be revised with effect from 1-1-2006 based on the recommendations of the commission. The company makes the provision of ` 680 lakhs for pay revision in the financial year 2014-2015 on the estimated basis as the report of the commission is yet to come. As per the contracts with the client on cost plus job, the billing is done on the actual payment made to the employees and allocated to jobs based on hours booked by these employees on each job. The company gives the following disclosures in its notes to accounts: "Salaries and benefits include the provision of ` 680 lakhs in respect of pay revision. The amount chargeable from reimbursable jobs will be billed as per the The Institute of Chartered Accountants of India 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 contract when the actual payment is made . The accountant feels that the company should also recognise the income by ` 680 lakhs in Profit and Loss Account as per the terms of the contract. Otherwise, it will be the violation of matching concept and it will lead to understatement of profit. You are required to comment on the treatment done by the company in line with provisions of Accounting Standards. SUGGESTED ANSWERS/HINTS 1. Books of Partnership Firm Realisation Account ` ` To Land & Building 1,00,000 By Sundry Creditors To Furniture To Stock 40,000 By 1,00,000 X Ltd. Co. - Purchase consideration (W.N.1) To Debtors To X Ltd. Co. - Sundry 66,000 By Creditors To X Ltd. Co. Commission 59,000 3% on 59,000 X Ltd. Company Sundry Debtors Less: Commission 5% on 66,000 60,000 2,79,000 66,000 3,300 62,700 1,770 To Profits transferred to X s Capital A/c 17,465 Y s Capital A/c 17,465 34,930 4,01,700 4,01,700 Capital Accounts X Y X Y ` ` ` ` To Shares in X Ltd. By 1,63,980 1,15,020 Co. (W.N.2) Balance b/d To Cash Payment Realisation a/c Profit Final 3,485 2,445 1,67,465 1,17,465 The Institute of Chartered Accountants of India By 1,50,000 1,00,000 17,465 17,465 1,67,465 1,17,465 PAPER 5 : ADVANCED ACCOUNTING 19 Cash Account ` To Balance b/d To X Ltd. Co. (Amount realized from Debtors less amount paid to creditors) (W.N.3) ` 4,000 By By X s Capital A/c- Final payment 3,485 Y s Capital Payment 2,445 A/c- Final 1,930 5,930 5,930 Working Notes: 1 Calculation of Purchase consideration ` Land & Building 1,20,000 Furniture 34,000 Stock 85,000 Goodwill 40,000 2,79,000 2 Shares received from X Ltd. Co. The shares received from the company have been distributed between the two partners X & Y in the ratio of their final claims i.e., 1,67,465: 1,17,465. No. of shares received from the company = X gets 2,79,000 = 23,250 12 23,250 1,67,465 = 13,665 shares valued at 13,665 x 12 = ` 1,63,980. 2,84,930 Y gets the remaining 9,585 shares, valued at ` 1,15,020 (9,585 12) 3 Calculation of net amount received from X Ltd Less: Amount realized from Debtors Commission for realization from debtors (5% on 66,000) Less: Amount paid to creditors Less: Commission for cash paid to creditors (3% on 59,000) Net amount received The Institute of Chartered Accountants of India ` 66,000 3,300 62,700 59,000 3,700 1,770 1,930 20 2. INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (a) Cash Particulars Creditors ` Balance due after loan Capitals P (`) Q (`) ` 16,000 52,000 43,500 R (` ) 32,000 January Balance available 9,000 Realization less expenses and cash retained 10,000 Amount available and paid 19,000 (16,000) - - Balance due - - (3,000) 52,000 43,500 29,000 February Opening Balance 6,000 Expenses paid and cash carried forward 3,000 Available for distribution 3,000 Cash paid to Q Machinery given to R and - Balance due 9,000 52,000 40,500 20,000 41,689 32,767 - 3,000 14,844 March Opening Balance Amount expenses realized 2,000 less Amount paid to partners 87,300 89,300 Loss 10,311 7,733 5,156 P (`) Q (`) R (` ) 65,000 50,500 32,000 (13,000) (7,000) - Working Note: (i) Highest Relative Capital Basis Scheme of payment for January 2015 Balance of Capital Accounts Less: Loans (A) Profit Sharing Ratio Capital / Profit sharing Ratio The Institute of Chartered Accountants of India 52,000 43,500 32,000 4 3 2 13,000 14,500 16,000 PAPER 5 : ADVANCED ACCOUNTING Capital in profit sharing ratio, taking P s capital as base (B) 21 52,000 39,000 26,000 4,500 6,000 3 2 Capital / Profit sharing Ratio 1,500 3,000 Capital in profit sharing ratio, taking Q s capital as base (ii) 4,500 3,000 Excess of R s capital and Q s Capital (A B) (i) Profit Sharing Ratio Excess of R s Capital over Q s capital (i ii) (ii) 3,000 Scheme of distribution of available cash for March: P (`) Q (`) R (` ) 52,000 40,500 20,000 4 3 2 Capital / Profit sharing Ratio 13,000 13,500 10,000 Capital in profit sharing ratio, taking R s capital as base (B) (i) 40,000 30,000 20,000 Excess of P s Capital and Q s Capital (A B) (i) 12,000 10,500 Balance of Capital Accounts at end of February (A) Profit Sharing Ratio Profit Sharing Ratio 4 3,000 Capital in profit sharing ratio taking P s capital as base (ii) Excess of Q s Capital over P s Capital (i ii) 3,500 12,000 9,000 - Capital / Profit sharing Ratio 3 1,500 (1,500) Payment ` 1500 (C) Balance of Excess Capital (i C) 12,000 (12,000) (9,000) Payment ` 21000 (D) Balance due (A C D) Balance cash Payment ` 22,500) = ` 66,800 (E) 9,000 40,000 (` 89,300 30,000 20,000 (29,689) (22,267) (14,844) Total Payment (` 89,000) (C + D +E) (iii) 41,689 32,767 14,844 Loss (A iii) 10,311 7,733 5,156 (b) Liabilities of designated partners As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be- The Institute of Chartered Accountants of India 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (1) responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the limited liability partnership agreement; and . (2) liable to all penalties imposed on the limited liability partnership for any contravention of those provisions. 3. The vesting of options is subject to satisfaction of two conditions viz. service condition of continuous employment for 3 years and market condition that the share price at the end of 2013-14 is not less than ` 70. Since the share price on 31/03/14 was ` 68, the actual vesting shall be nil. Despite this, the company should recognise value of option over 3year vesting period from 2011-12 to 2013-14. Year 2011-12 Fair value of option per share = ` 9 Number of shares expected to vest under the scheme = 48 1,000 = 48,000 Fair value = 48,000 ` 9 = ` 4,32,000 Expected vesting period = 3 years Value of option recognised as expense in 2011-12 = ` 4,32,000 /3 = ` 1,44,000 Year 2012-13 Fair value of option per share = ` 9 Number of shares expected to vest under the scheme = 47 1,000 = 47,000 Fair value = 47,000 ` 9 = ` 4,23,000 Expected vesting period = 3 years Cumulative value of option to recognise as expense in 2011-12 and 2012-13 = (` 4,23,000/ 3) 2 = ` 2,82,000 Value of option recognised as expense in 2011-12 = ` 1,44,000 Value of option recognised as expense in 2012-13 = ` 2,82,000 ` 1,44,000 = ` 1,38,000 Year 2013-14 Fair value of option per share = ` 9 Number of shares actually vested under the scheme = 45 1,000 = 45,000 Fair value = 45,000 ` 9 = ` 4,05,000 Vesting period = 3 years The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 23 Cumulative value of option to recognise as expense in 2011-12, 2012-13 and 2013-14 = ` 4,05,000 Value of option recognised as expense in 2011-12 and 2012-13 = ` 2,82,000 Value of option recognised as expense in 2013-14 = ` 4,05,000 ` 2,82,000 = ` 1,23,000 Employees Compensation A/c Year 2011-12 ` Year To ESOP Outstanding A/c ` 1,38,000 1,23,000 2013-14 By Profit & Loss A/c 1,23,000 1,23,000 To ESOP Outstanding A/c 1,38,000 1,38,000 2013-14 1,44,000 1,38,000 2012-13 By Profit & Loss A/c To ESOP Outstanding A/c 1,44,000 1,44,000 2012-13 1,44,000 2011-12 By Profit & Loss A/c 1,23,000 ESOP Outstanding A/c Year ` Year ` 2011-12 To Balance c/d 1,44,000 2011-12 By Employees Compensation A/c 1,44,000 1,44,000 1,44,000 2012-13 To Balance c/d 2,82,000 2012-13 By Balance b/d 1,44,000 By Employees Compensation A/c 1,38,000 2,82,000 2013-14 To General Reserve 2,82,000 4,05,000 2013-14 By Balance b/d 2,82,000 By Employees Compensation A/c 4,05,000 4. 1,23,000 4,05,000 Journal Entries 2013 Jan. 1 ` Dr. 24,00,000 Dr. 48,000 14% Debentures A/c Premium on Redemption of Debentures A/c To Debentures holders A/c ` 24,48,000 (Being amount payable on redemption of ` 24,00,000 debentures at a premium of 2%) Debenture Redemption Reserve A/c To Premium on The Institute of Chartered Accountants of India Redemption Dr. of 48,000 48,000 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Debentures A/c (Being premium on redemption adjusted against Debenture Redemption Reserve A/c) 75 Debenture holders A/c 24,48,000 100 Dr. 18,36,000 To Equity Share Capital A/c (1,44,000 `10) 14,40,000 To Securities Premium A/c (1,44,000 x ` 2.75) 3,96,000 (Being issue of 1,44,000 shares of ` 10 each at a premium of ` 2.75 per share to 75% debenture holders who exercised conversion option) Bank A/c Dr. 6,12,000 Profit & Loss A/c Dr. 68,000 To Debenture Redemption Reserve Investment A/c 6,80,000 (Being investment sold & loss transferred to Profit & Loss A/c) Debenture holders A/c (24,48,000 x 25%) Dr. 6,12,000 To Bank A/c 6,12,000 (Being cash payment to 25% debentureholders) Debenture Redemption Reserve A/c Dr. 18,84,000 To General Reserve A/c 18,84000 (Being balance of Debenture Redemption Reserve A/c transferred on 100% redemption of debentures) Investment A/c To Debenture Redemption Reserve Investment A/c (Being balance of Debenture Redemption Reserve Investment transferred to Investment (General) A/c) The Institute of Chartered Accountants of India Dr. 13,20,000 13,20,000 PAPER 5 : ADVANCED ACCOUNTING 25 Working Notes: (1) For every ` 100 debenture, amount payable on redemption including premium is ` 102 Less: Face value of 8 shares of ` 10 each to be issued for redemption of each debenture (8 ` 10) ` 80 Premium on issue of 8 shares ` 22 `2.75 ` 22 Therefore, premium on issue of each share 8 (2) Shares to be issued for conversion of 75% Debentures into shares @ 8 shares for every ` 100 Debenture i.e. 75 8 = 1,44,000 shares `24,00,000 100 100 (3) Cash payment for remaining 25% debenture holders who exercised 25 102 = `6,12,000 the option of cash i.e., `24,00,000 100 100 (4) Face value of investment to be sold to realize ` 6,12,000 will be ` 6,80,000 20,00,000 i.e. ` 18,00,000 ` 6,12,000 Loss on sale of investment = 6,80,000 6,12,000 = 68,000 (5) Debenture Redemption Reserve transferred to General Reserve: 20,00,000 48,000 68,000 = ` 18,84,000 5. Journal Entries In the books of Gamma Ltd. Dr. 1 Bank A/c To Investments A/c Dr. 12,600 12,000 To Profit and Loss A/c 2 (Being Investments sold and profit being credited to Profit and Loss Account) Bank A/c Dr. To Bank Loan A/c (Being Loan taken from Bank to finance Buyback) The Institute of Chartered Accountants of India Cr. ` in lakhs 600 8,000 8000 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 3 10% Redeemable Preference Share Capital A/c Dr. 10,000 Premium payable on Redemption of Preference Shares A/c Dr. 1,000 To Preference Shareholders A/c 11,000 (Being amount payable on redemption of Preference shares at a Premium of 10%) 4 Securities Premium A/c To Premium payable on Redemption of Preference Shares A/c Dr. 1,000 1,000 (Being Securities Premium utilised to provide Premium on Redemption of Preference Shares) 5 5 Equity Share Capital A/c Premium payable on Buyback A/c To Equity Share buy back A/c (Being the amount due on buy-back) Securities Premium A/c (3,200 1,000) General Reserve A/c (balancing figure) To Premium payable on Buyback A/c Dr. Dr. 8,000 8,000 16,000 Dr. Dr. 2,200 5,800 8,000 (Being premium on buyback provided first out of Securities Premium and the balance out of General Reserves) 6 7 8 Bank A/c To Bank Loan A/c (Being Loan taken from Bank to finance Buyback) Preference Shareholders A/c Equity Shares buy back A/c To Bank A/c Dr. 8000 Dr. Dr. (Being payment made to Preference Shareholders and Equity Shareholders) General Reserve Account (10,000 + 8,000) Dr. To Capital Redemption Reserve Account (Being amount transferred to Capital Redemption Reserve to the extent of face value of preference shares redeemed and equity shares bought back) The Institute of Chartered Accountants of India 8,000 11,000 16,000 27,000 18,000 18,000 PAPER 5 : ADVANCED ACCOUNTING 6. 27 Calculation of liability of each underwriter assuming that the benefit of firm underwriting is not given to individual underwriter Particulars Gross liability Less: Marked Applications (excluding firm underwriting) Balance Less: Surplus of N allotted to L, M & O in the ratio of 4:3:1 Balance Less: Unmarked application including firm underwriting (WN) Net Liability Less: Surplus of N allotted to L, M & O in the ratio of 4:3:1 Balance Add: Firm Underwriting Total Liability L 80,000 (55,000) No. of shares M N O Total 60,000 40,000 20,000 2,00,000 (40,000) (42,000) (8,000) (1,45,000) 25,000 (1,000) 20,000 (750) (2,000) 2,000 12,000 (250) 55,000 - 24,000 19,250 - 11,750 55,000 (7,200) 16,800 (5,400) 13,850 (3,600) (3,600) (1,800) 9,950 (18,000) 37,000 (1,800) 15,000 5,000 20,000 (1,350) 12,500 4,000 16,500 3,600 2,000 2,000 (450) 9,500 2,000 11,500 37,000 13,000 50,000 Working Note: Particulars No. of shares Applications received from public 1,50,000 Add: Firm underwriting 13,000 Total Applications 1,63,000 Less: Marked application (1,45,000) Unmarked application including firm underwriting 7. 18,000 Journal Entries in the books of Vaibhav Ltd. (i) Equity share capital (` 100) A/c Dr. To Equity Share Capital (` 40) A/c To Capital Reduction A/c (Being conversion of equity share capital of ` 100 each into `40 each as per reconstruction scheme) The Institute of Chartered Accountants of India ` 2,00,00,000 ` 80,00,000 1,20,00,000 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 (ii) 6% Cumulative Preference Share capital Dr. (` 100) A/c 1,00,00,000 To 6% Cumulative Preference Share Capital (` 60) A/c 60,00,000 To Capital Reduction A/c 40,00,000 (Being conversion of 6% cumulative preference shares capital of ` 100 each into ` 60 each as per reconstruction scheme) (iii) 5% Debentures (` 100)A/c Dr. 80,00,000 To 6% Debentures (` 70) A/c 56,00,000 To Capital Reduction A/c 24,00,000 (Being 6% debentures of ` 70 each issued to existing 5% debenture-holders. The balance transferred to capital reduction account as per reconstruction scheme) (iv) Trade Payable A/c Dr. 40,00,000 To Equity Share Capital (` 40) A/c 24,00,000 To Capital Reduction A/c 16,00,000 (Being a creditor of ` 40,00,000 agreed to surrender his claim by 40% and was allotted 60,000 equity shares of ` 40 each in full settlement of his dues as per reconstruction scheme) (v) Provision for Taxation A/c Dr. 2,00,000 Capital Reduction A/c Dr. 1,00,000 To Liability for Taxation A/c 3,00,000 (Being conversion of the provision for taxation into liability for taxation for settlement of the amount due) (vi) Capital Reduction A/c Dr. 199,00,000 To P & L A/c 12,00,000 To Fixed Assets A/c 50,00,000 To Current Assets A/c To Investments A/c To Capital Reserve A/c (Bal. fig.) (Being amount of Capital Reduction utilized in writing off P & L A/c (Dr.) Balance, Fixed Assets, Current Assets, Investments and the Balance transferred to Capital Reserve) The Institute of Chartered Accountants of India 110,00,000 1,00,000 26,00,000 PAPER 5 : ADVANCED ACCOUNTING (vii) Liability for Taxation A/c Dr. 29 3,00,000 To Current Assets (Bank A/c) 3,00,000 (Being the payment of tax liability) Balance Sheet of Vaibhav Ltd. (After Reconstruction) as on 31.3.2014 Particulars Equity and Liabilities 1 Shareholders' funds a Share capital b Reserves and Surplus 2 Non-current liabilities Long-term borrowings 3 Current liabilities Trade Payables(1,00,00,000 less 40,00,000) Total Assets 1 Non-current assets a Fixed assets Tangible assets b Investments 2 Current assets Total Notes ` 1 2 164,00,000 26,00,000 3 56,00,000 60,00,000 3,06,00,000 4 5 6 200,00,000 19,00,000 87,00,000 3,06,00,000 Notes to accounts ` 1. Share Capital Equity share capital Issued, subscribed and paid up 2,60,000 equity shares of ` 40 each (60,000 shares have been issued for consideration other than cash) Preference share capital Issued, subscribed and paid up 1,00,000 6% Cumulative Preference shares of ` 60 each Total The Institute of Chartered Accountants of India 1,04,00,000 60,00,000 1,64,00,000 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 2. Reserves and Surplus Capital Reserve 3. 26,00,000 Long-term borrowings Secured 6% Debentures 4. 56,00,000 Tangible assets Fixed Assets 2,50,00,000 Adjustment under scheme of reconstruction (50,00,000) 6. Investments 20,00,000 Adjustment under scheme of reconstruction 5. 2,00,00,000 (1,00,000) 19,00,000 Current assets Adjustment under scheme of reconstruction 2,00,00,000 110,00,000 90,00,000 Taxation liability paid (3,00,000) 87,00,000 Working Note: Capital Reduction Account To Liability for taxation A/c To P & L A/c To Fixed Assets 1,00,000 By Equity share capital 1,20,00,000 12,00,000 By 6% Cumulative preferences Share capital 50,00,000 To Current assets 110,00,000 By 5% Debentures To Investment 24,00,000 1,00,000 By Sundry creditors To Capital Reserve (Bal. fig.) 40,00,000 16,00,000 (a) _________ 2,00,00,000 8. 26,00,000 2,00,00,000 Journal Entries in the Books of P Ltd. Dr. Fixed Assets ` Dr. 1,05,000 To Revaluation Reserve The Institute of Chartered Accountants of India ` 1,05,000 (Revaluation of fixed assets at 15% above book value) Reserve and Surplus Cr. Dr. 60,000 PAPER 5 : ADVANCED ACCOUNTING To Equity Dividend (Declaration of equity dividend @ 10%) Equity Dividend To Bank Account (Payment of equity dividend) Business Purchase Account To Liquidator of Q Ltd. (Consideration payable for the business taken over from Q Ltd.) Fixed Assets (115% of ` 2,50,000) Inventory (95% of ` 3,20,000) Debtors Bills Receivable Investment Cash at Bank (` 40,000 ` 30,000 dividend paid) To Provision for Bad Debts (5% of ` 1,90,000) To Sundry Creditors To 12% Debentures in Q Ltd. To Bills Payable To Business Purchase Account To Capital Reserve (Balancing figure) (Incorporation of various assets and liabilities taken over from Q Ltd. at agreed values and difference of net assets and purchase consideration being credited to capital reserve) Liquidator of Q Ltd. To Equity Share Capital To 10% Preference Share Capital (Discharge of consideration for Q Ltd. s business) 12% Debentures in Q Ltd. (` 1,50,000 108%) Discount on Issue of Debentures To 12% Debentures (Allotment of 12% Debentures to debenture holders of Q Ltd. at a discount of 10%) Sundry Creditors The Institute of Chartered Accountants of India 31 60,000 Dr. 60,000 60,000 Dr. 4,90,000 4,90,000 Dr. 2,87,500 Dr. 3,04,000 Dr. 1,90,000 Dr. 20,000 Dr. 80,000 Dr. 10,000 9,500 1,25,000 1,62,000 25,000 4,90,000 80,000 Dr. 4,90,000 4,00,000 90,000 Dr. 1,62,000 Dr. 18,000 1,80,000 Dr. 10,000 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 To Sundry Debtors (Cancellation of mutual owing) Goodwill To Bank (Being liquidation expenses reimbursed to Q Ltd.) Capital Reserve To Goodwill (Being goodwill set off) 10,000 Dr. 30,000 30,000 Dr. 30,000 30,00 (b) Statement of Consideration payable by P Ltd. for 30,000 shares (payment method) Shares to be allotted 30,000 8 = 40,000 shares of P Ltd. 6 Issued 40,000 shares of ` 10 each i.e. ` 4,00,000 (i) 90,000 (ii) For 10% preference shares, to be paid at 10% discount ` 1,00,000 90 100 ` Consideration amount [(i) + (ii)] 9. ` 4,90,000 Liquidator s Final Statement of Receipts and Payments A/c ` ` To Cash in hand To Assets realised: Fixed assets 40,000 1,68,000 By Liquidator s remuneration and expenses 5,000 By Trade Payables 10,000 2,30,000 4,08,000 To Cash - proceeds of call on 1,800 equity shares @ ` 15 3,50,000 By Preference shareholders Inventory (1,10,000 1,00,000) Book debts ` 1,00,000 By Equity shareholders @ ` 10 on 2,000 shares 20,000 27,000 4,75,000 4,75,000 Working Note: Return per equity share ` Cash available before paying preference shareholders (` 4,48,000 ` 3,55,000) The Institute of Chartered Accountants of India 93,000 PAPER 5 : ADVANCED ACCOUNTING 33 45,000 1,38,000 (1,00,000) 38,000 Add: Notional calls 1,800 shares (2,000-200) ` 25 Less: Preference share capital Available for equity shareholders ` 38,000 = ` 10 Return per share= 3,800 (4,000 200) and Loss per Equity Share ` (100-10) = ` 90 Calls to be made @ ` 15 per share (` 90-75) on 1,800 shares. 10. (a) Computation of Tier I and Tier II Capital Fund Amount (` in crores) Particulars (i) Capital Funds Tier I Equity Share Capital 400.00 Statutory Reserve 250.00 Capital Reserve (arising out of sale of assets i.e. ` 86 cr `18 cr) 68.00 718.00 (ii) Capital Fund Tier-II Capital Reserve (arising out of revaluation of assets) 18.00 Less: Discount to the extent of 55% (9.90) 8.10 726.10 Risk Adjusted Assets Particulars Amount (` in crores) % of weight Amount (` in crores) Funded Risk Assets Cash Balance with RBI 12.00 0 0.00 Balance with other Banks 20.00 20 4.00 Other Investments 40.00 100 40.00 14.50 0 0.00 Loans & Advances : (i) Guranteed by Government (ii) Others Premises Furniture & Fixture Total (i) The Institute of Chartered Accountants of India 5,465.00 100 5,465.00 74.00 100 74.00 5583.00 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Off Balance Sheet Items Guarantees and other obligations 700.00 100 700.00 Acceptances, endorsements and letter of credit 4,900.00 100 4,900.00 Total (ii) 5,600.00 Total [ (i) + (ii) ] 11183.00 Risk Weighted Assets Ratio: Capital Fund x 100 Risk Adjusted Assets = (726.10 / 11183) x 100 = 6.49% 11. (i) Calculation of Rebate on bills discounted S.No. Amount (`) Due date 2015 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% 41,820 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, 2014 Add: Discount received during the year ended 31st March, 2015 Less: Rebate on bills discounted as on 31st March, 2015 Discount credited to the Profit and Loss Account 12. ` 91,600 4,05,000 4,96,600 60,140 4,36,460 In the books of XYZ Marine Insurance Ltd. Amount (`) (i) Net Premium earned Premium from Direct Business received Add: Receivable as on 31.03.2014 The Institute of Chartered Accountants of India 92,00,000 3,94,000 PAPER 5 : ADVANCED ACCOUNTING 35 Less: Receivable as on 01.04.2013 (4,59,000) Sub Total (A) 91,35,000 Premium on reinsurance accepted 7,86,000 Add: Receivable as on 31.03.2014 33,000 Less: Receivable as on 01.04.2013 (37,000) Sub Total (B) 7,82,000 Premium on reinsurance Ceded 6,36,000 Add: Payable as on 31.03.2014 20,000 Less: Payable as on 01.04.2013 (28,000) Sub Total (C) 6,28,000 Premium Earned (A+B-C) 92,89,000 (ii) Net Claims Incurred Claims paid on direct business 73,00,000 Add: Outstanding as on 31.03.2014 1,01,000 Less: Outstanding as on 01.04.2013 (94,000) Sub Total (A) 73,07,000 Reinsurance claims 5,80,000 Add: Outstanding as on 31.03.2014 12,000 Less: Outstanding as on 01.04.2013 (16,000) Sub Total (B) 5,76,000 Claims received from reinsurance 2,10,000 Add: Outstanding as on 31.03.2014 39,000 Less: Outstanding as on 01.04.2013 (42,000) Sub Total (C) 2,07,000 Net Claim Incurred (A+B-C) 76,76,000 13. (a) Interest on loan 2010-11 2011-12 Opening Capital cost (A) Gross Opening loan - considered at 70% of (A)=(B) Cumulative Repayment of Loan upto previous year (C) The Institute of Chartered Accountants of India 2012-13 ` 135.39 94.773 ` 137.02 95.914 ` 138 96.6 14 14.96 15.83 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 Net Loan Opening (B)-(C)=(D) 80.773 80.954 80.77 Additional capital expenditure (allowed above) (E) 1.63 0.98 0.52 Addition of loan due to approved additional capital expenditure - considered at 70% of (E)=(F) 1.141 0.686 0.364 0.96 0.87 0.68 Net Loan Closing [(D)+(F)-(G)=(H)] 80.954 80.77 80.454 Average Loan[(D)+(H)/2]=I 80.864 80.862 80.612 Weighted Average Rate of Interest on Loan (J) 7.35% 7.48% 7.50% Interest on Loan(I) x (J) 5.944 6.048 6.046 Repayment of loan during the year (net)(G) (b) Depreciation Name of the Power Station : Wastan Power Generation Project Date of commercial operation /Work Completed Date 1/4/95 Beginning of Current year 1/4/10 Useful life 35 Years Remaining Useful Life 20 Years (Figures in ` crores) S.N. 2010-11 2011-12 Capital cost at beginning of the year 2012-13 135.39 137.02 138 1.63 0.98 0.52 Closing capital cost 137.02 138 138.52 1 Average capital cost 136.205 137.51 138.26 2 Less: Value of Land 0.000 0.000 0.000 3 Capital cost for depreciation (1-2) 136.205 137.51 138.26 4 Depreciable value (90% of 3) 122.585 123.759 124.434 5 Depreciation recovered up to 2008-09 6 Depreciation recovered in 2009-10 7 Depreciation recovered upto previous year 52.31 55.824 59.400 8 Balance depreciation to be recovered (4-7) 70.27 67.936 65.035 9 Balance useful life of 35 years 20 19 18 10 Yearly depreciation from 2010-11 (8/9) 3.514 3.576 3.613 11 Depreciation recovered upto the year (7+10) 55.824 59.400 63.013 Additional capitalisation during the year The Institute of Chartered Accountants of India 49.05 3.26 PAPER 5 : ADVANCED ACCOUNTING 14. 37 Departmental Trading and Loss Account of M/s Division For the year ended 31st December, 2014 Deptt. A To Purchases To Gross profit Deptt. A Deptt. B ` To Opening stock Deptt. B ` ` ` 40,000 By Sales 10,00,000 15,00,000 9,10,000 By Closing 7,50,000 stock 1,00,000 2,00,000 11,00,000 17,00,000 4,00,000 7,50,000 4,00,000 7,50,000 50,000 6,50,000 4,00,000 11,00,000 17,00,000 To General Expenses (in ratio of sales) By Gross profit 75,000 3,50,000 6,75,000 4,00,000 To Profit ts/f to general profit and loss account 50,000 7,50,000 General Profit and Loss Account ` To Stock reserve required (additional: By Profit from: Stock in Deptt. A 50% of (` 20,000 - ` 10,000) (W.N.1) ` Deptt. A 5,000 3,50,000 Deptt. B 6,75,000 Stock in Deptt. B 40% of (` 30,000 - ` 15,000) (W.N.2) To Net Profit 6,000 10,14,000 10,25,000 10,25,000 Working Notes: 1. Stock of department A will be adjusted according to the rate applicable to department B = [(7,50,000 15,00,000) 100] = 50% 2. Stock of department B will be adjusted according to the rate applicable to department A = [(4,00,000 10,00,000) 100] = 40% The Institute of Chartered Accountants of India 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 15. (a) Books of Branch Journal Entries Amount in ` Dr. (i) (ii) (iii) (iv) Expenses Account Dr. To Head Office Account A/c (Being the expenses allocated by the Head office not recorded earlier, now recorded) 2,800 Provision for Doubtful Debts A/c Dr. To Head Office Account (Being the provision for doubtful debts not provided earlier, now provided for) 1,000 Head Office Account Dr. To Salaries Account (Being rectification of salary paid on behalf of Head Office) 3,000 Head Office Account Dr. To Cash Account (Being expenditure incurred on account of other branch, now recorded in books) Cr. 5,000 2,800 1,000 3,000 5,000 (v) No entry in Branch Books is required. (vi) Expenses Account Dr. To Head Office Account (Being allocated expenses of Head Office recorded) 75,000 Head Office Account Dr. To Debtors Account (Being adjustment entry for collection from Branch Debtors directly by Head Office) 30,000 (vii) (viii) Goods-in- transit Account To Head Office Account (Being goods sent by Head Office still in-transit) The Institute of Chartered Accountants of India Dr. 75,000 30,000 10,000 10,000 PAPER 5 : ADVANCED ACCOUNTING (b) 39 In the books of ABC Ltd. New York Branch Trial Balance in (`) as on 31st March, 2015 Conversion rate per US $ Dr. Cr. (`) ` ` Stock on 1.4.14 40 6,000 Purchases and sales 41 16,400 30,750 Sundry debtors and creditors 42 8,400 6,300 Bills of exchange 42 2,520 5,040 Sundry expenses 41 22,140 Bank balance 42 8,820 22,190 64,280 64,280 Delhi head office A/c 16. Financial Capital Historical Cost Particulars Maintenance at (`) Closing equity (` 30 x 60,000 units) 18,00,000 represented by cash Opening equity 60,000 units x ` 20 = 12,00,000 Permissible drawings to keep Capital intact 6,00,000 (18,00,000 12,00,000) 17. (a) Computation of Basic Earnings per Share Year 2012-13 (`) (i) EPS for the year 2012-13 as originally reported = Net profit for the year attributable to equity share holder / weighted average number of equity shares outstanding during the year ` 22,00,000 10,00,000 shares (ii) EPS for the year 2012-13 restated for the right issue The Institute of Chartered Accountants of India 2.20 2.12 Year 2013-14 (`) 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 ` 22,00,000 10,00,000 shares x 1.04 EPS for the year 2013-14 (including effect of right issue) ` 30,00,000 (iii) 2.62 (10,00,000 x 1.04 x 4/12) + (12,00,000 x 8/12) 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 ( ` 32 10,00,000 ) + ( ` 25 2,00,000 ) = ` 30.83 10,00,000 + 2,00,000 2. Computation of adjustment factor Fair value per share prior to exercise of rights Theoretical ex-rights value per share = (b) (i) ` 32 ` 30.83 = 1.04 (approx.) Calculation of Annual Lease Payment ` Cost of the equipment Unguaranteed Residual Value PV of unguaranteed residual value for 3 years @ 10% (` 1,00,000 x 0.751) Fair value to be recovered from Lease Payment (` 7,46,55,100 ` 75,100) PV Factor for 3 years @ 10% Annual Lease Payment (` 7,45,80,000 / PV Factor for 3 years @ 10% i.e. 2.486) 7,46,55,100 1,00,000 75,100 7,45,80,000 2.486 3,00,00,000 (ii) Unearned Finance Income Total lease payments [` 3,00,00,000 x 3] Add: Residual value The Institute of Chartered Accountants of India 9,00,00,000 1,00,000 PAPER 5 : ADVANCED ACCOUNTING 41 Gross Investments 9,01,00,000 Less: Present value of Investments (` 7,45,80,000+ ` 75,100) (7,46,55,100) Unearned Finance Income 1,54,44,900 18. (a) According to para 6 of AS 16 Borrowing Costs , borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred. Also para 10 of AS 16 Borrowing Costs states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. Thus, eligible borrowing cost = ` 11,00,000 ` 2,00,000 = ` 9,00,000 Sr. No. Particulars Nature of assets i Construction of factory building Qualifying Asset* 9,00,000x40/100 NIL = ` 3,60,000 ii Purchase of Machinery Not a Qualifying NIL Asset 9,00,000x35/100 = ` 3,15,000 iii Working Capital Not a Qualifying NIL Asset 9,00,000x25/100 = ` 2,25,000 Total Interest to be Interest to be charged to Profit Capitalized (`) & Loss Account (`) ` 3,60,000 ` 5,40,000 * A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. (b) As per para 31 of AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies , the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions, will not be considered as a change in accounting policy. (i) Accordingly, introduction of a formal retirement gratuity scheme by an The Institute of Chartered Accountants of India 42 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015 employer in place of ad hoc ex-gratia payments to employees on retirement is not a change in an accounting policy. (ii) The adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial will not be treated as a change in an accounting policy. 19. (a) AS 11 The Effects of Changes in Foreign Exchange Rates provides that exchange differences attributable to monetary items should be taken to Statement of Profit and Loss. In case the option under para 46A is exercised, the exchange differences arising on long-term foreign currency monetary items can be adjusted in the cost of the depreciable capital asset or in other cases transferred in Foreign Currency Monetary Item Translation Difference Account (FCMITD) and amortised. (i) Trade Receivables Particulars Foreign currency Rate Rupees Initial recognition US $ 12,919.90 38.70 5,00,000 Rate on B/S date Exchange Difference 45.80 US $ 12,919.90 7.10 91,731 Gain or loss Gain Treatment Credit to Profit & Loss A/c ` 91,731 (ii) Long Term loan Particulars Foreign currency Rate Rupees Initial recognition US $ 1,68,539.33 35.60 60,00,000 Rate on B/S date Exchange Difference 45.90 US $ 1,68,539.33 10.30 17,35,955 Gain or loss Loss Treatment Debit to Profit & Loss A/c ` 17,35,955 or transfer to FCMITD A/c and amortise. (b) According to para 21 of AS 12 on Accounting for Government Grants, the amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where the book value is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. The Institute of Chartered Accountants of India PAPER 5 : ADVANCED ACCOUNTING 43 ` (in lakhs) 1st April, 2011 Acquisition cost of machinery (` 1,500 ` 300) 1,200.00 31st March, 2012 Less: Depreciation @ 20% (240.00) Book value 31st March, 2013 Less: Depreciation @ 20% Book value 960.00 (192.00) 768.00 31st March, 2014 Less: Depreciation @ 20% (153.60) 1st April, 2014 Book value May, 2014 Add: Refund of grant 300.00 Revised book value 914.40 614.40 Depreciation @ 20% on the revised book value amounting ` 914.40 lakhs is to be provided prospectively over the remaining useful life of the asset i.e. years ended 31st March, 2015 and 31st March, 2016. 20. (a) As per para 44 of AS 26, costs incurred in creating a computer software product should be charged to research and development expense when incurred until technological feasibility/asset recognition criteria has been established for the product. Technological feasibility/asset recognition criteria have been established upon completion of detailed programme design or working model. In this case, ` 45,000 would be recorded as an expense (` 25,000 for completion of detailed program design and ` 20,000 for coding and testing to establish technological feasibility/asset recognition criteria). Cost incurred from the point of technological feasibility/asset recognition criteria until the time when products costs are incurred are capitalized as software cost (` 42,000 + ` 12,000 + ` 13,000) ` 67,000. (b) As per para 46 of AS 29, Provisions, Contingent Liabilities and Contingent Assets , when some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation. The reimbursement should be treated as a separate asset. The amount recognised for the reimbursement should not exceed the amount of the provision. Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent liability is matched by a related counter-claim or claim against a third party. In such cases, the amount of the provision is determined after taking into account the probable recovery under the claim if no significant uncertainty as to its measurability or collectability exists. The Institute of Chartered Accountants of India

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