Institute of Chartered Financial Analysts of India (ICFAI) University 2009 C.A Chartered Accountant Integrated Professional Competence (IPCC) - Advanced Accounting Revision Test s (ember ) - Question
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Partnership Accounts- Sale to a Company
PAPER - 5 : ADVANCED ACCOUNTING QUESTIONS
1. X' and Y' carrying on business in partnership sharing Profits and Losses equally, wished to dissolve the firm and sell the business to X' Limited Company on 31-3-2009, when the firm's position was as follows:
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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 Rs.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 Rs.10 each at a premium of Rs.2 per share.
The company collected all the amounts from debtors. The creditors were paid off less by Rs.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.
Partnership Accounts - Piecemeal Distribution System
2. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs. 9,600, Rs. 6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Rs. Rs.
Liability for interest on loans from : Investments 1,000
Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200
Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available, applying maximum possible loss procedure.
Redemption of Debentures
3. On 1st January, 2004 X Limited issued fifteen years debentures of Rs.100 each bearing interest at 10% p.a. One of the conditions of issue was that the company could redeem the debentures by giving six months' notice at any time after 5 years, at a premium of 4% either by payment in cash or by allotment of preference shares and/or other debentures at the option of the debenture holders.
On 1st April, 2009 the Company gave notice to the debenture holders of its intention to redeem the debentures on 1st October, 2009 either by payment in cash or by allotment of 11% preference shares of Rs.100 each at Rs.130 share or 11% Second Debentures of Rs.100 at Rs.96 per debenture.
Holders of 4,000 debentures accepted the offer of the preference shares; holders of
4,800 debentures accepted the offer of the 11% second debentures and the rest demanded cash on 1st October, 2009.
Give the journal entries to give effect to the above as of 1st October, 2009.
Accounting for Employees Stock Option Plan
4. ABC Ltd. grants 1,000 employees stock options on 1.4.2006 at Rs.40, when the market price is Rs.160. The vesting period is 21/2 years and the maximum exercise period is one year. 300 unvested options lapse on 1.5.2008. 600 options are exercised on 30.6.2009. 100 vested options lapse at the end of the exercise period.
Pass Journal Entries giving suitable narrations.
Underwriting of Shares
5. Alpha Chemicals Limited planned to set up a unit for manufacture of bulk drugs. For the purpose of financing the unit the Board of Directors have issued 15,00,000 equity shares of Rs.10 each. 30% of the issue was reserved for promoters and the balance was offered to the public. Aditya, Diwan and Anoop have come forward to underwrite the public issue in the ratio of 3:1:1 and also agreed for firm undertaking of 30,000; 20,000 and 10,000 shares, respectively. The underwriting commission was fixed at 4%. The amount payable on application was Rs.2.50 per share. The details of subscriptions are:
Marked forms of Aditya 5,50,000 Shares
Marked forms of Diwan 2,00,000 Shares
Marked forms of Anoop 1,50,000 Shares
Unmarked forms 50,000 Shares
(a) You are required to show the allocation of liability among underwriters with workings.
(b) Pass journal entries in the books of Alpha Chemicals Limited:
(i) For underwriters' net liability and the receipt or payment of cash to or from underwriters.
(ii) Determining the liability towards the payment of commission to the underwriters
Buy Back of Securities
6. The Balance Sheet of Gunshot Ltd. as on 31.3.2008 is given :
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Gunshot Ltd. buy back 16,000 shares of Rs. 20 per share. For this purpose, the Company sold its all non-trade investments for Rs. 3,20,000. Give Journal Entries with full narrations effecting the buy back. |
Internal Reconstruction
7. The Balance Sheet of Alteration Ltd. on 31st March, 2009 is as under:
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Liabilities |
Rs. |
Assets |
Rs. |
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Authorised, issued equity share |
Goodwill |
2,00,000 | |
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capital | |||
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20,000 shares of Rs. 100 each |
20,00,000 |
Plant and machinery |
18,00,000 |
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10,000 preference shares (7%) of |
Stock |
3,00,000 | |
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Rs. 100 each |
10,00,000 |
Debtors |
7,50,000 |
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Sundry creditors |
7,00,000 |
Preliminary expenses |
1,00,000 |
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Bank overdraft |
3,00,000 |
Cash |
1,50,000 |
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Profit and loss account |
7,00,000 |
Two years' preference dividends are in arrears. The company had bad time during the
last two years and hopes for better business in future, earning profit and paying dividend
provided the capital base is reduced.
An internal reconstruction scheme as follows was agreed to by all concerned:
(i) Creditors agreed to forego 50% of the claim.
(ii) Preference shareholders withdrew arrear dividend claim. They also agreed to lower their capital claim by 20% by reducing nominal value in consideration of 9% dividend effective after reorganization in case equity shareholders' loss exceed 50% on the application of the scheme.
(iii) Bank agreed to convert overdraft into term loan to the extent required for making current ratio equal to 2 : 1.
(iv) Revalued figure for plant and machinery was accepted as Rs. 15,00,000.
(v) Debtors to the extent of Rs. 4,00,000 were considered good.
(vi) Equity shares shall be exchanged for the same number of equity shares at a revised denomination as required after the reorganisation.
Show:
(a) Total loss to be borne by the equity and preference shareholders for the reorganization;
(b) Share of loss to the individual classes of shareholders;
(c) New structure of share capital after reorganization;
(d) Working capital of the reorganized Company; and
(e) A proforma balance sheet after reorganization.
Amalgamation of Companies
8. The following is the Balance Sheet of A Ltd. as at 31st March, 2009:
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Liabilities |
Rs. |
Assets |
Rs. |
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8,000 equity shares of Rs.100 each |
8,00,000 |
Building |
3,40,000 |
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10% debentures |
4,00,000 |
Machinery |
6,40,000 |
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Loan from A |
1,60,000 |
Stock |
2,20,000 |
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Creditors |
3,20,000 |
Debtors |
2,60,000 |
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General Reserve |
80,000 |
Bank |
1,36,000 |
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Goodwill |
1,30,000 | ||
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Misc. Expenses |
34,000 | ||
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17,60,000 |
17,60,000 |
(1) B Ltd. would take over all Assets, except bank balance at their book values less 10%. Goodwill is to be valued at 4 year's purchase of superprofits, assuming that the normal rate of return be 8% on the combined amount of share capital and general reserve.
(2) B Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and the balance in fully paid equity shares of Rs.100 each at Rs.125 per share.
The average profit is Rs.1,24,400. The liquidation expenses amounted to Rs.16,000. B
Ltd. sold prior to 31st March, 2009 goods costing Rs.1,20,000 to A Ltd. for Rs.1,60,000.
Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2009. Creditors of A
Ltd. include Rs.40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the
Balance Sheet of B Ltd. as at 1st April, 2009 after the takeover.
Liquidation of Companies
9. (a) Liquidation of YZ Ltd. commenced on 2nd April, 2009. Certain creditors could not receive payments out of the realisation of assets and out of the contributions from A list contributories. The following are the details of certain transfers which took place in 2008 and 2009:
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Shareholders |
No. of Shares transferred |
Date of Ceasing to be a member |
Creditors remaining unpaid and outstanding on the date of such transfer |
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A |
2,000 |
1st March, 2008 |
Rs. 5,000 |
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P |
1,500 |
1st May, 2008 |
Rs. 3,300 |
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Q |
1,000 |
1st October, 2008 |
Rs. 4,300 |
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R |
500 |
1st November, 2008 |
Rs. 4,600 |
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S |
300 |
1st February, 2009 |
Rs. 6,000 |
All the shares were of Rs. 10 each, Rs. 8 per share paid up. Show the amount to be realised from the various persons listed above ignoring expenses and remuneration to liquidator etc.
(b) The position of Priceless Ltd. on its liquidation is as under:
Issued and paid up Capital:
3.000 11% preference shares of Rs. 100 each fully paid.
3.000 Equity shares of Rs. 100 each fully paid.
Calls in Arrears are Rs. 10,000 and Calls received in Advance Rs. 5,000. Preference Dividends are in arrears for one year. Amount left with the liquidator after discharging all liabilities is Rs. 4,13,000. Articles of Association of the company provide for payment of preference dividend arrears in priority to return of equity capital. You are required to prepare the Liquidators final statement of account.
Financial Statements of Insurance Companies
10. Prepare the Fire Insurance Revenue A/c as per IRDA regulations for the year ended 31st
March, 2008 from the following details:
Rs.
Claims paid 4,90,000
Legal expenses regarding claims 10,000
Premiums received 13,00,000
Re-insurance premium paid 1,00,000
Commission 3,00,000
Expenses of management 2,00,000
Provision against unexpired risk on 1st April, 2007 5,50,000
Claims unpaid on 1st April, 2007 50,000
Claims unpaid on 31st March, 2008 80,000
Financial Statements of Banking Companies
11. Following information is furnished to you by Well-to-do Bank Ltd. for the year ended 31st March, 2008:
(Rs. in thousands)
Interest and discount - (Income) 8,860
Interest on public deposits - (Expenditure) 2,720
Operating expenses 2,662
Other incomes 250
Provisions and contingencies (it includes provision in respect 2,004 of Non-performing Assets (NPAs) and tax provisions)
Rebate on bills discounted to be provided for as on 31.3.2008 30 Classification of Advances:
Standard Assets 5,000
Sub-standard Assets 1,120
Doubtful Assets - fully unsecured 200
Doubtful assets - fully secured
Less than 1 year 50
More than 1 year but less than 3 years 300
More than 3 years 300
Loss assets 200
You are required to prepare:
(i) Profit and Loss Account of the Bank for the year ended 31st March, 2008.
(ii) Provision in respect of advances.
Financial Statements of Banking Companies
12. The following information is available in the books of X Bank Limited as on 31st March, 2009:
Bills discounted
10,56,650
Rate of Discount
12%
12%
14%
16%
Rebate on Bills discounted (as on 1.4.2008) Discount received
Details of bills discounted are as follows:
Value of bill Due date
(Rs.)
18.25.000 5.6.2009
50,00,000 12.6.2009
28.20.000 25.6.2009
40.60.000 6.7.2009
Calculate the rebate on bills discounted as on 31.3.2009 and give necessary journal entries.
Financial Statements of Electricity Companies
13. The following balance have been extracted at the end of March, 2009, from the books of an electricity company:
Rs. Rs.
Share capital 2,00,00,000 Consumers' deposit 80,00,000
Fixed assets 5,00,00,000 Tariffs and dividends 20,00,000
control reserve
Depreciation reserve on fixed assets
Reserve fund (invested in 8% Government securities (at par)
1,20,00,000 12% debentures
40,00,000
Contingency reserve invested in 7% State loan
Loan from State Electricity 24,00,000 Board
50,00,000
Intangible assets
Amount (contributed by consumers towards cost of fixed asset)
16,00,000
4,00,000
Current assets (monthly 30,00,000
average)
The company earned a profit of Rs.56,00,000 (after tax) in 2008-2009. Show how the profits have to be dealt with by the company assuming the bank rate was 10%.
All workings should form part of your answers.
Departmental Accounts
14. Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively. Department Z charges 20% and 25% profit on cost to Department X and Y, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Managers' commission, but before adjustment of unrealised profit are as under :
Rs.
Department X 36,000
Department Y 27,000
Department Z 18,000
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Stock lying at different departments at the end of the year are as under : | ||||||||||||||||||||
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Find out the correct departmental profits after charging Managers' commission |
Ganga Ltd. having head office at Mumbai has a branch at Nagpur. The head office does wholesale trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 2009:
15.
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Head Office |
Branch | |
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(Rs.) |
(Rs.) | |
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Opening stock (as on 1.4.2008) |
2,25,000 |
- |
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Purchases |
25,50,000 |
- |
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Goods sent to branch (Cost to H.O. plus 80%) |
9,54,000 |
- |
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Sales |
27,81,000 |
9,50,000 |
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Office expenses |
90,000 |
8,500 |
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Selling expenses |
72,000 |
6,300 |
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Staff salary |
65,000 |
12,000 |
You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year ended 31st March, 2009.
Accounting for Foreign Branches
16. An Indian company has a branch at Washington. Its Trial Balance as at 30th September, 2008 is as follows:
Dr. US $ 1,20,000 8,000
56.000 2,40,000
80.000 2,000 1,000 6,000 2,000 1,000
Cr. US $
4,16,000
Plant and machinery Furniture and fixtures Stock, Oct. 1, 2007 Purchases Sales
Goods from Indian Co. (H.O.) Wages
Carriage inward Salaries
Rent, rates and taxes Insurance
Trade expenses Head Office A/c Trade debtors
1,000 -
- 1,14,000 24,000 -
- 17,000
Trade creditors
Cash at bank
5.000
1.000
Cash in hand
5,47,000 5,47,000
The following further information is given :
(1) Wages outstanding - $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 % p.a.
(3) The Head Office sent goods to Branch for Rs. 39,40,000.
(4) The Head Office shows an amount of Rs. 43,00,000 due from Branch.
(5) Stock on 30th September, 2008 - $ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 2006, when the fixed assets were purchased, the rate of exchange was Rs. 38 to one $.
On October 1, 2007, the rate was Rs. 39 to one $.
On September 30, 2008, the rate was Rs. 41 to one $.
Average rate during the year was Rs. 40 to one $.
You are asked to prepare :
(a) Trial balance incorporating adjustments given under 1 to 4 above, converting dollars into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 2008 and Balance Sheet as on that date depicting the profitability and net position of the Branch as would appear in India for the purpose of incorporating in the main Balance Sheet.
Conceptual Framework for Preparation and Presentation of Financial Statements
17. (a) Explain the purpose and status of the conceptual framework for preparation and
presentation of financial statements in brief.
(b) Write short note on qualitative characteristics of financial statements.
Short Answer based Questions
18. Answer the following questions (Give adequate working notes):
(a) In X Bank Ltd., the doubtful assets (more than 3 years) as on 31.3.2009 is Rs.1,000 lakhs. The value of security (including DICGC 100% cover of Rs.100 lakhs) is
ascertained at Rs.500 lakhs. How much provision must be made in the books of the Bank towards doubtful assets?
(b) X, Y and Z are partners. X became insolvent on 15.4.2009. The Capital account balance of partner Y is on the debit side. Partner Y is solvent. Should partner Y bear the loss arising on account of the insolvency of partner X?
(c) Alphs & Co., having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an independent branch maintaining separate books of account. On 31.3.2009, it was found that the goods dispatched by head office for Rs.2,00,000 was received by the branch only to the extent of Rs.1,50,000. The balance goods are in transit. What is the accounting entry to be passed by the branch for recording the goods in transit, in its books?
(d) "One of the characteristics of financial statements is neutrality- Do you agree with this statement?
(e) Domestic Assurance Co. Ltd. received Rs.5,90,000 as premium on new policies and Rs.1,20,000 as renewal premium. The company received Rs.90,000 towards reinsurance accepted and paid Rs.70,000 towards reinsurance ceded. How much will be credited to Revenue Account towards premium?
(f) A loan outstanding of Rs.50,00,000 has DICGC cover. The loan guaranteed by DICGC is assigned a risk weight of 50%. What is the value of Risk-adjusted asset?
(g) X Ltd. acquired a fixed asset for Rs. 50,00,000. The estimated useful life of the asset is 5 years. The salvage value after useful life was estimated at Rs.5,00,000. The State Government gave a grant of Rs.10,00,000 to encourage the asset acquisition. At the end of the second year, the subsidy of the State Government became refundable. What is the fixed asset value after refund of grant/subsidy to the State Government but before amortising the asset value at the end of the second year?
Theory Questions based on Accounting Standards
19. (a) Which borrowing costs are eligible for capitalisation as per AS 16? Describe in brief.
(b) What are the disclosure requirements pertaining to Events occurring after the balance sheet date'?
(c) Discuss the accounting principles relevant to the auditors relating to:
(i) Prior period items.
(ii) Change in accounting estimates.
(d) Explain the provisions of AS 26 relating to retirement and disposal of intangible assets.
(e) If a sale and lease back transaction results in an operating lease, what provisions will be applicable? Describe in line with AS 19.
Practical Problems based on Accounting Standards
20. (a) A Ltd. leased a machinery to B Ltd. on the following terms:
(Rs. in Lakhs) 20.00
5 years
5.00
1.00
Fair value of the machinery Lease term
Lease Rental per annum Guaranteed Residual value
Expected Residual value Internal Rate of Return
2.00
15%
Depreciation is provided on straight line method @ 10% per annum. Ascertain unearned financial income and necessary entries may be passed in the books of the Lessee in the First year.
(b) A Ltd. has income from continuing ordinary operations of Rs. 2,40,000, a loss from discontinuing operations of Rs. 3,60,000 and accordingly a net loss of Rs. 1,20,000. The company has 1,000 equity shares and 200 potential equity shares outstanding as at March 31, 2008. Compute basic and diluted EPS.
21. (a) A company had imported raw materials worth US Dollars 6,00,000 on 5th January,
2007, when the exchange rate was Rs.43 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for the import transaction was made on 5th April, 2007 when the exchange rate was Rs.47 per US Dollar. However, on 31st March, 2007, the rate of exchange was Rs.48 per US Dollar. The company passed an entry on 31st March, 2007 adjusting the cost of raw materials consumed for the difference between Rs.47 and Rs.43 per US Dollar.
In the background of the relevant accounting standard, is the company's accounting treatment correct? Discuss.
(b) A company signed an agreement with the Employees Union on 1.9.2007 for revision of wages with retrospective effect from 30.9.2006. This would cost the company an additional liability of Rs. 5,00,000 per annum. Is a disclosure necessary for the amount paid in 2007-08?
22. (a) A company deals in petroleum products. The sale price of petrol is fixed by the
government. After the Balance Sheet date, but before the finalisation of the company's accounts, the government unexpectedly increased the price retrospectively. Can the company account for additional revenue at the close of the year? Discuss.
(b) An enterprise has purchased an exclusive right to generate hydro-electric power for sixty years. The costs of generating hydro-electric power are much lower than the
costs of obtaining power from alternative sources. It is expected that the geographical area surrounding the power station will demand a significant amount of power from the power station for at least sixty years. Discuss in the background of relevant accounting standards.
Daya Ltd. acquired a machine on 1-1-2004 for Rs. 10,00,000. The useful life is 5 years. The company had applied on 1-4-2004, for a subsidy to the tune of 80% of the cost. The sanction letter for subsidy, was received in November 2007. The company's Fixed Assets Account as at 31-3-2008 shows a credit balance as under:
Rs.
Machine (original cost)
Accumulated depreciation
(from 2004-2005 to 2006-2007 at straight line method) Less: Grant received
10,00,000
(6,00,000)
4,00,000 (8,00,000) (4,00,000)
How should the company deal with this asset in its account for 2007-08? Does it need to charge depreciation or negative depreciation for 2007-08? Can it credit Rs. 4,00,000 to capital reserve?
24. At the end of the financial year ending on 31st December, 2008, a company finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors. The possible outcome as estimated by the Board is as follows:
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In respect of five cases (Win) Next ten cases (Win) Lose (Low damages) Lose (High damages) Remaining five cases Win 50% 30% 20% Lose (Low damages) Lose (High damages) Outcome of each case is to be taken as a separate entity contingent loss and the accounting treatment in respect thereof. X Ltd. began construction of a new building on 1st January, 2007. It obtained Rs.1 lakh special loan to finance the construction of the building on 1st January, 2007 at an interest rate of 10%. The company's other outstanding two non-specific loans were: |
Probability Loss (Rs.) 100% 60% 30% 1,20,000 10% 2,00,000 1,00,000 2,10,000 Ascertain the amount of |
Amount
Rs.5,00,000
Rs.9,00,000
Rate of Interest 11%
13%
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Rs. | ||
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January |
2007 |
2,00,000 |
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April |
2007 |
2,50,000 |
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July |
2007 |
4,50,000 |
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December |
2007 |
1,20,000 |
Building was completed by 31st December, 2007. Following the principles prescribed in AS-16 Borrowing Cost,' calculate the amount of interest to be capitalized and pass one Journal Entry for capitalizing the cost and borrowing cost in respect of the building.
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Realisation Account 1 | |||||||||||||||||||||||||
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To X Ltd. Creditors Co. 5% on 66,000 Sundry |
To
Rs.
60,000
2,79,000
66,000
62,700
3,300
59,000
1,770
34,930
4,01,700
X Ltd. Co. - Commission 3% on 59,000
Profits transferred to A's Capital A/c 17,465
To
Capital Accounts
A B A B
Rs. Rs. Rs. Rs.
To Shares in X Ltd. By Balance b/d 1,50,000 1,00,000
Co.-(W.N.2) 1,63,980 1,15,020
To Cash - Final By Realisation A/c -
Payment 3,485 2,445 Profit 17,465 17,465
1,67,465 1,17,465 1,67,465 1,17,465
Cash Account
Rs. Rs.
To Balance b/d 4,000 By A's Capital A/c- Final
payment 3,485
To X Ltd. Co. (Amount realized from By B's Capital A/c- Final
Debtors less amount paid to Payment 2,445 creditors)-(W.N.3) 1,930 _
5,930 5,930
Working Notes:
1 Calculation of Purchase consideration:
Rs.
Land & Building 1,20,000
Furniture 34,000
Stock 85,000
Goodwill 40,000
2,79,000
2. The shares received from the company have been distributed between the two partners A & B in the ratio of their final claims i.e., 1,67,465: 1,17,4651.
No. of shares received from the company = 2,79 = 23,250
23 ?50 x 167 465
A gets =13,665 shares valued at 13,665 x 12 = Rs.1,63,980. B gets the
2,84,930
remaining 9,585 shares, valued at Rs. 1, 15,020 (9,585 x 12)
3. Calculation of net amount received from X Ltd on account of amount realized from debtors less amount paid to creditors.
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Realisation Interest Interest on loans on loans from from A B partners partners spouses Rs. Rs. Rs. 2,000 1,000 Balances due (i) Sale of investments (1,000) _- 1,000 1,000 1,000 (ii) Sale of furniture (a) (iii) Sale of machinery Maximum possible loss Rs. 22,800 (total of capital A/cs Rs. 24,000 less cash available Rs. 1,200) (1,000) (1,000) 2,000 1,200 |
Rs. 66,000 Amount realized from Debtors Less: 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 Statement of Distribution of Cash Partners Capitals 3,300 62,700 59,000 3,700 1,770 1,930 2. Total C Rs. Rs. Rs. Rs 9,600 6,000 8,400 24,000 9,600 6,000 8,400 24,000 9,600 6,000 8,400 24,000 |
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allocated to partners in the profit sharing ratio i.e. 5 : 3 : 2 Amounts at credit (11,400) (1,800) 1,800 Deficiency of A and B written off against C Amount paid (b) Balances in capital accounts (a-b)=(c) (iv) Sale of stock 4,000 Maximum possible loss Rs. 18,800 (Rs. 22,800 - Rs. 4,000) Allocated to partners in the ratio 5 : 3 : 2 Amounts paid (d) Balances in capital accounts left unpaid Loss (c)-(d)=(e) Journal Entries 3. Date Particulars 1.10.2009 10% Debentures A/c Dr. Dr. Premium on Redemption of Debentures A/c To Debenture holders A/c (Being transfer of amount due on redemption of 10% debentures - nominal value Rs. 10,00,000 plus premium Rs.40,000) |
(6,840) (4,560) (840) 3,840 840 (2,640) - 1,200 (22,800) 1,200 1,200 22,800 9,600 6,000 7,200 (9,400) (5,640) (3,760) 200 360 3,440 (18,800) (4,000) 18,800 Cr. Rs. 10,40,000 9,400 5,640 3,760 Dr. Rs. 10,00,000 40,000 |
To 11% Preference Share Capital A/c
To Securities Premium a/c
(Being issue of 3200 preference shares of Rs.100 each at a premium of Rs.30 each in exchange of 4000 debentures)
1.10.2009 Debentureholders A/c Dr. 4,99,200
Discount on Issue of 11 % Second Dr. 20,800
Debentures A/c
To 11% Second Debentures A/c
5,20,000
1,24,800
(Issue of 5200 11% Second Debentures of Rs.100/- each at a discount of Rs.4 in exchange of 4800 Debentures)
Debentureholders A/c Dr. 1,24,800
To Bank A/c
(Being the redemption of 1200 debentures by cash)
(3) Redemption of debentures in cash:
Claim of the holders of 1200 debentures @ Rs.104 (10,000 - 4,000- 4,800 = 1,200)
4. Journal Entries in the Books of ABC Ltd.
Date Particulars
Dr.
(Rs.)
48,000
Cr.
(Rs.)
48,000
31.3.2007
Employees compensation expenses account Dr.
To Employees stock option outstanding account
(Being compensation expenses recognized in respect of the employees stock option i.e.
1,000 options granted to employees at a discount of Rs. 120 each, amortised on
1
straight line basis over 2 years)
Rs.
4.16.000
3.200
Rs.
3.20.000 96,000
4,99,200
5.200
Rs.
5.20.000 20,800
Rs.4,16,000
130
Dr.
48,000
48.000
48.000
31.3.2008
Dr.
48,000
Dr. 48,000
48,000
Profit and loss account
To Employees compensation expenses account
(Being expenses transferred to profit and loss account at the end of the year)
Employees compensation expenses account
To Employees stock option outstanding account
(Being compensation expenses recognized in respect of the employee stock option i.e. 1,000 options granted to employees at a discount of Rs. 120 each, amortised on 1
straight line basis over 2 years)
Profit and loss account
To Employees compensation expenses account
(Being expenses transferred to profit and loss account at the end of the year)
31.3.2009 Employees stock option outstanding account Dr. 12,000 (W.N.1)
To General Reserve account (W.N.1) 12,000
(Being excess of employees compensation expenses transferred to general reserve account)
30.6.2009 Bank A/c (600 x Rs.40) Dr. 24,000
Employee stock option outstanding account Dr. 72,000 (600 x Rs.120)
To Equity share capital account 6,000
(600 x Rs. 10)
To Securities premium account 90,000
(600 x Rs.150)
(Being 600 employees stock option exercised at an exercise price of Rs. 40 each)
01.10.2009 Employee stock option outstanding account Dr. 12,000
To General reserve account 12,000
(Being Employees stock option outstanding A/c transferred to General Reserve A/c, on lapse of 100 options at the end of exercise of option period)
Working Note:
On 31.3.2009, ABC Ltd. will examine its actual forfeitures and make necessary adjustments, if any to reflect expenses for the number of options, that have actually vested. 700 employees stock options have completed 2.5 years vesting period, the expense to be recognized during the year is in negative i.e.
Rs.
No. of options actually vested (700 x Rs.120) 84,000
Less: Expenses recognized Rs.(48,000 + 48,000) 96,000
Excess expenses transferred to general reserve 12,000
|
5. (a) Statement of Allocation of Liability among Underwriters | ||||||||||||||||||||
|
|
Less: Firm undertaking |
30,000 |
20,000 |
10,000 |
60,000 |
|
6,00,000 |
1,90,000 |
2,00,000 |
9,90,000 | |
|
Less: Marked Applications |
5,50,000 |
2,00,000 |
1,50,000 |
9,00,000 |
|
50,000 |
(10,000) |
50,000 |
90,000 | |
|
Less: Unmarked Applications (in the ratio of 3:1:1) |
30,000 |
10,000 |
10,000 |
50,000 |
|
20,000 |
(20,000) |
40,000 |
40,000 | |
|
Surplus of Diwan distributed between Aditya and Anoop in the ratio of 3:1 |
(15,000) |
20,000 |
(5,000) |
- |
|
Net liability |
5,000 |
- |
35,000 |
40,000 |
|
Add: Firm undertaking |
30,000 |
20,000 |
10,000 |
60,000 |
|
Underwriters' liability |
35,000 |
20,000 |
45,000 |
1,00,000 |
|
(b) Alpha Chemicals Ltd. | ||||
|
Journal Entries | ||||
|
Dr. |
Cr. | |||
|
Rs. |
Rs. | |||
|
Aditya |
Dr. |
12,500 | ||
|
Anoop |
Dr. |
87,500 | ||
|
To Equity share capital A/c |
1,00,000 | |||
|
(Allotment of shares to underwriters: 5,000 shares to aditya and 35,000) shares to Anoop) | ||||
|
Underwriting Commission A/c |
Dr. |
4,20,000 | ||
|
To Aditya |
2,52,000 | |||
|
To Diwan |
84,000 | |||
|
To Anoop |
84,000 | |||
|
(Underwriting commission payable @4% on the amount of shares underwritten) | ||||
|
Aditya |
Dr. |
2,39,500 | ||
|
Diwan |
Dr. |
84,000 | ||
|
To Bank A/c |
3,23,500 | |||
|
(Amount paid to Aditya and Diwan in final settlement) | ||||
Bank A/c To Anoop
(Amount received from Anoop on shares allotted less underwriting commission)
Working Notes:
(1) Calculation of amounts payable to/by underwriters:
| ||||||||||||||||||||||||||||||||
|
Amount receivable from underwriters 3,500 |
No Journal entry is shown for firm undertaking by the underwriters on the assumption that the amounts have been already paid by the underwrite at the opening day of the issue. Alternatively, the students may pass entries for firm undertaking on the ground that the allotment of shares will be made by the company at that time.
(2)
Journal Entries for Buy-back of shares of Gunshot Ltd.
6.
(i)
Dr. 3,20,000
3,00,000
20,000
Dr. 3,20,000
3,20,000
Bank A/c
To Non-trade Investments To Profit & Loss A/c (Being the entry for sale of Non-trade Investments) Shares Buy back A/c (16,000 x Rs. 20)
To Bank A/c
(Being purchase of 16,000 shares @ Rs.20 per share)
Buy-back Premium (16,000 x Rs.10)
To Shares Buy-back A/c (Being cancellation of shares bought back)
Dr.
1,60,000
(iv)
Dr.
Dr.
1,00,000
60,000
1,60,000
Securities Premium A/c General Reserve
To Buy-back Premium (Being adjustment of buy-back premium)
General Reserve
To Capital Redemption Reserve
(Being the entry for transfer of General Reserve to Capital Redemption Reserve to the extent of face value of equity shares bought back)
7. (a) Loss to be borne by Equity and Preference Shareholders
Dr. 1,60,000
(v)
1,60,000
Rs.
7.00.000
1.00.000 2,00,000 3,00,000
3.50.000 16,50,000
3.50.000 13,00,000
capital i.e.
Profit and loss account (debit balance)
Preliminary expenses Goodwill
Plant and machinery (Rs. 18,00,000 - Rs. 15,00,000)
Debtors (Rs. 7,50,000 - Rs. 4,00,000)
Amount to be written off Less: 50% of sundry creditors
Total loss to be borne by the equity and preference shareholders*
(b) Share of loss to preference shareholders and equity shareholders
Total loss of Rs. 13,00,000 being more than 50% of equity share
Rs.10,00,000.
Preference shareholders' share of loss = 20% of Rs. 10,00,000 = Rs. 2,00,000
Equity shareholders' share of loss (Rs. 13,00,000 - Rs. 2,00,000) = Rs. 11,00,000
Total loss Rs. 13,00,000
Two years' preference dividend (arrears) have been ignored in the computation of loss to be borne by equity and preference shareholders.
(c) New structure of share capital after reorganisation
Equity shares:
20,000 equity shares of Rs. 45 each, fully paid up (Rs. 20,00,000 - Rs. 11,00,000)
Preference shares:
10,000, 9% preference shares of Rs. 80 each, fully paid up (Rs. 10,00,000 - Rs. 2,00,000)
(d) Working capital of the reorganized company
Current Assets:
Stock
Debtors
Cash
Less: Current liabilities:
Creditors Bank overdraft **
Working capital
Rs.
9,00,000
8,00,000
17,00,000
Rs.
3.00.000
4.00.000
1.50.000
8.50.000
Rs.
3,50,000
75,000
4.25.000
4.25.000
(e)
Balance Sheet of Alteration Ltd. (and reduced) as on 31st March, 2009
Rs. Assets
Liabilities
Rs.
|
Share Capital Authorised Issued and Paid up: 20,000 equity shares of Rs. 45 each |
Fixed Assets: 9,00,000 Plant and Machinery 15,00,000 |
10,000, 9% preference shares of 8,00,000 Current Assets: Rs. 80 each
|
Unsecured loan: Term loan with Bank |
Stock 3.00.000 4.00.000 2,25,000 Debtors |
Current ratio shall be 2 : 1, i.e. total current liabilities shall be 50% of Rs. 8,50,000 (i.e. Rs. 3,00,000 +
4,00,000 + 1,50,000) = Rs. 4,25,000. Therefore, Bank overdraft = Rs. 75,000 (Rs. 4,25,000 less creditors Rs. 3,50,000).
Current liabilities: Bank overdraft Creditors
23,50,000
Books of A Limited Realisation Account
16,06,000
16,000
4.00.000 1,60,000 1,60,000
7.36.000
4.00.000
4.00.000
1.60.000 1,60,000
34.000
34.000
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
4,00,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loan from A Account
1.60.000 By Balance b/d
To Bank
1.60.000
Misc. Expenses Account
34.000 By Equity shareholders
To Balance b/d
34.000
6,00,000
6,10,000
12,10,000
6,10,000
6,10,000
8,00,000
80,000
76.000
34.000 6,10,000 1,60,000 8,80,000
By
By
8,80,000
To Realisation
To Misc. Expenses
To Equity shares in B Ltd.
To Bank
To B Ltd.
To Realisation A/c
Equity Shares in B Ltd. Account
6.10.000 By Equity shareholders
6.10.000
Equity Shareholders Account
General Reserve Account
80.000 By Balance b/d
80.000
B Ltd. Account
12,10,000 By Bank
By Equity share in B Ltd.(4,880 shares at Rs.125 each)
Equity share capital General reserve
12,10,000
B Ltd.
|
Balance Sheet of Washington Branch as on 30th September, 2008 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||
|
80.85.200 80,85,200 Note |
The above solution has been given assuming that the Washington branch is a non-integral foreign operation of the Indian Company.
28,88,000
(1)
(2)
Depreciation has been calculated at the given depreciation rate of 10% on WDV basis.
17. (a) Purpose of the Framework: The framework sets out the concepts underlying the preparation and presentation of general-purpose financial statements prepared by enterprises for external users. The main purpose of the framework is:
(a) To assist enterprises in preparation of their financial statements in compliance with the accounting standards and in dealing with the topics not yet covered by any accounting standard.
(b) To assist ASB in its task of development and review of accounting standards.
(c) To assist ASB in promoting harmonisation of regulations, accounting standards
and procedures relating to the preparation and presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by accounting standards.
(d) To assist auditors in forming an opinion as to whether financial statements conform to the accounting standards.
(e) To assist the users in interpretation of financial statements.
Status and Scope of the Framework: The framework applies to general-purpose financial statements usually prepared annually for external users, by all commercial, industrial and business enterprises, whether in public or private sector. The special purpose financial reports, for example prospectuses and computations prepared for tax purposes are outside the scope of the framework. Nevertheless, the framework may be applied in preparation of such reports, to the extent not inconsistent with their requirements.
Nothing in the framework overrides any specific Accounting Standard. In case of conflict between an accounting standard and the framework, the requirements of the Accounting Standard will prevail over those of the framework.
(b) The qualitative characteristics are attributes that improve the usefulness of information provided in financial statements. The framework suggests that the financial statements should observe and maintain the following four qualitative characteristics as far as possible within limits of reasonable cost/ benefit.
1. Understandability: The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities. It is not right to think that more one discloses better it is. A mass of irrelevant information creates confusion and can be even more harmful than non-disclosure. No relevant information can be however withheld on the grounds of complexity.
2. Relevance: The financial statements should contain relevant information only. Information, which is likely to influence the economic decisions by the users, is said to be relevant. Such information may help the users to evaluate past, present or future events or may help in confirming or correcting past evaluations. The relevance of a piece of information should be judged by its materiality. A piece of information is said to be material if its omission or misstatement can influence economic decisions of a user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from material error and bias. The information provided are not likely to be reliable unless:
(a) Transactions and events reported are faithfully represented.
(b) Transactions and events are reported in terms of their substance and economic reality not merely on the basis of their legal form. This principle is called the principle of 'substance over form'.
(c) The reporting of transactions and events are neutral, i.e. free from bias.
(d) Prudence is exercised in reporting uncertain outcome of transactions or events.
4. Comparability: Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison. One essential requirement of comparability is disclosure of financial effect of change in accounting policies.
5. True and Fair View: Financial statements are required to show a true and fair view of the performance, financial position and cash flows of an enterprise. The conceptual framework does not deal directly with this concept of true and fair view, yet the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise.
18. (a)
(Rs. in lakhs)
Doubtful Assets (more than 3 years) 1,000
Less: Value of security (excluding DICGC cover) 400
600
Less: DICGC cover 100
Unsecured portion 500 Provision:
for unsecured portion @100% 500 lakhs
for secured portion @ 100% w.e.f 31.3.2007 400 lakhs
Total provision to be made 900 lakhs
(b) If some partner is having debit balance in his capital account and is not insolvent, then he cannot be called upon to bear the loss on account of the insolvency of the other partner.
Hence, Y need not bear the loss due to insolvency of partner X.
(c) Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:
Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[Being Goods sent by Head office is still in transit on the closing date].
(d) Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in financial statement must be neutral, that is free from bias. Financial Statements are not neutral if by the selection or presentation of information, they influence the making of a decision or judgement in order to achieve a pre-determined result or outcome. Financial statements are said to depict the true and fair view of the business of the organization by virtue of neutrality.
(e) Rs.
Premium received in respect of new policies 5,90,000
Add: Renewal premium 1,20,000
7,10,000
Add: Re-insurance premium accepted 90,000
8,00,000
Less: Re-insurance ceded 70,000
Premium amount to be credited to Revenue A/c 7,30,000
(f) Loan outstanding Rs.50,00,000 Guaranteed by DICGC - Risk weight 50% Value of risk adjusted asset Rs.50,00,000 x 50% = Rs.25,00,000
(g) Statement showing the calculation of fixed assets at the end of the second year:
Rs.
Original cost of the fixed assets 50,00,000
Less: State Government grant received (10,00,000)
40.00.000
Less: Amount to be written off in the first year
40,00,000 - 5,00,000 (7,00,000)
5 years
33.00.000
Add: Refund of State Government grant 10,00,000
Value of fixed assets, at the end of the second year, after refund of grant but before depreciation 43,00,000
19. (a) 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.
To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation
should be determined by applying a capitalisation rate to the expenditure on that asset. The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period.
(b) According to AS 4, paras 13,14 and 15
Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.
Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.
Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.
(c) (i) The nature and amount of prior period items should be separately disclosed in
the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
(ii) The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:
(a) the period of the change, if the change affects the period only; or
(b) the period of the change and future periods, if the change affects both.
The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate.
The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.
(d) Para 87, 88 and 89 of AS 26 states that an intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal.
Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss.
An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the asset for impairment under Accounting Standard on Impairment of Assets, and recognises any impairment loss accordingly.
(e) As per para 50 and 52 of AS 19, if a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss should be recognised immediately. If the sale price is below fair value, any profit or loss should be recognised immediately except that, if the loss is compensated by future lease payments at below market price, it should be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the excess over fair value should be deferred and amortised over the period for which the asset is expected to be used.
For operating leases, if the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value should be recognised immediately.
(f) According to para 44 of AS 20, If the number of equity or potential equity shares outstanding increases as a result of a bonus issue or share split or decreases as a result of a reverse share split (consolidation of shares), the calculation of basic and diluted earnings per share should be adjusted for all the periods presented. If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors, the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. When per share calculations reflect such changes in the number of shares, that fact should be disclosed.
20. (a) Computation of Unearned Finance Income
(i) Gross investment = Minimum lease payments + Unguaranteed residual value
= (Total lease rent + Guaranteed residual value) + Unguaranteed residual value
= [(Rs. 5,00,000 x 5 years) + Rs. 1,00,000] + Rs. 1,00,000
Table showing present value of (i) Minimum lease payments (MLP) and Unguaranteed residual value (URV).
(1)
(2)
|
Year |
MLP inclusive of URV Internal rate of |
Present | |
|
return (Discount |
Value | ||
|
factor 15%) | |||
|
Rs. |
Rs. | ||
|
1 |
5,00,000 |
.8696 |
4,34,800 |
|
2 |
5,00,000 |
.7561 |
3,78,050 |
|
3 |
5,00,000 |
.6575 |
3,28,750 |
|
4 |
5,00,000 |
.5718 |
2,85,900 |
|
5 |
5,00,000 |
.4972 |
2,48,600 |
|
1,00,000 |
.4972 |
49,720 | |
|
(guaranteed residual value) | |||
|
17,25,820 | |||
|
1,00,000 |
.4972 (unguaranteed residual value) (1) + (2) |
49,720 17,75,540 | |
Unearned Finance Income = Gross investment - PV of MLP
= Rs. 27,00,000- Rs. 17,75,540 = Rs. 9,24,460 Journal Entries in the books of B Ltd.
Rs.
Rs.
17,25,820*
At the inception of lease
Machinery account Dr. 7,25,820*
To A Ltd.'s account (Being lease of machinery recorded at present value of MLP)
As per para 11 of AS 19, the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of the leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the present value of minimum lease payments from the standpoint of lessee, the amount recorded should be the present value of these minimum lease payments. Therefore, in this case, as the fair value of Rs. 20,00,000 is more than the present value amounting Rs. 17,25,820, the machinery has been recorded at Rs. 17,25,820 in the books of B Ltd. (the lessee) at the inception of the lease. According to para 13 of the standard, at the inception of the lease, the asset and liability for the future lease payments are recognised in the balance sheet at the same amounts.
*
At the end of the first year of lease
Finance charges account (Refer W. N.) Dr. 2,58,873
|
(Being the finance charges for first year due) | ||||||||||||||||||
|
Working Note:
Table showing apportionment of lease payments by B Ltd. between the finance charges and the reduction of outstanding liability.
|
Year |
Outstanding |
Lease rent |
Finance |
Reduction in |
Outstanding |
|
liability |
charge |
outstanding |
liability (closing | ||
|
(opening |
liability |
balance) | |||
|
balance) | |||||
|
Rs. |
Rs. |
Rs. |
Rs. |
Rs. | |
|
1 |
17,25,820 |
5,00,000 |
2,58,873 |
2,41,127 |
14,84,693 |
|
2 |
14,84,693 |
5,00,000 |
2,22,704 |
2,77,296 |
12,07,397 |
|
3 |
12,07,397 |
5,00,000 |
1,81,110 |
3,18,890 |
8,88,507 |
|
4 |
8,88,507 |
5,00,000 |
1,33,276 |
3,66,724 |
5,21,783 |
|
5 |
5,21,783 |
5,00,000 |
78,267 |
5,21,783 | |
|
8,74,230 |
17,25,820 |
(b) As per para 39 of AS 20, Potential Equity Shares should be treated as dilutive when, and only when, their conversion to equity shares would decrease net profit per share from continuing ordinary operations.'
As income from continuing operations is the control figure as per para 40, Rs.
2,40,000 should be considered and not Rs. (1,20,000) for deciding whether the potential equity shares are dilutive or anti-dilutive. Accordingly, 200 potential equity shares would be dilutive potential equity shares since their inclusion decrease the net profit per share from continuing operations from Rs. 240 (i.e. Rs.2,40,000/ 1,000 shares) to Rs. 200 (i.e. Rs.2,40,000/1,200 shares). In view of the above, the basic loss per share would be Rs. 120 and diluted loss per share would be Rs. 100.
21. (a) As per AS 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates',
monetary items denominated in a foreign currency should be reported using the closing rate at each balance sheet date. The effect of exchange difference should be taken into profit and loss account. Sundry creditors is a monetary item, hence should be valued at the closing rate i.e, Rs.48 at 31st March, 2007 irrespective of the payment for the same subsequently at lower rate in the next financial year. The difference of Rs.5 (48-43) per US dollar should be shown as an exchange loss in the profit and loss account for the year ended 31st March, 2007 and is not to be adjusted against the cost of raw- materials. In the subsequent year, the company would record an exchange gain of Re.1 per US dollar, i.e., the difference between Rs.48 and Rs.47 per Us dollar. Hence, the accounting treatment adopted by the company is incorrect.
(b) It is given that revision of wages took place on 1st September, 2007 with retrospective effect from 30.9.2006. Therefore wages payable for the half year from 1.10.2006 to 31.3.2007 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item.
Additional wages liability of Rs. 7,50,000 (for 1/ years @ Rs. 5,00,000 per annum) should be included in current year's wages.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
22. (a) According to para 8 of AS 4 (Revised 1995), the unexpected increase in sale price
of petrol by the government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet date, which requires an adjustment at the Balance Sheet date, since it does not represent a condition present at the balance sheet date. The revenue should be recognized only in the subsequent year with proper disclosures. The retrospective increase in the petrol price should not be considered as a prior period item, as per AS 5, because there was no error in the preparation of previous period's financial statements.
(b) According to AS 26, the enterprise should amortise the right to generate power over sixty years, unless there is evidence that its useful life is shorter. But the enterprise should subject this right to impairment testing at each year end during its useful life since useful life is considered to be more than 10 years.
23. In respect of depreciable assets, AS 12 does not permit the crediting of the grant or any part thereof to capital reserve. The company has only two options - reduce the grant from the cost of fixed assets or treat it as deferred income. It appears that company follows the first option. Out of the Rs. 8,00,000 that has been received, Rs. 4,00,000 is the balance in Machinery account and so Rs. 4,00,000 should be credited to the Machinery account. The balance Rs. 4,00,000 may be credited to profit & loss account as already the cost of the assets to the tune of Rs. 6,00,000 has been debited to profit and loss account in the earlier years and Rs. 4,00,000 transferred to profit & loss account would be partial recovery of that cost. There is no need to provide depreciation for 200708 or 2008-09 as the depreciable amount is now Nil.
24. According to AS 29 Provisions, Contingent Liabilities and Contingent Assets', contingent liability should be disclosed in the financial statements if following conditions are satisfied:
(i) There is a present obligation arising out of past events but not recognized as provision.
(ii) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence, question of providing for contingent loss does not arise. The probability of winning of next ten cases is 60% and for remaining five cases is 50%. As per AS 29, we make a provision if the loss is probable. As the loss does not appear to be probable and the possibility of an outflow of resources embodying economic benefits is not remote rather there is reasonable possibility of loss, therefore disclosure by way of note should be made. For the purpose of the disclosure of contingent liability by way of note, amount may be calculated as under:
Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000
= Rs. 36,000 + Rs. 20,000 = Rs. 56,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic. Therefore, the better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000 x 10 + Rs. 72,000 x 5) as contingent liability.
25. (i) Computation of average accumulated expenses Rs.
Rs. 2,00,000 x 12 / 12 = 2,00,000
Rs. 2,50,000 x 9 / 12 = 1,87,500
Rs. 4,50,000 x 6 / 12 = 2,25,000
Rs. 1,20,000 x 1 / 12 = 10,000
6,22,500
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (in Rs.) Rate of Ampount of interest (in Rs.)
interest
5.00.000 11% = 55,000
9.00.000 13% = 1,17,000
14,00,000 1,72,000
Weighted average rate of interest = 12.285% (approx)
x100]
14,00,000 )
(iii) Interest on average accumulated expenses
Rs.
Specific borrowings (Rs. 1,00,000 X 10%) = 10,000
Non-specific borrowings (Rs. 5,22,500* X 12.285%) = 64,189
Amount of interest to be capitalized = 74,189
(iv) Total expenses to be capitalized for building
Rs.
Cost of building Rs.(2,00,000 + 2,50,000 + 4,50,000 + 1,20,000) 10,20,000
Add: Amount of interest to be capitalised 74,189
10,94,189
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Particulars Building account Dr To Bank account (Being amount of cost of building and borrowing cost thereon capitalized) |
Dr. (Rs.) Cr. (Rs.) 10,94,189 In the above situation, shares received from X Ltd. Company have been distributed between two partners A and B in the ratio of their final claims. Alternatively, shares received from X Ltd. can be distributed among the partners in their profit sharing ratio i.e. Rs. 2,79,000 x Vi =Rs. 1,39,500 each. In that case, firm will pay cash amounting Rs. 27,965 to A and will receive cash Rs.22,035 from B. In the absence of the particulars of assets and liabilities (other than those of A Ltd.), the complete Balance Sheet of B Ltd. after takeover cannot be prepared. The difference between this figure and guaranteed residual value (Rs. 1,00,000) is due to approximation in computing the interest rate implicit in the lease.
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 Institute of Chartered Financial Analysts of India (ICFAI) University 2009 C.A Chartered Accountant Integrated Professional Competence (IPCC) - Advanced Accounting Revision Test s (ember ) - Question
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